Decision likely to embolden European Commission

Microsoft has been found to have engaged in anti-competitive practices, writes Jamie Smyth

It took a few moments for observers at the Court of First Instance in Luxembourg to decode the brief legal ruling read out by Judge Bo Verterdorf yesterday in the Microsoft case. But when European Commission lawyers began posing for personal photographs in the court room while ashen-faced Microsoft executives filed quietly out of court, it soon became clear: the commission had won a big victory.

"The court has confirmed that Microsoft cannot regulate the market by imposing its products and services on people . . . Computer users are therefore entitled to benefit from choice, more innovative products and more competitive prices," said EU competition commissioner Neelie Kroes in a hastily arranged press conference.

Both sides in the mammoth nine-year anti-trust battle have consistently argued that they are acting in the interests of consumers. But in its 250-page judgment the court supported the commission decision in 2004 that Microsoft had abused its dominant position in the market for Windows - the operating system used by 95 per cent of computers - to harm its rivals, and as a consequence restrict consumer choice.

Microsoft's top lawyer Brad Smith said he was disappointed by the ruling, which he recognised gave "quite broad power and quite broad discretion" to the EU executive. He said the firm would comply with the judgment while reserving its right to appeal on points of law only to Europe's highest court, the European Court of Justice.

The clarity of the ruling was a surprise to some participants who had predicted a possible split decision given the two distinct legal concepts in the case: the bundling of software into Windows and the provision of interoperability information to rivals.

Yet it will be some time before the full implications of the judgment are known for Microsoft, the software industry, consumers and the commission's anti-trust policy.

Ms Kroes's initial bullish reaction to the victory: that it should lead to a "significant drop" in Microsoft's 95 per cent share of the market, was quickly toned down by the commission. And the stock market's tame reaction to the ruling - Microsoft's shares slid just 1 per cent in early trading - shows that investors aren't too concerned.

The court's ruling means Microsoft cannot recoup the record €497 million fine levied by the commission. The firm also faces new fines, currently worth €3 million per day, for not complying with the 2004 ruling to provide technical information to rival firms to enable them to build products that can interoperate with Windows.

Yet with revenues worth €51.12 billion in 2007 Microsoft has plenty of cash.

Probably the biggest threat to Microsoft is the threat to its business model posed by the ruling. The court ruling found that Microsoft's strategy of bundling its own Media Player into Windows has "led to a weakening of competition in such a way that the maintenance of an effective competitive structure would not be ensured".

This is likely to embolden the commission to step up scrutiny of new Microsoft software releases and force the company to provide alternative products to the market.

Jonathan Zuck, president of the Association for Competitive Technology (ACT), a key ally of Microsoft, warned yesterday that consumers are now unlikely to see the technologies they are demanding, like voice recognition and multi-touch interfaces integrated into Windows.

"The decision on the Media Player opens a dangerous precedent for other companies and sectors. Airbus should start worrying about adding new features to their planes," added Mr Zuck.

But such fears are probably exaggerated. The ruling notes that the commission decision in 2004 did not preclude Microsoft from selling a version of Windows with its own Media Player installed. Instead the firm was merely obligated to provide a separate version of Windows to consumers with no Media Player.

Given that only a few thousand of these competing versions have been sold since 2005 compared to the tens of millions of copies of regular Windows, the commission's established remedy to prevent abuse from "bundling" plainly has not been a success.

But the scale of yesterday's victory will be a significant boon in the commission's struggle with Microsoft to force it to provide rivals with adequate and reasonably priced interoperability information to build products that work with Windows.

For several months the commission has put on hold a decision on imposing new penalties on Microsoft. For example it could raise the ongoing daily fine on Microsoft to 5 per cent of daily turnover.

Access to this information will prove a boon for rivals that will be able to develop new innovative technologies that work properly with Windows, say Microsoft rivals.

The decision is also likely to help shape future EU anti-trust policy, which is currently being reviewed by Ms Kroes.