Report: Why EU Socked It to Microsoft

By Matthew Broersma  |  Posted 2004-04-22

Report: Why EU Socked It to Microsoft

The European Commission has more than doubled the fine it had originally planned in its antitrust case against Microsoft Corp. because of Microsofts considerable financial resources, according to the full text of the decision, due for publication this week.

The decision, which leaked widely on Thursday and was published by the online edition of the Wall Street Journal, shows that the EC relied extensively on information from Microsofts competitors, as well as on internal memos from Microsoft itself. Microsoft responded with a seven-page evisceration of the decision, arguing it "creates new law in an effort to justify unprecedented regulatory intervention." The EC is the executive arm of the European Union.

The more than 300-page document gives a lengthy justification for the ECs record fine, citing case history, evidence from competitors, market data and Microsoft s internal correspondence. In arriving at an amount for the fine, for example, the EC examined Microsofts financial standing and its refusal to change its business practices over the course of the investigation.

Initially, the commission planned to fine Microsoft 165.7 million euros, the decision said, "to reflect the gravity of the infringement." Later, the commission doubled that figure to 331.5 million euros, "in order to ensure a sufficient deterrent effect on Microsoft."

The doubling was necessary because "Microsoft is currently the largest company in the world by market capitalization," the decision noted in footnote 1,342, referring to Microsofts $49 billion cash reserve in June 2003, its 41 percent profit margin overall in the 2002-2003 fiscal year, and its 81 percent profit margin on Windows in the same time period.

Finally, the commission increased the fine by another 50 percent, to 497 million euros ($613 million) because the company refused to alter its business practices during the course of the investigation. The duration of Microsofts two abuses—refusing to supply server compatibility information and tying Windows to media player software—together added up to five years and five months in duration, the decision said.

Next page: Internal memos.

Page Two

The commissions decision is partly based on an array of internal corporate memos, which offer an illuminating picture of Microsofts own attitudes to its software and business practices. In a memo from Bill Gates, for example, the companys chairman makes it clear that the loyalty of application makers is due not so much to the superiority of Windows as to the difficulty of making Windows applications cross-platform.

"The Windows API is so broad, so deep and so functional that most ISVs would be crazy not to use it," said the Feb. 21, 1997, memo, drafted for Gates by C++ General Manager Aaron Contorer. "It is so deeply embedded in the source code of many Windows apps that there is a huge switching cost to using a different operating system instead. ... It is this switching cost that has given customers the patience to stick with Windows through all our mistakes, our buggy drivers, our high TCO, our lack of a sexy vision at times, and many other difficulties.

"In short, without this exclusive franchise called the Windows API, we would have been dead a long time ago," the memo said.

In its response, Microsoft argued that the decision—which it plans to appeal—would strip dominant companies of their incentives to innovate. For one thing, the decision "opens the door for even a single complaining component supplier to argue that innovation should be thwarted if its market position may be harmed," Microsoft said.

The commissions way of narrowly defining markets, and of considering companies with 30 percent to 40 percent market share as dominant, would give the decision too wide a scope, Microsoft argued. "These rulings put at risk the economic incentives for a broad range of companies and industries," the company said.

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