Commission Adopts Decision in the Microsoft Case

Antitrust Commission adopts Decision in the Microsoft 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 position 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 server operating system market; and Windows. Applications that are written to (ii) tying its Windows Media 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 Windows 2000 generation of PC and server 4. Microsoft's abuses products, as well as Microsoft's incorporation of Windows Media Player 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 operating 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 software 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. Number 2 — Summer 2004 45 Antitrust Microsoft's justification was that the information time, there remains today separate consumer at stake was protected by intellectual

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