Microsoft gets clobbered

Microsoft received a very significant setback this morning – its appeal against anti-trust actions taken by the European Commission was rejected by Europe’s Court of First Instance (with the exception of one, more or less unimportant aspect of the Commission’s oversight regime) (NYT story here, Court press release “here”:http://curia.europa.eu/en/actu/communiques/cp07/aff/cp070063en.pdf. This is a very interesting ruling, not only for the EU but for US markets as well. While Microsoft can (as it has done in the past) continue to sell tailored products for the European market only, it is likely to find its business model quite significantly constrained by the threat of future action. More detailed analysis below the fold …

First – the actual substance of the original enforcement action which Microsoft appealed against is not very important any more. The Commission’s efforts to force Microsoft to unbundle Media Player from Windows were at best successful as a demonstration that this could be done. As Microsoft was then free to sell the unbundled version of Windows at the same price as the version with Windows, there wasn’t much incentive for consumers to buy the unbundled version. The supervision regime that the Commission set up to force Microsoft to share information on how to hook into Windows with its competitors has worked to a very limited degree, but Microsoft has been as uncooperative as it thought it could get away with.

Second – what _is_ interesting are the implications for future actions by the Commission. The Commission, which had been slapped down recently in another unrelated antitrust issue, has been given the go-ahead by the Court of First Instance to engage in quite heavy handed and direct forms of regulation of information markets. This means that it is in a strong legal position to restrain Microsoft from future anti-competitive actions. It also is in a stronger position to leverage competition law against other behemoths (such as Google and Apple) which might suffer from similar temptations. Apple in particular is likely to be unhappy about the very strong language in the Court’s ruling about the importance of interoperability in underpinning competition. The Court seems to have bought into the idea that information technology markets may require strong interventions if competition is to work. The Commission had taken a bit of a gamble, punishing Microsoft very heavily and hoping that the Court would agree with it (in contrast to the US DoJ, the Commission can take anti-trust actions without going to the court first, although those affected can appeal that the action be stayed until the court rules on it – Microsoft did this early on, and lost). Unless the European Court of Justice reverses the Court of First Instance ruling (which seems highly unlikely), this substantially changes the politics of information technology governance.

Third – this will have implications for the US as well as the EU. It is possible for companies such as Microsoft to sell different products in the EU and the US. But it is very expensive to have to do this, as well as often being politically awkward (when consumers would like what is on offer in another jurisdiction but can’t get it), and always organizationally highly inconvenient. The result is that companies are likely to make their products comply with EU rules _across_ markets, except when the costs to so doing are very high indeed. This means that the European Commission is effectively becoming a regulator that substantially affects what is or isn’t sold in US markets too. The US administration has taken a hands-off (some might say supine) approach to preventing monopoly abuses in technology markets – the Commission is now in an excellent position to start to fill this regulatory vacuum. This should make for some interesting politics – while the US administration is likely to deplore this ruling, I don’t know that there is very much that it can actually do about it (especially given the continued controversy over its decision to roll over for Microsoft after the Bush administration came into office). It seems to me that the Commission has chosen its case very well, with respect to cementing its power over European information technology markets and increasing its international influence very substantially too. This should make for very interesting international politics.