March 8, 2007 12:50 PM

And There Was One

In the famous Dutch story, a kid's finger in the dike saved the town. Will Microsoft's single protocol licensee save it from further EU admonishment and additional fines?

A week after the European Union's Competition Commission throttled Microsoft, again, over protocol licensing, the company announced the first—and only—licensee. Quest has licensed WSPP (Work Group Server Protocol Program).

In a statement issued March 1, the Competition Commission faulted Microsoft over protocol licensing pricing, as required by the March 2004 adverse antitrust ruling.

"Microsoft has agreed that the main basis for pricing should be whether its protocols are innovative," said Competition Commissioner Neelie Kroes. "The Commission's current view is that there is no significant innovation in these protocols. I am therefore again obliged to take formal measures to ensure that Microsoft complies with its obligations."

The Competition Commission warned of additional fines against Microsoft. With the original adverse antitrust ruling, the EU fined the company $613 million, in part, for failing to properly disclose interoperability information to third parties. The EU decision found that Microsoft had used its dominance in desktop operating systems to gain unfair advantage in the server software market.

In July 2006, the EU levied a second fine, $357 million, against Microsoft. Now, one licensee stands between Microsoft and possible new fines.

In a conference call last week, Brad Smith, Microsoft's general counsel, asserted, "The pricing that we have proposed is quite flexible."

Microsoft is now in position to claim pricing is reasonable.

"Quest chose to sign their license the same day the Commission issued its Statement of Objections on protocol royalties, even though we had agreed on terms with Quest some weeks ago," Erich Andersen, Microsoft Europe associate general counsel, said in a statement distributed to the news media.

"Quest has taken the User and Group Administration protocol set at the published royalty rate, 5.25 percent of net revenues generated by the Quest products that will incorporate the protocols," Andersen continued. "This agreement clearly shows that Quest believes the royalties are reasonable."

What Andersen and Smith failed to really address is innovation. The European Commission mainly faulted pricing because of a lack of innovation—indicating that pricing is too high because what Microsoft offers has too little value.

Microsoft has divided the protocols into different levels. According to the European Mission, "There is no innovation in any protocol in the Gold and Silver categories"—the two highest levels. "These protocols represent more than 95 percent of the price of the total Technical Documentation."

Smith scantily covered innovation in his press conference, charging that the European Commission focused on "innovation alone." His contention rings hollow for a company whose executives repeatedly thump their chests about Microsoft's innovation and the importance of it. So, is or is not innovation important? Microsoft can't have it both ways.

As for the extent of innovation, the European Commission offered a scathing comment from the technical trustee reviewing Microsoft protocols: "All of the described features were considered either to have been Microsoft implementations of prior developments by others, or to have been anticipated by prior developments and to be immediately obvious minor extensions to that prior work."

Microsoft benefits most by dragging out the process, particularly now. The European Union's Court of First Instance is soon to issue a ruling on Microsoft's appeal of the 2004 adverse antitrust ruling. If Microsoft wins, it could flip the switch off the protocol licensing program. That's a whole lot easier if the company has offered something of limited value or no licensee has taken the offer.

Meanwhile, Microsoft's U.S. protocol licensing program is fairing better, but not without difficulty. In court documents filed on Tuesday, Justice Department and state lawyers expressed "concern" that "Microsoft has not been able to meet its original schedule and are particularly troubled [by] that at this late hour in the program."

Microsoft contends that the schedule needed to be changed to accommodate new protocols, for Windows Server "Longhorn," made available after the schedule was developed. Both parties are expected to discuss protocol licensing during a routine court hearing scheduled for next week in Washington.

Microsoft has more impetus to comply with the U.S. protocol licensing program because of the company's settlement with the Justice Department and eight states and the resulting court oversight. In Europe, Microsoft has no settlement agreement and has yet to exhaust its appeals process.

On the continent, for now, time is on Microsoft's side.

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