New EU threat to Mi­crosoft of­fers a cau­tion­ary tale

The Pak Banker - - Front Page - Ran­dal C. Picker

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., Ama­ 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.

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