New EU threat to Microsoft offers a cautionary tale

EUROPEAN Union antitrust officials announced late last month that they are considering fining Microsoft Corp. (MSFT) for failing to fulfill its antitrust obligations to the EU. The fine could be as high as 10 percent of Microsoft's annual revenue, or about $7 billion.

That isn't a paper threat. The EU has levied huge fines against Microsoft before. Governments should wield that kind of immense power against private parties only when they are certain a real wrong is being corrected. Unfortunately, everything about the EU's antitrust history with Microsoft should make us question whether that is the case here. Microsoft's battle with the EU also offers a broader cautionary tale: Companies can create real risks for themselves and shareholders when they make product-design commitments to settle government actions. We have seen this happen in recent settlements between the U.S. Federal Trade Commission and Google Inc., Facebook Inc. and MySpace Inc. In each case, the companies face an extra layer of regulation for the next 20 years for products that could change daily. Google may soon face new antitrust actions in the U.S. and the EU for its search engine design and patent licensing practices.

In a world dominated by Apple Inc., Amazon.com Inc., Google and Facebook, there is little doubt that Microsoft's market power has declined. U.S. antitrust officials have been finished with Microsoft for some time, yet the EU continues to regulate the company through its antitrust laws. (Disclosure: I have received research funding in the past from Microsoft, but have not been involved in any of the EU matters. The University of Chicago Law School, my employer, continues to receive Microsoft funding.)

A little background is in order. The EU in 2004 found that Microsoft had violated competition laws because of the way Windows worked with certain programs that run computer servers. It also thought Microsoft was tilting competition in media players by distributing its player software with Windows, an activity called tying in antitrust-speak.

When the EU decided in 2008 that it didn't like the way Microsoft was complying with that decision, it fined the company 899 million euros, or $1.1 billion in today's dollars. The EU hit the company again in 2009, this time claiming it was tying Internet Explorer to Windows.

With that history, and possibly facing a delayed introduction of Windows 7, Microsoft chose to settle rather than fight -- hardly a surprising decision. The settlement gave birth to the "browser ballot." When you first try to access the Internet on a Windows 7 machine in the EU, a choice of browsers to install -- 12 of them currently -pops up.

Microsoft, however, admitted that it violated the browser agree- ment again when it released its first major upgrade of Windows 7. From February 2011 until July 2012, it rolled out millions of new computers in the EU without the browser ballot. Microsoft said it was a mistake, but how this could go on for 17 months is hard to understand. You would think Microsoft and the EU would be monitoring the marketplace. Microsoft created the problem by not quickly fixing its browser-ballot glitch; the EU was seemingly asleep at the switch.

The lesson for companies is that they shouldn't violate settlements with governments. Yet an even larger issue is at stake here: Companies also shouldn't face huge fines for mistakes that may well prove irrelevant in the marketplace.

I refer here to another EU antitrust remedy, which forced Microsoft to release two versions of Windows, one with its media player and one without. But almost everyone bought the version with the media player. While well-intentioned, the solution accomplished little beyond forcing Microsoft to spend money on versions of Windows no one wanted.

The upshot is that governmentdictated product design has consequences, especially in sectors where products change with great speed. Indeed, antitrust settlements can act as a hidden tax on innovation.

At any rate, the EU needn't have worried. Despite Microsoft's dominance in personal computers, its Zune MP3 player was a failure due to competition from what con- sumers decided was a better product, Apple's iPod. The EU prescription had wrongly focused on the PC rather than the emergent competition in music devices.

What has happened in the marketplace because of the browser ballot? We don't know; the EU doesn't make its data on this public. That's too bad. We should expect antitrust regulation to be subject to public scrutiny. There is an unfortunate tendency for governments, in the U.S. and abroad, to want to act without accountability.

Not knowing browser market shares, it's impossible to say what sort of fine would make sense.