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The European Court of First Instance
has upheld a staggering £345 million fine on Microsoft for breaking
competition law. It was ruled the American giant had abused its
dominance of the market for PC operating systems through its
Windows software.
Is this the end of Microsoft's dominance, or
is it merely a levelling of a playing field that will threaten
other big players and help smaller technology companies avoid being
trampled underfoot?
The story is that in 1998, Sun Microsystems
complained to the competition authorities that Microsoft had
refused to provide it with interface information to allow it to
develop server products that would operate with Windows.
Microsoft said the information was secret and
it was not prepared to give it to others so they could develop
competing products.
In 2000, the European Commission also started
investigating the effects of the incorporation into Windows 2000 of
Microsoft's Windows Media Player (WMP).
This component came bundled free with Windows
and quickly took over from erstwhile market leaders such as
RealPlayer and QuickTime.
In 2004, the commission decided that
Microsoft's refusal to supply interface information between Windows
software and non-Microsoft operating systems was part of a broader
strategy deliberately intended to exclude competitors from the
market.
The commission also found that by attaching
WMP to Windows 2000, Microsoft had artificially reduced competitor
incentives to develop competing software and this ultimately
reduced consumer choice.
It was these decisions by the commission that
have now been upheld by the court.
The court's view was that in order to be able
to compete viably with Windows work group server operating systems,
competing systems had to be able to interact with Windows on an
equal footing.
This did not mean, as Microsoft had
complained, that essential source code would have to be
revealed.
But it would be necessary for the company to
give its competitors a detailed technical description of certain
rules of interconnection and interaction that can be used within
the Windows work group networks to deliver work group
services'.
This means Microsoft is now forced to reveal
some of its secrets and must license some of its intellectual
property to its competition.
Usually, an owner of a technical secret or
intellectual property can use it - or refuse to use it - as they
see fit, but there are exceptional cases' where, if the owner is
dominant in its market, the European Court will order
otherwise.
For an exceptional case' to arise:
- the refusal to grant a licence must relate to a product or
service vitally necessary to a particular activity.
- the refusal must be of such a kind as to exclude any effective
competition in its neighbouring market.
- the refusal must prevent the appearance of a new product for
which there is potential consumer demand.
The court also found the bundling of WMP into
Windows was an abuse since:
- the tying product (the operating system) and tied products (the
media player) were two separate products.
- Microsoft was dominant in the market for the tying
product.
- consumers could not choose to buy Windows without WMP, and WMP
could not be uninstalled from Windows.
- the practise was to the detriment of the competition.
- there was no objective justification for the bundling.
Perhaps surprisingly, none of this is new law.
The rules on inter-operability of software products have been
around since the mid-1980s.
The decision on WMP has merely confirmed a
previous European court decision on refusals to license
intellectual property which also dates from about 20 years ago.
These rules do not only apply to software - the previous court
decision related to copyright in TV listings magazines.
All types of technology are covered by these
rules. The key element is that a company has to be dominant in the
relevant market, but dominance' usually means having about only 40
per cent or more of a market, so it is a threshold that can easily
be reached in new and innovative industries.
Microsoft can appeal to the full European
Court of Justice, but it is doubtful that the main decisions will
be overturned.
The judgement in this case confirms that if
you are a successful company, with a significant share of your
market, then you need to be careful how you treat your competitors
who can come knocking on your door demanding access to your secret
technology.
The Commission is already looking hard at the
likes of Intel, Apple and at Microsoft's new product, Vista.
And if you are a smaller player dominated by a
Microsoft or similar big beast, a careful application of the
competition laws may well reap dividends, and help level an
otherwise daunting playing field.
Simon Smith is a partner in Blake
Lapthorn, and specialises in intellectual property,
competition and contract law.
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