Microsoft Antitrust Cases Stand in Judgment

The two cases follow different tracks, because of their focus and variances in antitrust law, but they overlap in current form around server interoperability. Here, US District Judge Colleen Kollar-Kotelly will soon decide whether or not to extend Microsoft antitrust oversight. Next week, the European Court of First Instance will rule on the validity of the Competition Commission's findings against Microsoft and the remedy, including a stiff fine imposed against the company.

In both cases, Microsoft has embarked on aggressive campaigns to diminish the remedies' impact on its core businesses, by shifting technology development away from the rulings' scope and dragging out the disclosure of server protocol information.

This essay makes no value judgment about Microsoft's behavior, whether right or wrong. Microsoft's actions speak for themselves. To people that believe Microsoft was wrongly prosecuted: The company's actions are self-defense against regulations that hamstring competition.

To people that believe Microsoft was rightly prosecuted: The company's actions demonstrate how a dangerous and unrepentant monopoly preserves its anti-competitive position. Readers only interested in Microsoft's behavior should skip to the second and third subheads.

Cases in Point
The U.S. antitrust case is reaching a critical juncture, because of closure. Judge Kollar-Kotelly approved the settlement between the Justice Department, Microsoft and seven states in November 2002. The consent decree, and so court oversight, largely expires on November 12. Some oversight, pertaining to protocol disclosure, will continue for another two years.

Last week, the settling parties filed a legal brief praising the consent decree's positive effect on software competition. Another handful of states—the "California group"—disagreed and asked for additional court oversight. Kollar-Kotelly will likely hold another hearing on the merits of the settlement and whether oversight should end.

Meanwhile, Windows Vista Service Pack 1 raises uncertainty about the consent decree's closure. In June, the Justice Department, Microsoft and all participating states agreed to changes in how Windows Vista search works. Google had complained that Microsoft's search implementation was anti-competitive. Microsoft will deliver the search changes after court oversight largely ends. Google has asked for extended oversight, and Judge Kollar-Kotelly will allow the search company to make its case.

Across the Atlantic, on September 17, thirteen judges are scheduled to rule on the European antitrust case. In March 2004, the European Union's Competition Commission ruled that Microsoft violated local antitrust law by using its dominant position with desktop operating systems to gain an unfair competitive position in workgroup servers. Additionally, the European Commission faulted Microsoft for bundling, or "tying," its media player to Windows. The European Commission fined Microsoft about $612 million, ordered the release of a Windows version without the media player and demanded disclosure of server protocol information.

Microsoft appealed the adverse antitrust ruling, which the Court of First Instance will rule on next week. By the way, the 13 judges must reach a consensus, meaning a unanimous decision, which increases the likelihood of some kind of split ruling.

Microsoft's Feints and Misdirections
As the saying goes, actions speak louder than words—and Microsoft's technology track record is revealing with respect to its compliance with the U.S. settlement or the European remedy.

Microsoft settled the U.S. antitrust case on fairly favorable terms, considering that at one point U.S. District Judge Thomas Penfield Jackson ordered it to breakup into two separate entities. In late summer 2001, the Justice Department dropped its bundling claim and abandoned its pursuit of a breakup. An adverse ruling on bundling could have undermined Microsoft's longstanding practice of integrating independent technologies into Windows.

The U.S. antitrust trial focused on four main areas of so-called middleware: e-mail, instant messaging, media playback and Web browsing. Following the settlement, Microsoft all but abandoned development in three of the four categories, with respect to Windows. Internet Explorer and Outlook Express development languished until 2004-2005, after Mozilla released Firefox and Thunderbird and Windows Vista development pushed ahead in earnest. Meanwhile, Microsoft shifted its instant messaging development away from Windows—to Office Communicator for businesses and MSN Messenger for Windows. Vista dropped Windows Messenger altogether.

Microsoft continued to develop Windows Media technologies for awhile, but with its focus shifted towards server tools and DRM (digital rights management). Microsoft wrongly saw rights protection as a hook to woo content providers—and content—for Windows Media Player. The bundled component has changed little since 2003, even with last year's release of Windows Media Player 11. The point: Microsoft largely backed off middleware technologies covered by the consent decree. Any new development only came after new competitors successfully entered one of the middleware categories.

Additionally, Microsoft stonewalled the Justice Department and settling states on server protocols. Nearly five years after Judge Kollar-Kotelly approved the settlement and almost six years after the parties signed the agreement, Microsoft has yet to fully document its server protocols. Meanwhile, Windows Server market share growth has been in the double digits for about five years straight, during the period governed by the consent decree.

Something else, which relates to technology abandonment and server protocols: Microsoft shifted its server strategy from Windows to Office, following the settlement. During the 2003 product release cycle, or less than year after Judge Kollar-Kotelly approved the settlement, Microsoft embarked on an aggressive desktop application-to-server integration strategy. From one perspective, the approach made some good business sense. But from another viewpoint, the strategy aligned server software more closely with Office than Windows.

Courts on neither continent issued rulings against Office, only against Windows. Office is outside the jurisdiction of both antitrust cases. The Office-to-server software realignment allows Microsoft to achieve the same competitive goals as with Windows, perhaps more. Most businesses purchase applications first and purchase supporting operating system or server software second. The alignment pulls server sales without Windows as the lever, or subject to court oversight on either continent.

The European antitrust ruling came less than a year after Microsoft released its 2003 product lineup. Almost immediately, the European Commission and Microsoft knocked heads over compliance. The company chose to call its special Windows XP versions "Reduced Media" editions, which made the European Commission balked. From a negative marketing perspective, Windows XP Reduced Media Edition was a brilliant maneuver. Later, Microsoft renamed the special Windows versions "N".

Microsoft and the European Commission could come to no consensus on server protocol licensing. The result: In July 2006, European officials levied a second, $357 million fine against Microsoft, for failing to disclose server protocols in a manner that was timely and consistent with the remedy.

By all indications, Microsoft never had the intention of truly complying with the server protocol licensing remedy, because:

• There was opportunity to expand Windows Server market share—something that could not be easily undone once gained—by staying the competitive course.
• Next week's ruling could undo any server protocol licensing requirements. The European Commission agreed to let Microsoft retract protocol licenses and suspend the program should the Court of First Instance rule in the company's favor. It would be easier for Microsoft to keep the genie in the bottle rather than for it to try to put it back in following a favorable ruling.
• Philosophical differences separated the two sides' approaches. The European Commission wanted the protocol licensing program to embrace free, open-source development. That's a concession Microsoft wouldn't easily make.

So, Microsoft played a cat-and-mouse game with European trustbusters, such as embarking on a plan to release too much server information. Microsoft put forth a plan to let third parties see source code, which some developers regarded as being a poison pill. Review of the source code could make developers seeing it liable to future accusations of intellectual property theft. Even if viewed as no poison pill, Microsoft's action failed simply because the European Commission ruling required something, but the company gave something else.

The European Drama
While stalling on remedy compliance, Microsoft embarked on an aggressive campaign to independently settle with competitors participating in the European antitrust case. Microsoft reached agreements with most of the participating parties or would-be participants in the case: AOL, Be, Novell, RealNetworks and Sun Microsystems. Each settlement removed a vocal complainant and potentially damaging information from the record.

For example, following the RealNetworks settlement, the court approved Microsoft's request to remove supporting material that Real provided to the Competition Commission. The Court of First Instance will make its appeals ruling based on the content in the record. Information removal could benefit Microsoft during the appeals process.

The case once largely supported by Microsoft competitors is now more the purview of a ragtag collection of industry groups, including ECIS (European Committee for Interoperable Systems), FSFE (Free Software Foundation Europe) and SIIA (Software Industry Information Association). CCIA (Computer & Communications Industry Association) had also participated, but settled with Microsoft in late 2004.

ECIS is perhaps the most formidable of the groups because of its European presence and position as an intervener in the case. Founded in 1989, ECIS also represents a Who's Who list of Microsoft competitors, including Adobe, Corel, IBM, Linspire, Nokia, Opera, Oracle, RealNetworks, Red Hat and Sun.

But representatives of competitors aren't the same as competitors, strengthening Microsoft's position on appeal. It's a tree-in-the-forest scenario. If no competitor complains of anticompetitive behavior, can Microsoft be said to have abused its monopoly power?

As for the appeals ruling, the 13 judges can go a number of different directions—and, again, they must reach a unanimous decision. What to expect:

• Like the U.S. case, the appeals court must determine if the findings of fact are correct under European antitrust law. In the U.S. case, the appellate judges upheld about 12 of the 20 findings of fact. The findings of fact are the basis for everything else in the case.
• In cases like this one, procedure is everything. The Court of First Instance will likely assess whether the European Commission gave Microsoft sufficient clarity about the remedy, particularly the protocol licensing.

• The appeals court also will likely determine if the European Commission followed the rule of law in its handling of Microsoft's ruling and remedy.

The possible outcomes could dramatically vary. Based on Microsoft legal arguments, the appeals court could:

• Affirm the substance of the case, but lower the fine.
• Affirm the case's substance and keep the fine.
• Affirm the case's substance but annul the overseeing technical advisor.
• Affirm the substance of the case but reject some or all of the remedies.
• Affirm the case's substance and do a combination of the above.
• Annul bundling but uphold the interoperability portions.
• Annul interoperability but uphold the bundling portions.
• Uphold both bundling and interoperability portions.
• Annul bundling and interoperability portions, and reverse the European Commission's ruling.

There are numerous points of law that could lead to any of these scenarios, a combination of them or to others.

For example, the European antitrust investigation started about five years before the ruling was issued. At the time, the European Commission used a narrow "workgroup" server definition that Court of First Instance could decide no longer applies. Another example: The withdrawal of RealNetwork's information could help the court rule against the bundling finding.

The point: The case has many nuances. It's all guesswork until September 17.

Related Posts:

• Did Microsoft's Consent Decree Benefit You?, Microsoft Watch, August 31, 2007
• Yes, Virginia, There Is a Vista Service Pack 1, Microsoft Watch, August 29, 2007
• Search This, Google!, Microsoft Watch, June 26, 2007
• Fake or Real, He's Probably Right, Microsoft Watch, June 26, 2007
• Google This!, Microsoft Watch, June 25, 2007
• Microsoft Will Modify Vista Search, Microsoft Watch, June 20, 2007
• Google Complaint Targets Vista Search, Microsoft Watch, June 9, 2007
• The Google Problem, Microsoft Watch, May 31, 2007
• And There Was One, Microsoft Watch, March 8, 2007
• Microsoft Competitors' 'Wow' Moment, Microsoft Watch, January 26, 2007

• Microsoft Resubmits Technical Documents to the EU, Microsoft Watch, November 23, 2006
• Microsoft's Antitrust Control Problem, Microsoft Watch, November 22, 2006
• Who You Gonna Call? Trustbusters!, November 17, 2006
• Interoperability: Is Microsoft All Talk?, Microsoft Watch, November 15, 2006