Anti-Trust Action Aplenty

There’s been a bunch of news recently about Microsoft’s continuing anti-trust problems. There were arguments in Massachusetts’ appeal of the consent decree between MS and the Department of Justice. Also, three days of hearings occurred this week in the European Union’s investigation of MS conduct in Europe. Nothing definitive happened, but there are some intriguing bits and pieces that surfaced.

Editorial Notice: All opinions are those of the author and not necessarily those of

The US hearing was for Massachusetts’ appeal of Judge Kollar-Kotelly ‘s approval of the DOJ/MS settlement. Massachusetts says the settlement is too light and fails to deprive Microsoft of their ill-gotten gains. Normally, I’d say their chances of winning this appeal were between slim and none. If the DOJ and the lower court are OK with the deal and feel it’s a valid expression of the appeal court’s earlier ruling, then that’s that. But Massachusetts has two things going in their favor. First, Microsoft is demonstrably still enjoying the fruits of its crimes. They have been forced to give up nothing, and they’re still fighting over Java. Also, Kollar-Kotelly and the DOJ are on record recently as expressing concern over Microsoft’s adherence to the consent decree. The proximate cause of their concern being the pitiful take-up rate on company’s wanting to look at Microsoft APIs. These two points could be argued to show Microsoft is not taking the settlement seriously. If the judges buy that argument, then all bets are off. Because then it would be a turf issue. Does Microsoft’s behavior amount to contempt of court? I wouldn’t want to be the MS attorney for that hearing.

But that’s still a long shot. A more likely (but still low-odds) result would be for the appeals court to add a few things to the consent decree. That would save face all around for the Federal courts. Rather than a rebuke of Kollar-Kotelly , it could be taken as a reinforcement of her orders. An expansion based not on her errors, but on Microsoft’s failure to fully comply. No new precedents, no nasty overturning of lower rulings, no basis for further appeal.

If the appeals court ruled that way, and its a big if, what would they order? We can forget anything that would substantially re-mold the market. No new break-up order, for example. But they could rule narrowly on the basis of denying Microsoft the fruits of their crimes that some source code might need to be opened. Say Internet Explorer and some APIs. They could rule that MS must carry Java. But since that’s the subject of separate proceedings, I wouldn’t count on it.

If (there’s a lot of ifs here) they did order the source code to IE be opened, MS would immediately argue they were being deprived of property without due process, unreasonable search and seizure, etc. But that wouldn’t get them anywhere. The Federal courts have no problem with the government confiscating property when that property was related to illegal activities. Boats, cars, houses, bank accounts, jewelry, you name it and the US government has seized it as part of drug investigations. They wouldn’t need to set a precedent here in order to make such a ruling. The thinking would be, Microsoft can’t argue they’re being deprived of a valuable asset since the only reason the asset is valuable is because of their illegal behavior.

Microsoft’s lawyer, Michael Lacovara may have undermined his own case by arguing that the damage to Netscape could not be quantified. According the Washington Post, he “insisted that no one had proved that the software giant’s acts led to Netscape’s share of the market falling from nearly 85 percent to its current 5 percent.” Hmmmm. I guess that means if nobody can find the body, there must have been no murder. Realistically, nobody has to prove such a causal link. The fact that MS profited and Netscape suffered because of conduct this court has already held to be illegal is sufficient. The undermining part comes from the “85 percent” argument. If the exact fruits cannot be quantified, then a more general remedy is called for. Had Lacovara said, yes we were responsible for this, and we’re sorry and we’ll make restitutions, MS would be off the hook. Its hard to imagine that any court would impose restitutions high enough to make a significant dent in Microsoft’s pile ‘o money. I think Ballmer would be delighted to turn this into a problem that he could just throw money at. But a more general remedy could pose significant business risks in the future.

Its always a mistake to read too much into the questions the justices ask during oral arguments. But you can sometimes determine the general direction of their thinking. For example, if all the questions are about the First Amendment, its unlikely they are going to decide the case based on the Fifth. In this case they were predictably scornful of Massachusetts dragging the rotting corpse back into their courtroom. On the other hand, some of the questions clearly showed that they understand the “ill-gotten gains” argument. There is no way to tell if they agree or disagree with the argument, but they certainly recognize that its an argument they must deal with one way or another.

In Europe, things look a bit more serious for Microsoft. The European Commission has decided that Microsoft’s conduct has violated EU anti-trust law and that they should 1) change that conduct and 2) be punished for past transgressions. The three days of hearings this week concerned what changes and punishments would be appropriate. When the commission renders its final decision, Microsoft will almost certainly appeal. That will take some time. The Commission was slapped hard three times in court last year for the way it handled anti-trust cases. So the court is no slam dunk and MS would lose nothing by trying its luck. But, and its a big but, the Commission is said to have gone so slowly on this precisely because they wanted an airtight case before the courts. If they do have such a case, its very likely that any non-monetary remedies the Commission orders will be allowed to stand during the appeal. That’s significant. If they are ordered to take Media Player out of Windows, then MS would face the choice of complying or not doing business in Europe. The slow appeals process would become their enemy rather than their ally.

Most commentators have focused on the fines the EU might impose (up to 10% of annual gross revenue). That’s irrelevant. Ballmer would love to make this all go away for a measly 2 or 3 billion dollars. Much more serious would be a sweeping EU order to remove Media Player and/or open up sufficient APIs to create a level playing field in the server market. Especially if they couldn’t get the order stayed during appeal. I don’t know what MS would do. They would probably have to comply.

The server market is one where MS has big aspirations, but not a big market share. An order to open the APIs would be a setback, but not a decisive one. Its different with Media Player. That has taken on a much greater importance for MS in the three years since the EU started this case. Here’s the problem. Microsoft has grown too big for the markets it dominates. Where’s the growth in OS revenues going to come from in 5 years? They can’t double their market share. Same goes for Office. MS needs new markets and needs them desperately. That’s why they’ve thrown money at cable, phones, game consoles, and anything else they can think of. I don’t think they have a grand and detailed plan for global domination. I think they know what way they want to go and they keep trying things. Then they reinforce success. When they launched Media Player, it wasn’t that important in the grand scheme. But of all the non OS, non Office possibilities, NGSCB (Trusted Computing) looks like the best bet right now. By hooking up the player, DRM, MS file formats and a secure OS, Microsoft opens some vast new markets. Look at it this way, Apple may be the legal music download champ today. But if MS has anything to do with it, they will own that market in five years. And they need the player to do that. Each part of the puzzle is critical and reinforces the other parts. MS file formats and hardware Ids mean it would be hard to get around DRM. A secure OS tied to the hardware makes it hard to get around restrictive file formats. Strong DRM is what Hollywood wants to hear about. And the player wraps the whole thing up and puts it in the user’s lap.

They can do all this without the player, but its a lot more difficult. Especially the Hollywood-DRM part. The studios have failed to get compulsory DRM tied to hardware through lawyers, lobbying or laws. But if MS can pull this off, they’ll be able to give the studios exactly what they want. In substance if not in name. What would that be worth?

So there’s a lot at stake here. Although MS is making nicey-nice noises, they apparently told the Commission that they have done nothing wrong, and shouldn’t be punished at all. That the Commission’s evidence is anecdotal, that MS won’t countenance a crippled version of Windows for the European market, and that the US settlement is sufficient to address any problems.

If they really did say those things, they’re toast. They may not realize that the more polite a bureaucrat becomes, the angrier they really are. An American company judged to have damaged European consumers and business through illegal tactics will not be treated nicely. Especially one that tells the EU to shut up and accept the Bush administration’s wisdom on the matter. Also, Microsoft’s trump argument “measure x will only help our competitors” carries zero weight in the EU. There are plenty of free-market conservatives there, but the idea that governmental intervention might skew the market is fine with them. They do it all the time. Look at Airbus. Having gone so far, the EU can’t back off now, especially when they’ve said the transgressions are ongoing. All the political minefields are on the path to compromise. They lose nothing by being as tough as possible, they could lose a lot if they aren’t seen as being tough enough.

And so the inexorable slow grind of justice continues. Probably, MS will win the US case. Probably, they will lose the EU case. To make it worse, the EU has started investigating them again in a separate matter. Make no mistake, the EU competition bureaucrats are just as craven as any others. But they have an institutional need to prevail this time. The three recent rebuffs in court hurt them a great deal. They need to re-establish some credibility. They need a win, and they’ve got MS pretty much sewn up. At this point, Mr. Ballmer should be thinking about what to do when that happens.


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