Antitrust

Commission adopts Decision in the case Nicholas BANASEVIC, Jean HUBY, Miguel PENA CASTELLOT and Oliver SITAR, Directorate-General Competition, unit C-3, and Henri PIFFAUT, Directorate-General Competition, unit C-4

1. Introduction ware that runs PCs. Microsoft's current market share in this market, with its Windows product, is On March 24 2004, the Commission concluded its between 90 and 95%, and it has enjoyed the same Microsoft investigation by way of a formal Deci- high market shares for many years. In its response sion. This brought to an end proceedings which to the third Statement of Objections, Microsoft had lasted just over five years. The Commission recognised its dominance in this market. found that Microsoft had abused its dominant posi- tion in PC operating systems by (i) refusing to The Decision highlighted that the key to provide interoperability information necessary for Microsoft's enduring dominance were the network competitors to be able to effectively compete in the effects relating to the applications that run on work group market; and Windows. Applications that are written to (ii) its Player with Windows will not run on other operating systems. Windows. The main benefits that consumers derive from a given PC operating system relate to the number and variety of applications that they can run on it. 2. Procedure Similarly, software developers who write applica- The case originated with a complaint in December tions value operating system platforms that enable 1998 from Sun Microsystems, which alleged that them to reach the greatest number of users. There Microsoft, with its Windows product, enjoyed a is therefore a self-reinforcing dynamic, because dominant position in PC operating systems, and the higher the number of users of a given operating that it had abused this dominant position by system platform, the greater the number of appli- reserving to itself information that certain software cations that applications developers write for that products for network computing, called work platform and vice versa. group server operating systems, needed to Due to the ubiquity that Microsoft has achieved on interoperate fully with Windows. Following an the PC operating system market, virtually all investigation into this complaint, the Commission commercial applications are written first and fore- issued a Statement of Objections on 1 August 2000 most to the Windows platform. There is therefore a which focussed on the interoperability issues in very strong network effect which protects Sun's complaint. Microsoft's position. This is called the ‘applica- In parallel, in February 2000, the Commission had tions barrier to entry’. launched an ex officio investigation into Micro- soft's generation of PC and server 4. Microsoft's abuses products, as well as Microsoft's incorporation of into its PC operating system product. On 30 August 2001, the two 4.1. Interoperability procedures were joined with the sending of a The Decision identifies a relevant market for work second Statement of Objections to Microsoft. On 6 group server operating systems. These are oper- August 2003, following an extensive market ating systems which are designed and marketed to enquiry, the Commission issued a third Statement deliver collectively to PC users the core tasks of of Objections, focussing on both issues of file and print sharing and group and user adminis- interoperability and tying. An Oral Hearing was tration within a corporate/administrative network. held on 12-14 November 2003. As such, interoperability with PCs is a necessary attribute of these products. The Commission also 3. Microsoft's dominance found that these operating systems are generally installed on cheaper servers. The common point of departure for both of Microsoft's abuses was its overwhelmingly domi- As regards demand side substitutability, these nant position in PC operating systems, the soft- operating systems fulfil a different demand to

44 Number 2 — Summer 2004 Competition Policy Newsletter

other operating systems such as: (i) higher-level connections: for full interoperability with the PC ANTITRUST operating systems, which support mission/busi- to be achieved in this context, server-to-server ness-critical applications; or (ii) ‘edge’ server connections are indispensable. As a result, the operating systems, such as firewall or web server refusal, although it involves both client-to-server operating systems. As regards supply side and server-to-server connections that relate to the substitutability, although different server oper- interoperation within Windows work group ating systems within a given product range are networks, is in its essence a denial of compatibility generally built on a common ‘code base’, each with Windows PCs to competing work group server operating system within this product range server operating systems. needs to be optimised according to the tasks that it is designed to fulfil, and this requires a specific Although undertakings are as a rule free to choose development and testing process. This process their business partners, it is established case-law involves significant time and costs. Supply side that a refusal to supply may in certain circum- substitutability from other markets does not there- stances constitute an abuse of a dominant position, fore represent an appreciable competitive unless it is objectively justified. In the present constraint in the market for work group server case, the Commission has identified the following operating systems. The Decision also identifies exceptional circumstances of Microsoft's refusal. significant barriers to entry in the work group server operating system market, in particular due First and foremost, Microsoft's refusal risks elimi- to the presence of network effects in that market. nating competition in the work group server oper- ating system market. This is borne out by the Sun supplied evidence that it had requested tech- evolution of Microsoft's market power in that nical information on how Windows work group market, where the Decision establishes that servers interoperate with Windows PCs in order to Microsoft has actually already attained a dominant adapt its own work group server operating system position and that its market shares continue to offering to compete with Microsoft's, and that it grow. The Commission collected a very signifi- had not been provided that information. Microsoft cant amount of customer evidence showing that it acknowledged during the course of the investiga- is the ‘interoperability advantage’ that Microsoft tion that it was not prepared to provide the infor- reserves to its product via its refusal to supply mation requested by Sun to Sun or any other work interoperability information that drives customers group server operating system vendor. Indeed, towards Microsoft's work group server operating many work group server operating system vendors system products. This is confirmed by customer confirmed to the Commission that they had diffi- data provided by Microsoft itself. The Decision culties in building products compatible with the establishes that the interoperability information is architecture of Windows work group networks indispensable to be able to viably compete in the (PCs + work group servers). The Commission work group server operating system market. In therefore concluded that Microsoft had engaged in particular, the Commission extensively analysed a general pattern of conduct of withholding actual and potential substitutes to the interoperability information from its competitors. interoperability information which Microsoft had The Commission also identified that similar infor- argued were effective, and concluded that they mation had been previously provided to the were technically or commercially unrealistic. It is industry at large — through disclosure to AT&T also noteworthy that, due to the presence of signif- — and that with Windows 2000, Microsoft icant barriers to entry in the work group server disrupted this previous level of supply. operating system market, an elimination of compe- It must be underlined that the information at issue tition would be difficult to reverse. consists of the rules of connection between soft- ware elements in an IT network. The legally rele- Second, Microsoft's refusal limits technical devel- vant refusal is not a refusal to supply the Windows opment in the impacted market to the prejudice of source code, which constitutes the core of consumers. If competitors had access to the Microsoft's products. Microsoft is able to docu- refused interoperability information, they would ment the information at issue in the form of inter- be able to provide new and enhanced products to face specifications and thereby supply this infor- the consumer. Market evidence shows that mation without having to disclose source code. consumers value product characteristics such as security and reliability, although those characteris- It is also noteworthy that the relevant information tics are relegated to a secondary position due to relates to the organisation of Windows work group Microsoft's interoperability advantage. networks, which is based on an architecture of Microsoft's refusal thereby indirectly harms interrelated PC-to-server and server-to-server consumers.

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Microsoft's justification was that the information time, there remains today separate consumer at stake was protected by intellectual property demand for stand-alone media players, distin- rights. The Commission did not take a position on guishable from demand for PC operating systems; the validity of Microsoft's general intellectual (ii) a number of vendors develop and supply media property claims, which could in any case only be players on a stand-alone basis; and (iii) Microsoft ascertained on a case by case basis when Microsoft itself develops and distributes versions of its has prepared the relevant specifications. Windows Media Player for other PC operating systems. An undertaking's interest in exercising its intellec- tual property rights cannot as such constitute an The Commission also concluded that Microsoft objective justification when exceptional circum- afforded consumers no choice to obtain Windows stances such as the ones identified above are estab- without Windows Media Player; Windows Media lished. However, the Commission did not a limine Player is always present on a Windows PC. Even reject Microsoft's proffered justification, and though the icon can be hidden, the product itself addressed the impact on Microsoft's incentives to cannot be removed and the code remains instantly innovate of an obligation to supply in this case. accessible on a user's PC (this is important for the First, the Commission concluded that an order to subsequent harm to competition analysis). The supply the relevant information could not lead to issue of whether or not consumers are obliged to the cloning of Microsoft's product, not least use Windows Media Player with Windows was because the interoperability information relates to different to the question of whether they are interface specifications as opposed to source code. obliged to obtain Windows Media Player with Second, the Commission took account of the fact Windows. The question of usage of Windows that disclosure of interoperability information was Media Player as opposed to other media players commonplace in the industry. Third, the Commis- was nevertheless of key importance when the sion drew inspiration from the IBM undertaking Commission considered the issue of whether tying and from the 1991 Software Directive, (1) which harmed competition. strikes a balance between interoperability and copyright in restricting in specific circumstances On this point, the Commission took into account the exercise of copyright over software (including the fact that users can and do also obtain other exercise by non-dominant undertakings) in favour media players (mainly over the Internet) and that of interoperability, thereby stressing the impor- these media players are often free. The Commis- tance of interoperability in the software industry in sion therefore undertook a detailed analysis of the order to enhance competition and innovation. impact of Microsoft's behaviour, which included extensive questionnaires to a range of content In view of those exceptional circumstances, the providers, software developers and content Commission concluded that Microsoft's behaviour owners. amounted to an abuse of a dominant position. The Decision outlined that the tying of Windows 4.2. Tying Media Player to Windows afforded Microsoft unmatched ubiquity on PCs worldwide, because The Decision expounds that tying prohibited under Windows Media Player instantly shares the ubiq- Article 82 of the Treaty requires the presence of uity of Windows in newly-shipped PCs. The the following elements: (i) the undertaking Commission's analysis of the relevant evidence concerned is dominant in the tying product market; highlighted that other distribution means (e.g. (ii) the tying and tied goods are two separate prod- downloading over the Internet, bundling with ucts; (iii) the undertaking concerned affords other software or hardware, agreements with consumers no choice to source the tying product OEMs and the retail channel) are second best. This without the tied product; and (iv) tying forecloses guarantees content providers and software devel- competition. In addition, it needs to be examined opers that if they use Microsoft's technology, they whether there is any objective justification for the will be able to reach almost all PC users world- tying. wide. Furthermore, the Commission's market enquiry showed that supporting several technolo- The Commission concluded that PC operating gies generates significant additional costs. As systems and media players are separate products. such, Windows Media Player's ubiquitous pres- This is because: (i) although Microsoft has been ence induces content providers and software tying its media player with Windows for some developers to rely on Windows Media technology.

(1) Council Directive 91/250/EEC of 14 May 1991 on the legal protection of computer programs.

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Due to the fact that applications and content are its use for the development of compatible ANTITRUST largely specific to the proprietary infrastructure products. The disclosure order is limited to inter- used, customers will in turn prefer using Windows face specifications (not source code), and to Media Player, since a wider array of complemen- ensuring interoperability with the essential tary software and content will be available for that features that define a typical work group network. product. It applies not only to Sun but to any undertaking that has an interest in developing products that This self-reinforcing mechanism seriously under- constitute a competitive constraint to Microsoft's mines the competitive process in the media player product in the work group server operating system market to the detriment of innovation and the market. consumer, and has spill-over effects on competi- tion in other markets. For instance, it strengthens The conditions under which Microsoft makes Microsoft's position on media encoding and these disclosures must be reasonable and non- management software (often server-side). If discriminatory. Microsoft is allowed to require a Microsoft came to control the media player reasonable and non-discriminatory remuneration market, then its proprietary technology could for the production of the documentation, as well as constitute a significant barrier to market entry, not for specific intellectual property rights that the only to the media player market but also to related Decision might prevent it from fully enforcing markets in which technologies against beneficiaries of the order to supply are used (e.g. handheld devices). (provided that Microsoft can establish that these specific intellectual property rights are valid in the The Commission's analysis was supported by European Economic Area). market data, as well as by surveys commissioned by Microsoft itself. These figures showed a clear trend in favour of usage of Windows Media Player 5.2. Tying and Windows Media formats, to the detriment of The Decision orders Microsoft to provide a competitors. Microsoft's argument that its success version of Windows which does not include was the result of competition on the merits was not Windows Media Player. PC manufacturers and supported by the available evidence, which did not consumers are thus left the choice to obtain indicate a clear-cut lead of Windows Media Player Windows with the media player of their — not in terms of product quality. Microsoft's — choice. To maintain competitive Microsoft attempted to objectively justify its markets so that innovations succeed or fail on the conduct by putting forward a number of efficiency merits is an important objective of this remedy considerations related to distribution, and to the order. This will be beneficial to consumers. It is protection of the coherence of Windows, which important to note that consumers have the benefit according to Microsoft, outweighed any anti- of PC manufacturers acting as their "purchasing competitive effects from tying. The Commission agents" in relation to media player vendors. concluded that any such efficiencies could be Consumers will not be forced to do that job them- achieved without resorting to tying. As for selves by rummaging through the web. Microsoft's argument that tying Windows Media It is worth noting that the Commission does not Player would be efficient as it provided a focal prevent Microsoft from also offering a bundled point for developers of complementary and version of Windows including Windows Media compatible content and software, this is not a legit- Player. However, the Decision makes clear that imate argument under Community competition Microsoft must not circumvent the decision by law as it distorts competition on the merits. engaging in technical or economic tying. In light of the above, the Commission concluded that Microsoft's tying of Windows Media Player 5.3. Monitoring regime with Windows violated Article 82, and in partic- ular paragraph (d). In order to enable the Commission to efficiently oversee Microsoft's compliance with the Decision, 5. Remedies and fines a monitoring regime is foreseen by the Decision. Microsoft is required to submit a proposal to that effect, including provisions for the establishment 5.1. Interoperability of a monitoring trustee. The Decision outlines what the Commission considers to be the neces- The Decision orders Microsoft to disclose the sary tasks that the trustee should be able to carry information that it has refused to supply and allow out. In essence, these are tasks that will assist the

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Commission in enforcing the decision on an 5.4. Fines ongoing basis, and in the face of Microsoft's prod- ucts developing and changing. In view of the above abuses, the Commission imposed a fine of € 497.196 million. The fine represents 1.62% of Microsoft's annual world- As regards interoperability, the monitoring wide turnover. (1) Microsoft's infringement was trustee's responsibility should, in particular, considered very serious on the basis of the nature involve assessing whether the information made of the infringement, its impact on the market, available by Microsoft is complete and accurate, and the size of the relevant geographic market. The whether the terms under which Microsoft makes initial starting amount of the fine was set at the specifications available and allows their use € 165.732 million. In view of Microsoft's size and are reasonable and non-discriminatory, and resources, in order to ensure a sufficient deterrent whether the ongoing disclosures are made in a effect, this was multiplied by a factor of 2. The timely manner. starting amount was therefore € 331.464 million. This amount was increased by 50% in order to take As regards tying, the trustee's responsibility into account the 5 years and 5 months duration should, in particular, be to advise the Commission of the infringement. In view of the absence of both whether substantiated complaints by third parties aggravating and attenuating factors, the final about Microsoft's compliance with the Decision amount of the fine was therefore at € 497.196 are well-founded from a technical point of view. million.

(1) EUR € 30,700.336 million.

48 Number 2 — Summer 2004