Microsoft, antitrust and innovation
— by Georg C. F. Greve
If one were to believe Microsoft, antitrust law is for sore losers who are too lazy to innovate, and the decision of the European Court of Justice against Microsoft was to the detriment of consumers around the world. One might even believe that any company with large enough market share would now have to fear the wrath of the European Commission and its anti-innovation bloodhounds.
At first the notion seemed ludicrous, but then more and more blogs repeated it and serious media started picking it up. Even representatives of the US government spoke out on behalf of Microsoft, to the annoyance of Neelie Kroes, the European Union’s antitrust commissioner.
When the European Court of First Instance announced its decision, the first reaction of Microsoft was to talk about compliance with the ruling and that it was only partially confirmed by the court. Then people read the decision.
There was only one modification to the Commission’s case, relating to the trustee provision. This was because the EC should not have asked an independent third party selected from a list provided by Microsoft to monitor compliance. It should have supervised this itself. In essence the Commission was told they had been too forthcoming with Microsoft. This was not a partial annulment by any means, it could rather be seen as going beyond what the Commission had decided.
During the hearing, Microsoft had tried to attack the case on procedural and administrative grounds, no matter how likely or unlikely. None of this stuck, because the European Commission had done its homework, and done an extraordinarily thorough, careful and balanced investigation. It also showed extraordinary patience with Microsoft’s attempts to delay.
Declaring antitrust law to be "of the devil" and to distract from the situation by pointing fingers at others was really the last available option to distract from the facts of the case.
This allegation does not hold up to examination though. Allow me to tell you why.
1st Fallacy: That the Ruling Punishes Innovation
The first fallacy was that this kind of ruling punished the innovator. Who were the innovators? Real Inc. innovated the streaming media market, and Novell was the innovator in the workgroup server market. In both cases Microsoft unfairly leveraged its desktop monopoly to drive the innovator out of the market. That is why future innovators in Silicon Valley often do not receive venture capital if they do not have defensive strategies against Microsoft or at least a co-existence strategy. Quite often that strategy is to become successful enough to become an attractive purchase for Microsoft. Not much of a reward for innovation.
One of the functions of antitrust law is to create an environment that is protective of the innovator. Microsoft has not been an innovator.
2nd Fallacy: That Google, Apple and All Successful Companies Need to Fear
The second claim, echoed widely by major media outfits, is that Google and Apple should now be worried about similar lawsuits because of their large market shares. But antitrust law is not about having large market shares. Antitrust law says nothing about offering a product and gaining monopolies. As long as there is no distortion of competition in neighboring markets, this is legitimate.
What antitrust law cares about in this context is leveraging monopolies of one market into another through abusive practices. The Commission found Microsoft employing two abusive practices: bundling and the deliberate obstruction of interoperability.
Horatio Gutierrez of Microsoft is quoted asking "If Microsoft can’t bundle an audio player with Windows, why can Nokia bundle a camera with a phone?" — the answer seems obvious.
It is questionable whether Nokia has 95% market share in mobile phones, but even if that were the case: There is currently no separate market for mobile phone add-on cameras, so there is no neighboring market to be be distorted by monopoly abuse.
If Nokia had 95% domination and if there were such a market, Nokia might find itself in conflict with antitrust authorities if it took active steps to ensure that a) all its phones always came with the camera included and there is no way to buy the phone separately; b) removal of the camera would be very difficult for a normal user and potentially end up damaging the phone; c) the phone would be built in ways to make sure cameras of other vendors would not work and it would be impossible to buy both together.
Microsoft was found doing all of the above with its media player.
The second abusive practice the Commission found Microsoft guilty of is the deliberate obstruction of interoperability, generally achieved through arbitrary and willful modification of Open Standards. This makes it impossible for competitors to write interoperable software. This is to the detriment of customers, who find themselves locked into the products of one vendor, the antithesis of competition.
Microsoft is comparatively silent on this charge and for good reasons. Vendor lock-in is precisely what public administrations around the world are concerned about. It is a driving force behind the growing momentum on Open Standards, and Microsoft’s refusal to end the obstruction might not go down too well.
It might look much worse in the light of public statements that Microsoft will not even commit to standards that it has proposed itself, such as the recent Microsoft OfficeOpenXML (OOXML) format it wants approved by ISO.
The less people talk about the interoperability side of the case, the better for Microsoft. Otherwise people might connect MS-OOXML to the fact that Microsoft initiated the standardisation effort in the workgroup server area to open the market and later started obstruction of interoperability on its own standard to drive the innovator out of the market.
As long as other companies avoid these practices they will have nothing to fear from the European Commission.
Despite what Microsoft and its partners would have you believe, monopoly abuse is not good for you. It only benefits the monopolist at the expense of competition, innovation and society at large. Antitrust law was created to address this issue and to protect the interests of society.
If a monopolist tells me that antitrust law harms innovation, I have to clearly state that I am not convinced.
Neither should you be.
ADDITION: On the same subject you might be interested in the ”Logic from another planet” blog entry about previous activities of the people speaking out on behalf of the United States.