The Euro Witch Hunt Against Microsoft

Cecile Philippe
Issue CLII - April 27, 2008
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For the third time in a decade-long antitrust saga, the European Commission imposed a fine on Microsoft, this time to the tune of 899 million euros.

It should be recalled that, after numerous twists and turns, the European Court of Justice in September 2007 upheld the Commission's 2004 decision to punish the company for abusing its dominant position in the operating systems market. Soon after this, the Commission launched new investigations regarding Microsoft's Office suite and its Internet Explorer browser that could produce rulings similar to the 2004 decision.

The new fine, for failure to provide information needed for interoperability with its operating system, confirms that the Commission is acting blindly by not measuring competition correctly in the market for these technologies. This ruling, like earlier decisions, distracts attention from major strategic issues that will determine the future of the new technologies market.

Deluded by a competition model that defines the market arbitrarily, the Directorate General for Competition has trouble recognizing that competition endures and has continued to do so in areas where the authorities thought it was absent. Leaving aside the sensational announcements about investigations and fines, Microsoft's desire to purchase Yahoo and its decision to release more than 30,000 pages of documentation on its operating system say much more about the vitality of competition.

These moves show that, to continue serving consumers in this ever-changing market, firms have to innovate and to adapt quickly. Microsoft must not only pay heed to potential competition from new entrants, but also competition from existing players that are increasingly interested in the operating system market.

Intel, the world leader in microprocessors, could, for instance, venture into this market through its contract with Red Hat. In addition to providing support services, Red Hat also supplies Linux, which is a free operating system. The two companies may harbour an ambition to move more deeply into the fast-growing Linux market.

Google – with a revenue model based solely on advertising – is moving just as surely toward the operating system market. This has been Microsoft's bailiwick up to now, but recent changes could threaten its position. A glance at the new products Google provides on its site helps to understand the challenges Microsoft will have to cope with. Google is offering a software suite (including word processing and spreadsheet programs) free of charge on the Internet, in direct competition with Microsoft products. For major players like Google, the advance of the Linux open-source (and thus free) operating system can hardly have gone unnoticed.

There exists nowadays a wide variety of free software that only need to find a bundler to respond effectively to consumers' needs to write, calculate, manage e-mail and agendas, and so on. Google could well become this bundler and thereby pose a direct threat to the Microsoft model.

With its eyes riveted to market shares and the number of competitors, the Commission has failed to notice the dynamics of innovation in the world of operating systems. It has done the same mistake in regards to the telecommunications market.

The Commission's faith in its model leads it to believe that the existence of a number of resellers (Neuf Telecom and Free, for instance, in the case of France) using the network of a former monopolist (France Telecom) increases competition. This blinds it to the competition that could arise from other networks, as occurs in Canada with competition from cable and cellphone providers. A static vision of competition could threaten the emergence of these new players and networks. The regulation of network access and pricing risks reducing profit opportunities for new entrants and lowering incentives for the former monopolist to maintain its network.

Counting the number of competitors or focusing too heavily on market share neglects the very essence of competition. It takes little account of the process of innovation that often emerges where it is least expected and challenges acquired positions.

Moreover, through a hostile attitude toward large or "dominant" companies, the authorities manipulate the market not to the benefit of most consumers but to the benefit of producers, resellers and players who, without this intervention, may not have seen the light of day or met the test of consumer choice.

As the Commission keeps tilting at Microsoft, it is worth recalling that very large companies do not exist just by chance. In the absence of regulations protecting them, they are a means that men and women have found to transform pioneering products into mass goods. It is time the competition authorities open their eyes to this reality.

Cécile Philippe is director of the Institut économique Molinari.

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