The antitrust cases against Microsoft in the United States and
Europe have been the most high profile implementation of competition law in the last 20 years. Christos Genakos, Kai Uwe
Kühn and John Van Reenen look at the key economic issues, notably what they imply for the conduct of competition policy in high-tech industries dominated by rapid innovation.
CentrePiece Summer 2007
The European
Commission
versus Microsoft: competition policy in high-tech industries
I
n the various Microsoft cases, antitrust authorities in the United
States and the European Union
(EU) took on one of the most valuable companies in the world and its CEO Bill Gates, the world’s richest man. After five years of investigation, in
March 2004, the European Commission held Microsoft guilty of abuse of its dominant market position under Article 82 of EU law and imposed the largest fine ever for such an antitrust violation in
Europe: €497 million.
The Commission found that Microsoft had abused its monopoly of personal computer (PC) operating systems in two ways: ‘deliberately restricting interoperability between Windows PCs and non-Microsoft work group servers, and by tying its Windows Media Player, a product where it faced competition, with its ubiquitous Windows operating system.’
(Work group servers are computers that allow people to share files and printing, store and protect large amounts of data, access the internet, etc.)
The Commission also demanded major remedies, including compulsory licensing of intellectual property: ‘within 120 days, to disclose complete and accurate interface documentation which would allow non-Microsoft work group servers to achieve full interoperability with Windows
PCs and servers’; and ‘within 90 days, to offer to PC manufacturers a version of its
Windows client PC operating system without Windows Media Player.’
This degree of intervention is highly unusual and has led to a continued conflict about the implementation of the remedies. The case also raises an important question about the conduct of competition policy in high-tech industries dominated by rapid innovation.
Market power
In the server case, which we focus on here, the Commission’s basic argument was that Microsoft extended its market power from PC operating systems (of which Windows controls over 95% of the market) into a complementary market – that of the operating systems for work group servers. How did it do this?
For server operating systems to be effective, they must be able to communicate easily with the PC operating system – what is known as ‘efficient interoperability’. Microsoft’s control of the
PC operating system meant that it could limit the efficient interoperability between
Windows and rival companies’ server operating systems by manipulating the interfaces responsible for connecting
Windows with other software.
The Commission argued that Microsoft had both short-run (‘static’) and long-run
(‘dynamic’) incentives to ‘foreclose’ rivals from the server operating systems market in this way. The dynamic reasons are
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probably most important, as Microsoft was clearly concerned that a strong presence of rivals in server operating systems could threaten the profits it enjoyed from its
Windows monopoly of the PC market in the future.
For example, customers could reduce their reliance on PCs by running applications like spreadsheets, database management and banking software mostly on servers, leading to a decline of
Microsoft’s longstanding monopoly. By extending the Windows platform dominance from PCs to servers, Microsoft could extinguish this future threat.
Various internal emails by Microsoft senior executives suggest that this strategy was not the overzealous imaginings of
Eurocrats. For example, in 1997, Bill Gates wrote: ‘What we’re trying to do is use our server control to do new protocols and lock out Sun and Oracle specifically… the symmetry that we have between the client
operating
