Competition enforcement and software – some thoughts following Microsoft v. Commission Brno competition law conference

1. Competition enforcement and software – some thoughts following Microsoft v. CommissionBrno competition law conference25 October 2007 Becket McGrath Partner, EU and Competition Berwin Leighton Paisner LLP

2. The Economist – 27 March 2004

3. Outline • Market structure • Competition problems • Challenges for competition authorities • The Microsoft case • Interoperability abuse • Tying abuse • The Article 82 discussion paper and the Commission’s effects analysis in Microsoft • Consequences and next steps

4. Market structure • IT markets characterised by ‘modularity’, ie made up of large number of elements, generally connected by open standards, eg Backbone Hardware Network OS Applications Applications Content Content • Enables increased specialisation by element, ensuring • lower costs • greater innovation • greater consumer choice

5. Competition problems • Adequate interoperability between elements is essential • Network effects bring efficiencies but can lead to dominant technologies • Control over one layer may facilitate control over others: OS Application • Made worse by complexity of products and information asymmetry (near infinite scope to confuse) • Even ‘open standards’ may not be open in practice

6. Challenges for competition authorities • Complex, and often highly lucrative, products so plenty to argue about (e.g. What is sufficient access? How far should innovation be rewarded? Can structural remedies ever be justified?) • Complexity of product may require significant input from (interested) third parties and independent experts but authority must still be able to take and defend its own decision • Specific nature of information involved and level of protection (eg confidential information, patent?) may be hard to pin down • Issues arise internationally but enforcement national - how to avoid differences in approach? • Markets move quickly but investigations can take a long time

7. Workgroup server Printer PC client Main server Example – the EC Microsoft caseI. Interoperability abuse • Commission concerned that Microsoft could extend dominance on PC OS market into workgroup server OS market by preventing rivals’ OS products working as well with Windows servers and PCs • Required Microsoft to license ‘interoperability information’ to rival manufacturers of workgroup server operating systems to ensure sufficient client/server and server/server interoperability • Encourages competition for workgroup server OSs, eg Solaris, Linux

8. ‘Exceptional circumstances’ justifying compulsory licensing Step 1 IP/information is indispensable to compete viably in neighbouring market Step 2 refusal risks eliminating all effective competition on that market Step 3 refusal prevents emergence of a new product for which there is unmet consumer demand

9. The CFI’s view – steps 1 and 2 Step 1IP/information is indispensable to compete viably in neighbouring market • met, since rival OSs “cannot continue to be marketed if they are incapable of achieving a high degree of interoperability with Windows”, effectively requiring interoperability “on an equal footing with Windows” to compete viably Step 2refusal risks eliminating all effective competition on that market • met – the evolution of the market revealed a risk that competition would be eliminated – “What matters … is that the refusal … is liable to, or is likely to, eliminate all effective competition … the fact that competitors … retain a marginal presence in certain niches … cannot suffice” (para 563)

10. Step 3 - The new product test • Microsoft pointed out that rival workgroup server operating systems were present on the market, so no unmet demand for a new product • CFI ruled that this requirement was met since: • the new product test “cannot be the only parameter which determines whether a refusal to license an [IPR] is capable of causing prejudice to consumers within the meaning of Article 82(b) EC … [S]uch prejudice may arise where there is a limitation not only of production or markets but also of technical development” • alternative, potentially better, operating systems were equivalent to a ‘new product’

11. Dominance as abuse? “Article 82 covers not only practices which may prejudice consumers directly but also those which indirectly prejudice them by impairing an effective competitive structure … In this case, Microsoft impaired the effective structure on the workgroup server operating systems market by acquiring a significant share on that market.” (para 664)

12. II. Tying abuse • Commission concerned that ubiquity of MS Windows Media Player (due to bundling with Windows) could reduce incentives for content owners to provide content in rival media formats and ultimately foreclose competition in media player market • Required MS to offer version of Windows without WMP Media player Content server Decoded content Encoded content

13. The CFI’s view • Conditions of abusive tying: • tying and tied products are separate • undertaking is dominant on the market for the tying product • customers do not have a choice to obtain the tying product without the tied product • the practice in question forecloses competition •  •  • 

14. Foreclosure of competition “The main direct anticompetitive effect of tying and bundling is possible foreclosure on the market of the tied product” Commission Article 82 Discussion Paper “a new and highly speculative theory” Microsoft

15. Foreclosure of competition – the CFI’s view • “the Commission clearly demonstrated … that the fact that … Microsoft offered OEMs … only the version of Windows bundled with Windows Media Player had the inevitable consequence of affecting relations on the market between Microsoft, OEMs and suppliers of third-party media players by appreciably altering the balance of competition in favour of Microsoft and to the detriment of the other operators” (para 1034) • “[T]here was a reasonable likelihood that tying Windows and Windows Media Player would lead to a lessening of competition so that the maintenance of an effective competition structure would not be ensured in the foreseeable future” (para 1089)

16. The Art 82 discussion paper • Commission discussion paper: “Article 82 prohibits exclusionary conduct which produces actual or likely anticompetitive effects in the market and which can harm consumers … The central concern of Article 82 with regard to exclusionary abuses is thus foreclosure” • Decision and CFI judgment fully consistent with this approach

17. CFI comments on the Commission’s effects analysis • “ [T]he fact that the Commission examined the actual effects which the bundling had already had on the market and the way in which that market was likely to evolve, rather than merely considering that the tying has by its nature a foreclosure effect, does not mean that it adopted a new legal theory.” (para 1035) • “[T]he Commission’s findings … are not based on any new or speculative theory, but on the nature of the impugned conduct, on the conditions of the market and on the essential features of the relevant products. They are based on accurate, reliable and consistent evidence which Microsoft, by merely contending that it is pure conjecture, has not succeeded in showing to be incorrect” (para 1058)

18. Consequences and next steps • Summer 2006 – Voluntary amendments made to Vista OS to address US and EU concerns • 12 July 2006 – Commission imposes fine of €280.5 million on Microsoft for non-compliance with original decision • June 2007 – Microsoft announces changes to Vista search function, to address concerns raised by Google • July 2007 – Commission confirms sending of Statement of Objections to Intel • 17 September 2007 – Kroes statement on judgment: “This is an important precedent, not just for this particular product on this particular market … The Commission decision made clear that this was in many ways an exceptional case. Super-dominance like Microsoft’s is rate.”

19. Consequences and next steps (ctd.) • 1 October 2007 – Commission confirms formal proceedings against Qualcomm • 16 October 2007 – Microsoft drops appeal against infringement finding by South Korean FTC • 19 October 2007 - BECTA announces complaint to UK’s OFT concerning Microsoft’s licensing policy in schools • 22 October 2007 – Commission announces Microsoft’s compliance with 2004 decision; Microsoft confirms not appealing CFI judgment; Kroes: notes closing of “dark chapter” • Various IT investigations remain ongoing (e.g. Microsoft Vista, Qualcomm, Intel, Rambus) • Microsoft’s share of workgroup OS market now stands at 70%

20. Competition enforcement and software – some thoughts following Microsoft v. CommissionBrno competition law conference25 October 2007 Becket McGrath Partner, EU and Competition Berwin Leighton Paisner LLP