A Window into Microsoft's Battle

The long-running antitrust battle between Microsoft (MSFT) and the European Commission (EC) will test several critical legal issues when arguments begin in a Luxembourg courtroom on Apr. 24 in Microsoft's appeal of the commission's 2004 decision against the company.

The case revolves around two separate issues: Microsoft's bundling of its Media Player into Windows, and whether the company must disclose secret software protocols to rivals that dictate how programs interact with Windows network servers. Here's a look at the arguments both sides are likely to use to advance their positions.

The crux of Microsoft's legal position in the Media Player portion of the case, which will occur on the first two days of the hearing, is that the commission was wrong to declare that PC operating systems and media players are separate products and markets. Though the commission focused on the Media Player bundled into Windows in the late 1990s, Microsoft points out that it has included the ability to play streaming audio files in Windows since 1992 -- years before rival RealNetworks was even founded (by former Microsoft executive Rob Glaser). What's more, there remains a market for non-Microsoft media players, as evidenced by the soaring success of Apple's (AAPL) iPod and iTunes Music Store.


  Microsoft's argument, legal experts say, is analogous to shoes and shoelaces. While consumers can and do buy shoelaces separately, they also expect at least one pair to be included when they buy new shoes. The company will argue that modern consumers similarly now demand a media player built into the operating system. Yet by including one, Microsoft will say that it has not foreclosed competition -- and that the EC misread the market in its determination to prove illegal "tying" of two separate products. "This entire part of the case is a loser for the commission," says a source close to Microsoft.

Not so fast, counters the other side. The commission wouldn't speak about the case. But Thomas Vinje, a partner in the Brussels office of law firm Clifford Chance, says that the commission's argument has already been borne out by the market. "Microsoft has essentially eliminated all competition in media players," Vinje says, noting that the market shares for RealPlayer and QuickTime are each now below 10%. Microsoft's claim that it has not foreclosed competition "doesn't cut the mustard," he says.

The crucial point, Vinje says, is that the commission avoided a simple declaration of unlawful tying by a monopoly player. Rather, it undertook a detailed analysis of the impact Microsoft's bundling has on the independent market for digital audio and video. "There's not much content available any more for rival players," Vinje says. Perhaps streaming media is a market that naturally tends toward a single standard, he concedes. But if that's the case, he plans to tell the court, the standard should be open and competitive -- not controlled by the same company that provides the underlying operating system software.


 The arguments over server interoperability, which will take place on Apr. 26 and 27, are more complex. Microsoft views the commission's order to provide software specifications as an unjustified "taking" of its intellectual property. "This is about forcing us to give away technology that we developed," says the source close to the company. "We spent the money on the R&D, and now other people want to use it for free."

Microsoft will note that despite the alleged difficulties of co-existing with Windows servers and desktops on a network, rivals haven't been forced off the market. Indeed, Microsoft can point to Linux , which continues to gain share in servers, and to the many companies that successfully host mixed networks of PCs, Apple Macintoshes, and Unix-based workstations. To assuage the EC, Microsoft has offered various concessions, including the opportunity for competitors to obtain a license to the underlying source code of Windows. This would, in theory, give them the information they need to connect their servers to the software.

On matters of law, Microsoft will claim that the commission relied too heavily on one precedent concerning forced disclosure of intellectual property. In that case, three British and Irish broadcasters were ordered by the court in 1995 to disclose information about their program listings to a publisher named Magill that wanted to put out a weekly TV guide.


  Instead, Microsoft will say, the court should consider instead the precedent established in another intellectual property dispute between rival producers of pharmaceutical sales data, IMS Health and NDC Health. In that case, ruled by the European Court of Justice in April, 2004 -- after the European Commission decision against Microsoft -- NDC was not allowed to copy a system developed by IMS for segmenting the German market.

The IMS ruling says companies can be forced to disclose intellectual property to competitors only when the rivals want to introduce new products or attack secondary markets. Under that standard, Microsoft claims it shouldn't be forced to disclose its server interface information because the software makers who want to use it aim to enhance their existing products to compete against Microsoft in its primary market. Needless to say, this leaves numerous fine points open to interpretation.

Microsoft's rivals, naturally, take a different view. "The key issue in the interoperability case is to what extent so-called intellectual property rights conflict with antitrust rules," says Carlo Piana, a principal with the Milan law firm Tamos & Piana, which will represent the Free Software Foundation Europe before the court. His point: While courts largely lean towards protecting the intellectual property rights of inventors, things change when the holder of the copyright or patent is a monopolist with the ability to shape markets. In preceding U.S. and European cases, dominant companies with "blocking" technologies have sometimes been required to give them up in the interest of competition.


  Clifford Chance lawyer Vinje says that the crucial problem for Microsoft is a legal concept known as "cessation of supply." When Microsoft was a minor player in the networking market dominated by Novell's NetWare, it readily shared information about how to connect Windows PCs to rivals' servers. But after Microsoft introduced its Active Directory technology in the late 1990s, it closed off the tap.

Today, rival systems can co-exist on Windows networks, but they don't have access to the crucial information about users and network resources stored in Active Directory. That relegates other software to a junior role -- and reinforces the dominance of Windows, Vinje says. "Failure to provide this information risks eliminating competition."

Vinje says the commission isn't trying to force Microsoft to give away its programming code or even vital patents. All it ordered was that Microsoft disclose a roadmap for how outside software can connect to its servers, just as it does for the millions of independent programmers who write software that runs on Windows PCs.

To that end, the anti-Microsoft camp will rely less on the squishy precedents provided by Magill and IMS, and instead cite other non-tech cases where courts have ordered companies to recommence giving out information that they once did and stopped. That, they hope, will move the argument away from sticky intellectual property concerns to a focus on the business practices of a dominant supplier.

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