EU-Microsoft II: The Rematch

This time, the stakes are higher. The European Commission's two new antitrust investigations challenge the software giant's core businesses

European antitrust officials are once again probing possible anticompetitive behavior by Microsoft (MSFT). This time, the allegations concern Microsoft's core operations and, if they stick, could disrupt the company's Internet strategy and weaken its dominance of desktop software.

Four months after a landmark decision to uphold an earlier antitrust case (, 9/17/07), the European Commission said Jan. 14 it will begin two new formal antitrust investigations against Microsoft. If Microsoft loses the latest round, the impact could be far more sweeping.

One of the new investigations will probe whether Microsoft, by refusing to disclose key information, is preventing competing products from interoperating with its own Office suite of business applications, the .Net programming language, and other products. The other challenges the legality of bundling Microsoft's Web browser, Internet Explorer, with its Windows operating system.

The old case ended up costing Microsoft billions of dollars and forced it to change some practices. But it centered on servers and media players, which are important but fringe businesses for the software giant. Not so with the more recent probes. "Microsoft should be concerned because this case addresses core aspects of its business model and the preservation of its core monopolies," says Thomas Vinje, a partner at law firm Clifford Chance in Brussels, Belgium, who represents a coalition of tech companies that filed one of the two new complaints. "The case has the potential to transform the software industry and give consumers a real choice in desktop operating systems and programs."

In a statement, Microsoft said it plans to cooperate with the European Commission's investigation and provide it with the information it requests. "We are committed to ensuring that Microsoft is in full compliance with European law," the company said.

Europe's Heavy Caseload

The initiation of proceedings signifies the EC will further investigate the case, though it does not mean European officials have proof of an infringement. It also reflects the commission's confidence in tackling other high-tech targets. Emboldened by the Sept. 17 decision, Europe is pursuing cases against Qualcomm (QCOM) and Rambus (RMBS), both involving intellectual-property licensing disputes, and an unrelated case against chipmaker Intel (INTC), which allegedly harmed rival Advanced Micro Devices (AMD) and impeded consumer choice through heavy-handed marketing tactics.

As with earlier cases, the complaints against Microsoft involve bundling and a lack of interoperability, practices the Sept. 17 ruling found to be illegal when practiced by a dominant company. As part of that decision, the EC was able to show that the free inclusion of Media Player in Windows, ostensibly a boon to consumers, harmed rivals such as RealNetworks (RNWK) and Apple (AAPL), and reduced competition in the media player market. A similar argument held that by limiting the information it gave out about Windows networking standards, Microsoft had stymied competition in desktop and server operating systems, to the detriment of consumer choice.

Market Dominance vs. Interoperability

The new cases center on very similar arguments. Microsoft rivals IBM (IBM), Oracle (ORCL), and Nokia (NOK) filed the latest interoperability complaint with the EC in December, 2006, through an industry group called the European Committee for Interoperable Systems (ECIS). They argue that with the new Vista version of Windows and Office 2007, Microsoft is trying to extend its dominance into even more areas of the market and threatening the open nature of the Internet (, 9/14/07) by failing to release interoperability information.

In its Sept. 17 Microsoft judgment, Europe's Court of First Instance made clear what type of interoperability disclosures dominant companies must make. So, the EC said in a Jan. 14 statement it will investigate a variety of Microsoft products, including its new file format Office Open XML, as implemented in Office, to see if it is sufficiently interoperable with competitors' products.

The 2006 ECIS complaint argues that Microsoft realized in the mid-1990s that the Internet represented a serious threat to its Windows monopoly, so it developed a strategy to dominate Web applications and technologies. The complaint alleges the software giant's actions ranged from destroying rival browsers, including Netscape Navigator, and compromising Sun Microsystems' (JAVA) Java programming language, to the creation of proprietary Web technologies implemented in Windows 2000 and Windows 2003. Microsoft's most recent and forthcoming products take this practice to an unprecedented level, the complaint argues, with an aim to gain broad control of the Internet as a programming and service platform.

Other ECIS members include Sun, Adobe Systems (ADBE), RealNetworks, and open-source software maker Red Hat (RHT). They argue that if Microsoft is allowed to succeed, it will turn the Internet into its own proprietary playground, suppressing open Internet standards just as it suppressed open standards and technologies in other software areas. "We want to bring back competition in desktop operating systems, browsers, and into office applications," says Georg Greve, head of the Free Software Foundation Europe, which helped the EC investigate previous complaints against Microsoft.

Would Unbundling Be a Benefit?

The second complaint, filed by Opera, a Norwegian browser company that competes with Microsoft, accuses Microsoft of abusing its dominant position by tying its browser, Internet Explorer, to the Windows operating system and by hindering interoperability by not following accepted Web standards. In addition, Microsoft is accused of tying other separate software products, including desktop search and Windows Live, to Windows.

Opera software accounted for only about 0.7% of Web browsers on PCs and mobile phones in December, according to Net Applications, a maker of Web traffic measurement software. Internet Explorer claimed a 76% share, Mozilla's Firefox browser had about 17% share, and Apple's Safari claimed 5.6%.

Like Netscape, Opera and Firefox would both be a lot further today if Internet Explorer was not tied to Windows, says Opera CEO Jon von Tetzchner. "The fact that Microsoft has included a browser with operating systems has limited how well competitive browsers can do in the market," he says. Opera is asking the European Commission to obligate Microsoft to unbundle Internet Explorer from Windows and/or carry alternative browsers pre-installed on computers.

Nicholas Economides, a professor at New York University's Stern School of Business, says the interoperability case could be tough because the EC will have to prove for each product that Microsoft was withholding key details. The bundling case is more clear-cut, he says. "On that claim, [the EC] may win because it is very similar to Media Player," he says. But Economides cautions that the EC should think twice before ordering Microsoft to separate Internet Explorer from Windows. "To a large extent, Internet Explorer is part of the operating system," he says, so separating it would be a "calamity." The European Union, he cautions, "needs to be careful in what remedy it is going to request," he says. "It is important to know what you aim for if you win."

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