Microsoft's Big European Defeat: What Now?

While open-source advocates applaud the court ruling, the tech sector worries about its potential effects on innovation—and other companies

by Jennifer L. Schenker

The Sept. 17 ruling by Europe's second-highest court affirming a landmark 2004 antitrust order against Microsoft (MSFT) is no mere bump in the road for the software giant. None other than Brad Smith, Microsoft's chief counsel, put the decision into the sweeping context it merits. The case, he said, will have an "extraordinary impact" that will occupy "the thoughts and discussions of many people, not just in the weeks ahead, but in the months and years to follow." The company hasn't yet decided whether to appeal (BusinessWeek, 9/17/07).

In a strongly worded, 244-page decision, the Luxembourg-based European Court of First Instance ordered Microsoft to obey a March, 2004 order by the European Commission to share confidential networking protocols with rivals and to offer a version of Windows without a built-in copy of the audio and video Media Player. The court also upheld the record $613 million fine levied against Microsoft. The verdict was read by the court's chief judge, Bo Vesterdorf, who, as expected, also announced his retirement the same day, ending his career with a flourish.

Network protocols, media players—it all seems a bit esoteric. But the impact of the ruling is enormous because it ushers in a stark new era for Microsoft. The European Commission now has the tools in its legal arsenal to continue pressing for modifications in the company's behavior, whether in product design or how Microsoft deals with competitors. That could limit the firm's ability to add features to Windows or force it to disclose once-secret technologies. "Microsoft's behavior will have to change, which means the market will change," says Alain Georges, an antitrust lawyer at Latham & Watkins in Brussels who was not involved in the case.

Fresh Vistas of Oversight?

The decision also boosts the likelihood that the commission will act on a separate complaint brought by a group of Microsoft competitors alleging that features added to the new Vista version of Windows will harm their businesses and limit consumer choice. "This landmark judgment sets a clear standard for Microsoft's future conduct and empowers the European Commission to impose it in the European market when necessary," said Thomas Vinje, a partner at the law firm Clifford Chance in Brussels, which is representing a coalition of tech companies behind the latest complaint, including IBM (IBM), Oracle (ORCL), and Nokia (NOK).

Equally important, Europe's victory against Microsoft could embolden regulators in other parts of the world to step up oversight of the company. South Korea's supreme court, for instance, is expected to rule Oct. 17 in an antitrust case brought by that country's fair trade commission alleging that Microsoft competed unfairly by weaving media-playing and instant-messaging capabilities into Windows.

Even the U.S., which prosecuted Microsoft during the Clinton Administration but has eased up on antitrust cases under President George W. Bush, could become more activist after next year's election. European Competition Commissioner Neelie Kroes says she plans to meet with her U.S. antitrust counterparts in Washington next week. Though it's a routine visit, the European court decision will undoubtedly be on the agenda.

The powerful court victory may well boost the commission's confidence in tackling other high-tech targets. It is investigating or pursuing separate cases against Qualcomm (QCOM) and Rambus (RMBS), both involving intellectual-property licensing disputes, and an unrelated case against chipmaker Intel (INTC), which it alleges harmed rival Advanced Micro Devices (AMD) and consumer choice through heavy-handed marketing tactics limiting the penetration of AMD's PC processors.

Fear of EU Interference

Predictably, the prospect of increased government involvement in the tech sector has set off an immediate debate about Europe's role. Nicholas Economides, a professor at New York University's Stern School of Business, says the court's ruling means Microsoft will have to keep selling a different version of Windows for Europe and could be forced to develop other products with less functionality for the European market. Plus, he adds, "Every competitor of Microsoft with a potential antitrust dispute will try to get the EU to pursue it."

More alarmist comments came from pro-Microsoft lobbying groups in the U.S., which raised the specter of the EU coming down on other successful U.S. tech firms such as Apple (AAPL) or Adobe (ADBE). "Will Neelie Kroes be leading a prison march of the world's most successful firms through her Brussels doors?" asked Jonathan Zuck, president of the Association for Competitive Technology, a pro-Microsoft industry association.

Similar sentiments came from Americans for Technology Leadership, another group allied with Microsoft. "The commission has been given a free hand to impose unprecedented regulation over the technology industry that will result in government bureaucrats designing software and forcing Microsoft to share its intellectual property with competitors," says Executive Director Randy Skoglund. "Today's decision will have a chilling effect on innovation across the world."

Even the U.S. Justice Department weighed in, issuing a rare comment on a foreign case that seemed to support Microsoft's side of the drama. "We are concerned that the standard applied to unilateral conduct by the [European Court of First Instance], rather than helping consumers, may have the unfortunate consequence of harming consumers by chilling innovation and discouraging competition," said Thomas Barnett, assistant attorney general for antitrust, in a written statement.

Microsoft Called an Exception

Kroes and the commission strongly dismiss such claims. And the care with which they and predecessors have ushered the Microsoft case through its tortuous nine-year history suggests they are hardly frivolous in pursuing targets. "There is only one company that will have to change its illegal behavior as a result of this ruling, and that is Microsoft," said Kroes, who adds that she does not expect Brussels to become the world's high-tech litigation capital. "This was an exception—the kind of superdominance of a Microsoft is rare."

Still, Kroes called the ruling "bittersweet," noting that it came too late to introduce real competition into the PC media-player market, now dominated by Microsoft. Meanwhile, she said, during the years that the commission has pursued Microsoft, the company's share of the server-operating-systems software market has climbed from 40% to about 80%—a level she called "unacceptable" in light of viable alternatives, such as Unix and Linux.

Kroes also rather boldly suggested that she hopes to see Microsoft's desktop market share fall "significantly," though she declined to say how much decline would satisfy the commission. The tension that has marked the Microsoft case in recent years was evident in her curt summary of the ruling's meaning. "It sends a clear signal that superdominant companies cannot abuse their position by excluding competitors," she said. "Microsoft must comply with its remedy; we will not tolerate continued noncompliance."

Open-Source Advocates Buoyed

That could be good news for the open-source software sector, which claims that despite the commission's 2004 ruling, Microsoft still has not provided the needed technical details so that Linux can fully interoperate with Windows. "I am the happiest man in Luxembourg today," says Carlo Piana, a partner at Milan law firm Tamos Piana & Partners, who represents the Free Software Foundation Europe, an industry group that champions open-source software.

Piana says the Sept. 17 ruling will help the open-software sector "finally get a seat at the table." But, he added, "This is a victory not only for free software but for the software industry at large." Piana says he believes the European programming scene will become more vibrant and that venture capitalists will be more willing to invest in parts of the market where Microsoft plays if they know that safeguards are in place to prevent the U.S. software giant from "unfairly and systematically crushing rivals."

The Court of First Instance may have strongly affirmed the commission, but the ruling clearly has done nothing to lower the level of rhetoric. Kroes, for one, didn't use her moment of victory to sound a conciliatory note. Asked at an early afternoon press conference at commission headquarters when she would like Microsoft to comply in full with the 2004 ruling, she said simply: "The sooner the better; let them start this afternoon."