TCS Daily

Full Monti

By Jeremy Slater - August 19, 2003 12:00 AM

Microsoft may have successfully fought off the threat to its business from the U.S. Department of Justice in November 2001, but it remains under serious fire from across the Atlantic. Brussels' anti-trust watchdogs have stepped up their remorseless four-year investigation into the company's domination of the server software market. This could eventually lead to a demand for Microsoft to unbundle its products, and in the process create mayhem in the global software market.


The European Commission announced earlier this month it was sending a third and final list of concerns to the Seattle-based company. EU regulators are targeting Microsoft's domination of the markets for software that allows communication between PCs and "low-end" servers and also the way its Media Player is tied to the Windows operating system. If the company fails to comply with the Commission's demands for changes in the way it operates in the market, Microsoft could face a fine as high as $3.2 billion, which is equivalent to 10 percent of its global sales last year. It is expected that the Commission could take another six months to decide on the outcome of the investigation.


And the EU isn't kidding around. A spokesman for Competition Commissioner Mario Monti was talking tough recently. "Our case is too strong to ignore by the company," he said. "It will be at the company's and their lawyer's peril to ignore this." The swagger belies the fact that Monti and his department have been on the ropes lately. The EU Court of Justice has in the last year thrown out three of his highest-profile merger cases, calling them weak and/or unnecessary. He desperately needs to land a punch and Microsoft is a heavyweight target.


The company will now be forced to respond to what is known as a "statement of objections," in which the Commission sets out all of its doubts concerning the case. The document also states Brussels' demands for how Microsoft should remedy this situation and how in the future it should operate in the marketplace. If the Commission finds that Microsoft has not cooperated or produced the desired remedies, it will fine the company heavily.


Brussels regulators said they were issuing the highly unusual third request for information because they had received new evidence from rival companies and business users since the start of the case nearly four years ago. EU regulators are far more likely than their trust-busting U.S. counterparts to accept input from and be swayed by complaints from third parties -- i.e., competitors.


Whatever the final decision, Brussels claims it does not expect any significant fallout in its relationship with the U.S., despite the havoc created by earlier decisions such as GE-Honeywell. However, the case could have more serious impact for the future. If the Commission wins on the unbundling issue, Brussels will then have the confidence to go back and demand more of the same remedies in other product areas. For Microsoft this could be the opening of Pandora's box and the company, because of its market dominance, could find itself involved in inquiry after inquiry, draining it of valuable resources and having its legal team and advisors in constant battle with European regulators.


And, as the Wall Street Journal-Europe reported recently, the action could have devastating implications for competitiveness in the software market. "Bundling is the key weapon in Microsoft's competitive arsenal," Thomas Vinje, a Brussels-based competition lawyer, told the Journal. "If they're forced to abandon that weapon, then the competitive landscape really will change. Microsoft officials claim the decision could affect not only their efforts to innovate, but also make it harder for other software companies to make programs that work with Microsoft's.


Microsoft's dominance in the operating system market has provoked alliances among its rivals. Brussels is keener to listen to these competitors' complaints and thus more likely to be swayed by their arguments. Bundle these two facts together, and throw in an EU commissioner out to prove himself as a transatlantic trust-buster, and you've got nothing but trouble ahead for Microsoft -- and the software business in general.


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