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The European Commission has concluded, after a 5-year investigation, that Microsoft Corporation http://europa.eu.int/comm/competition/antitrust/cases/index/by_nr_75.html#i37_792 broke European Union competition law by leveraging its near monopoly in the market for PC operating systems (OS) onto the markets for work group server operating systems(1) and for media players(2). Because the illegal behavior is still ongoing, the Commission has ordered Microsoft to disclose to competitors, within 120 days, the interfaces(3) required for their products to be able to “talk” with the ubiquitous Windows OS. Microsoft is also required, within 90 days, to offer a version of its Windows OS without Windows Media Player to PC manufacturers (or when selling directly to end users). In addition, Microsoft is fined € 497.2 million for abusing its market power in the EU.

EU Competition http://europa.eu.int/comm/competition/index_en.html Commissioner Mario Monti http://europa.eu.int/comm/commissioners/monti/index_en.htm commented http://www.eurunion.org/news/press/2004/20040047.htm on the decision in Brussels today: "Dominant companies have a special responsibility to ensure that the way they do business doesn't prevent competition on the merits and does not harm consumers and innovation. Today's decision restores the conditions for fair competition in the markets concerned and establish clear principles for the future conduct of a company with such a strong dominant position.”

After an exhaustive and extensive investigation of more than 5 years and 3 statements of objections(4), the Commission has today taken a decision finding that US software company Microsoft Corporation has violated the EU Treaty's competition rules by abusing its near monopoly(5) (Article 82) in the PC operating system.

Microsoft abused its market power by deliberately restricting interoperability between Windows PCs and non-Microsoft work group servers and by tying its Windows Media Player (WMP), a product where it faced competition, with its ubiquitous Windows operating system.

This illegal conduct has enabled Microsoft to acquire a dominant position in the market for work group server operating systems, which are at the heart of corporate IT networks, and risks eliminating competition altogether in that market. In addition, Microsoft's conduct has significantly weakened competition on the media player market.

The ongoing abuses act as a brake on innovation and harm the competitive process and consumers, who ultimately end up with less choice and facing higher prices.

For these very serious abuses, which have been ongoing for 5½ years, the Commission has imposed a fine of € 497.2 million.

Remedies

In order to restore the conditions of fair competition, the Commission has imposed the following remedies:

As regards interoperability, Microsoft is required, 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. This will enable rival vendors to develop products that can compete on a level playing field in the work group server operating system market. The disclosed information will have to be updated each time Microsoft brings to the market new versions of its relevant products.

To the extent that any of this interface information might be protected by intellectual property in the European Economic Area http://europa.eu.int/comm/external_relations/eea/index.htm (6), Microsoft would be entitled to reasonable remuneration. The disclosure order concerns the interface documentation only, and not the Windows source code, as this is not necessary to achieve the development of interoperable products.

As regards tying, Microsoft is required, within 90 days, to offer to PC manufacturers a version of its Windows client PC operating system without WMP. The un-tying remedy does not mean that consumers will obtain PCs and operating systems without media players. Most consumers purchase a PC from a PC manufacturer which has already put together on their behalf a bundle of an operating system and a media player. As a result of the Commission's remedy, the configuration of such bundles will reflect what consumers want, and not what Microsoft imposes.

Microsoft retains the right to offer a version of its Windows client PC operating system product with WMP. However, Microsoft must refrain from using any commercial, technological or contractual terms that would have the effect of rendering the unbundled version of Windows less attractive or performing. In particular, it must not give PC manufacturers a discount conditional on their buying Windows together with WMP.

The Commission believes the remedies will bring the antitrust violations to an end, that they are proportionate, and that they establish clear principles for the future conduct of the company.

To ensure effective and timely compliance with this decision, the Commission will appoint a Monitoring Trustee, which will, inter alia, oversee that Microsoft's interface disclosures are complete and accurate, and that the two versions of Windows are equivalent in terms of performance.

The investigation

In December 1998, Sun Microsystems, another US company, complained that Microsoft had refused to provide interface information necessary for Sun to be able to develop products that would "talk" properly with the ubiquitous Windows PCs, and hence be able to compete on an equal footing in the market for work group server operating systems.

The Commission's investigation revealed that Sun was not the only company that had been refused this information and that these non-disclosures by Microsoft were part of a broader strategy designed to shut competitors out of the market.

This relegated to a secondary position competition in terms of reliability, security and speed, among other factors, and ensured Microsoft's success on the market. As a result, an overwhelming majority of customers informed the Commission that Microsoft's non-disclosure of interface information artificially altered their choice in favour of Microsoft's server products. Survey responses submitted by Microsoft itself confirmed the link between the interoperability advantage that Microsoft reserved for itself and its growing market shares.

In 2000, the Commission enlarged its investigation, on its own initiative, to study the effects of the tying of Microsoft's Windows Media Player with the company's Windows 2000 PC operating system.

This part of the investigation concluded that the ubiquity which was immediately afforded to WMP as a result of it being tied with the Windows PC OS artificially reduces the incentives of music, film and other media companies, as well software developers and content providers to develop their offerings to competing media players.

As a result, Microsoft's tying of its media player product has the effect of foreclosing the market to competitors, and hence ultimately reducing consumer choice, since competing products are set at a disadvantage which is not related to their price or quality.

Available data already show a clear trend in favour of WMP and Windows Media technology. Absent intervention from the Commission, the tying of WMP with Windows is likely to make the market "tip" definitively in Microsoft's favour. This would allow Microsoft to control related markets in the digital media sector, such as encoding technology, software for broadcasting of music over the Internet and digital rights management etc.

More generally, the Commission is concerned that Microsoft's tying of WMP is an example of a more general business model which, given Microsoft's virtual monopoly in PC operating systems, deters innovation and reduces consumer choice in any technologies which Microsoft could conceivably take interest in and tie with Windows in the future.

Note to editors

The European Commission enforces EU competition rules http://europa.eu.int/comm/competition/antitrust/legislation/ on restrictive business practices and abuses of monopoly power for the whole of the European Union when cross-border trade and competition are affected.

The Commission has the power to force changes in company behaviour and to impose financial penalties for antitrust violations of up to 10% of their annual turnover worldwide.

Commission decisions can be appealed to the European Court of First Instance in Luxembourg.

- "EU Commission Concludes Microsoft Investigation, Imposes Conduct Remedies and a Fine," Press Release No. 45/04, 24 March, 2004.
No. 45/04 http://www.eurunion.org/news/press/2004/20040045.htm

Commission of the European Communities, Commission Decision of 24 March, 2004 relating to a proceeding under Article 82 of the EC Treaty (Case COMP/C-3/37.792 Microsoft)

The full report (PDF format) is a 1.32MB file, has 142,796 words, and consists of 302 pages.

http://europa.eu.int/comm/competition/antitrust/cases/decisions/37792/en.pdf

(Only the English Text is Authentic)

1) These are operating systems running on central network computers that provide services to office workers around the world in their day-to-day work, such as file and printer sharing, security and user identity management.
(2) A media player is a software product that is able to play back music and video content over the Internet.
(3) The interfaces do not concern the Windows source code, as this is not necessary to achieve the development of interoperable products. The interfaces are the hooks at the edge of the source code which allow one product to talk to another.
(4) A Statement of Objections marks the opening of a formal investigation as the Commission states its charges or objections to the company(ies) concerned.
(5) Microsoft's operating systems equip more than 95% of the world's personal computers.
(6) The European Union plus Norway, Iceland and Liechtenstein.

***************************************************

http://www.eurunion.org/news/press/2004/20040046.htm

MICROSOFT: QUESTIONS AND ANSWERS ON EU COMMISSION DECISION

Microsoft is a US company. What gives the European Commission authority to decide whether its behavior is legal or not?

Microsoft sells its products globally including in the European Union, which is one of its main markets together with the United States. It must therefore respect EU competition rules http://europa.eu.int/comm/competition/antitrust/legislation/ in the same way that European companies must respect US law when operating on the other side of the Atlantic.

What exactly must Microsoft do to comply with EU law?

The company has been ordered "to disclose complete and accurate specifications for the protocols" necessary for its competitors' server products to be able to “talk” on an equal footing with Windows PCs, and hence compete on a level playing-field. It must also offer a version of Windows for client PCs which does not include Windows Media Player. This applies to Windows sold directly to end users or licensed to Original Equipment Manufacturers—i.e., PC manufacturers.

Does this go beyond what was agreed between Microsoft and the US Department of Justice?

The US case http://europa.eu.int/comm/competition/antitrust/cases/index/by_nr_75.html#i37_792 presents certain similarities with the EU case, and the Commission did take on board those points where the US settlement had addressed its own concerns. But the EU case also presented different facts, and given the European Commission's duty to uphold EU law in the European single market, the remedies are designed to fit with the specifics of the EU case. As regards interoperability, the Commission requires, inter alia, the disclosure of certain server-to-server protocols not covered by the US case. As regards tying, the US remedy did not contain provisions on code removal as it was designed for a monopoly maintenance and not a tying liability.

Did the Commission co-operate with the United States on this case?

The Commission and the United States Department of Justice have kept each other regularly informed on the state of play of their respective Microsoft cases, including holding meetings at regular intervals. These meetings have been held in a co-operative and friendly atmosphere, and have been substantively fruitful in terms of sharing experiences on issues of common interest.

Does Microsoft have to pay the fine immediately?

The fine needs to be paid within three months of the date of notification of the Decision.

Where does the money go?

The money goes into the EU's central budget.

Does Microsoft have to pay the fine if it appeals to the European Court of First Instance (CFI) http://www.curia.eu.int/en/index.htm and seeks interim measures?

In case of appeals to the CFI, it is normal practice that instead of paying the fine outright, companies, with the agreement of the Commission, provide a bank guarantee. Any fine that is paid subsequently has interest payable on it. The interest rate is that applied by the European Central Bank to its main refinancing operations on the first day of the month in which the Decision is adopted, plus 3.5 percentage points. In the present case, that is 5.50%. This is normal practice in all Decisions with fines.

What happens if Microsoft does not disclose the specified information or offer a version of Windows without WMP within the deadlines outlined by the Commission?

The remedies outlined in the Commission's Decision are legally binding, and Microsoft is therefore obliged to comply. Experience shows that companies respect such Decisions taken by the Commission, and the Commission has no reason to believe that it will be any different this time. If a company does not comply with the provisions of a Decision, it is liable for daily penalty payments.

What is the geographical scope of the remedies?

The Commission is competent to ensure the maintenance of effective competition within the borders of the EEA [European Economic Area] http://europa.eu.int/comm/external_relations/eea/index.htm. In this respect, even if markets are defined as world-wide in the Decision, the geographical scope of the remedies is EEA-wide.

Does the Commission's Decision seek to protect competitors?

The Commission does not look at the specific interests of individual companies, but is charged with ensuring that competition on the merits is safeguarded. This creates an environment where consumers can benefit and where innovation can flourish. The Commission in its Decision has not taken up all the elements of Sun's original complaint.

Are the Commission's legal theories in the case in any way novel?

The legal underpinning of the Commission's case is not in any way novel. Both parts of the Commission's case are based on a consistent pattern of Court jurisprudence (interoperability: inter alia, Commercial Solvents, Telemarketing, Magill, and tying: inter alia, Hilti and Tetra Pak).

Why does the Commission believe that the normal competition rules should apply to fast-changing technology markets?

The specifics of the particular industry in question (be it "hi-tech" or "old economy") must be taken into account when conducting any anti-trust analysis. Differing characteristics will have an influence on the specific assessments that are reached. This, however, does not mean that a soundly conducted anti-trust analysis cannot be applied to "new economy" markets. In fact, the specific characteristics of the market in question (e.g., network effects, applications barrier to entry) could mean that there is in fact an increased likelihood of positions of entrenched market power compared to certain "traditional industries."

Does Microsoft have intellectual property over the interface information to be disclosed?

The Commission is not seeking disclosure of Microsoft's source code. The Commission does not exclude that the information that the Decision obliges Microsoft to disclose might be protected by intellectual property rights in the EU. To the extent that it is, the Decision finds that in line with the relevant jurisprudence, the exceptional circumstances of the case (Microsoft's overwhelming dominance, indispensability of the interface information, risk of elimination of competition in the market) would mandate such disclosure.

How will the Commission ensure that Microsoft does not exclude competitors from the market by setting very high royalties for the information in question?

To the extent that any of the information in question is protected by intellectual property rights in the EEA, Microsoft is entitled to reasonable remuneration. It will be the role of the Monitoring Trustee, under the authority of the Commission, to ensure that Microsoft does not charge too high a price for the information.

Is the Decision compatible with international rules on the protection of intellectual property rights?

The Decision is fully consistent with the Community's international obligations, in particular with those resulting from the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement). The TRIPS Agreement allows the Commission to order the remedies to bring to an end the abuse of a dominant position identified in the Decision.

Is the Commission's case in line with US law as far as unbundling of the WMP is concerned?

Yes. The Commission has followed a "rule of reason" approach in order to establish whether the anti-competitive effects of tying WMP outweigh any possible pro-competitive benefits. This is precisely the framework for tying cases that US Court of Appeals laid down in 2001.

Does the remedy on the media player mean that, in the future, Microsoft will be forced to offer two versions of all the products it integrates in the Windows operating system?

No, as any future case will be examined on its own merits. Having said that, the Decision provides a framework within which allegations of future tying in software markets can be examined.

When is the Decision going to be published?

The Decision in English (the official language version of the Decision) will be made available shortly on DG Competition's website (once Microsoft's business secrets have been taken out). French and German translations will also be made available on DG Competition's website in due course. A summary of the Decision will be published in the OJ L series in all languages (once the translations are available).

Were the two sides ever close to a settlement?

Whilst there was significant progress towards resolving the issues of the present case, the Commission cannot comment on the specifics of the settlement discussions. The Commission believes that it is essential to establish clear principles for the future conduct of a company with such a strong dominant position in the market.