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European IP Bulletin, Issue 11, April - Intellectual Property

Intellectual Property

1. EC Commission Rules Against Microsoft For Abuse Of Its Dominant Position

On 24 March the Commission announced its decision to rule against the software giant Microsoft for abuse of its dominant position in the Common Market.

Commissioner Mario Monti rejected a last minute settlement proposal by Microsoft.  The Commission held that Microsoft intentionally restricts the interoperability of its Windows software with non-Microsoft servers and, through tying its operating system to Windows Media Player, the company is leveraging its monopoly in the software market and extending it to other markets.

 The Commission ordered Microsoft to disclose all information necessary to achieve full interoperability of Windows with non-Microsoft servers and to offer PC manufacturers a version of Windows without Windows Media Player.  The Commission also levied a fine of €497.2 million on Microsoft.  The Commission has also decided to appoint a monitoring trustee to oversee the complete disclosure of the interface and ensure that the two versions of Windows have the same level of performance.  Soon after the announcement of the decision, Microsoft announced its intention to appeal before the European Court of First Instance and a lengthy judicial battle is expected.

Although the European case mirrors the US case against Microsoft, the decision of the Commission goes beyond the agreement between Microsoft and the US Department of Justice for example, in respect of interoperability, the European Commission’s requests for disclosure of certain protocols on the removal of code and bundling liability were not sought in the US.

The decision affects Microsoft’s business model as it attempts to block Microsoft’s strategy of expansion through the desktop to other areas of the software market.  By bundling its Explorer software with its Windows operating system Microsoft restricted the early commercialisation of Netscape in the Internet browser market.  Similarly, by bundling Media Player with its operating systems, Microsoft sought to cut the early lead of Real Player.  Microsoft’s aim was to establish the latest version of Windows media player as the standard for digital downloading of films and music, thus undermining the competition from companies such as Apple and Real Networks.  Even now Microsoft could gain a strong position in the area of encoding films and songs and the sale of digital rights management software to media companies if enough consumers choose their product.

With regard to competition law, this case raises issues of whether it is appropriate to apply traditional competition law principles in cases involving new technologies, especially in respect of the software industry.  Traditionally any company with a market share of 40% or more is likely to be regarded as a dominant player.  However, competition law also takes into account the ways in which a market works and the interchangeability of products.  New technologies can move into the market faster than is the case in more traditional industries for example, much software can be downloaded through the Internet and therefore companies trying to promote software products do not need to engage themselves in costly processes of distribution, thus lowering the cost of entry of newcomers into the software market.  Finally the case also raises issues of inter-jurisdictional applicability, since software is a global business and the EC is the second largest market for software in the world.

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