The EU Microsoft case: refusal to supply

1. BIICL Conference London, September 25th 2007 The EU Microsoft case:refusal to supply Nicholas Banasevic DG Competition, European Commission (speaking in a personal capacity - the views expressed are not necessarily those of the European Commission)

2. Microsoft’s dominance • Microsoft holds a dominant position on the PC OS market • Microsoft has a very high and stable market share • Fringe competitors: Apple and Linux • Barriers to entry are high: • Sunk cost (cost of developing OS) • Applications barriers to entry (indirect network effect)

3. Microsoft’s market shares

4. Applications barrier to entry Applications (Windows API-specific) API (Microsoft proprietary) Windows

5. Sun’s complaint • Dominance in the PC operating system market • Need interoperability with Microsoft’s PCs to compete • Microsoft refuses to allow sufficient interoperability between Sun’s work group servers and Windows PCs

6. Work Group ServerOperating System Market • Work group server operating systems are optimised for file, print and group and user administration • Installed on cheaper servers • Difference to other server operating system tasks

7. The “interoperability” caseWhat is “interoperability”?

8. The “interoperability” caseThe interoperability problem Jak se máš? I don’t understand. ?

9. The legal test • Follows a long line of consistent case-law • Commercial Solvents, Magill, Volvo, Bronner, IMS • Indispensability of information that is refused • Elimination of competition • Emergence of new product • Objective justification

10. Indispensability (I) • Interoperability significant • Computers do not function in isolation • Definition consistent with the Software Directive • No viable alternatives to the information

11. Indispensability (II) ‘Microsoft itself has recognised, both in its written pleadings and in answer to a question put to it at the hearing, that none of its recommended methods or solutions made it possible to achieve the high degree of interoperability which the Commission correctly required in the present case’ (para. 435) ‘Microsoft puts forward no specific argument capable of establishing that the Commission’s assessment of those statements is flawed’ (para. 244)

12. Elimination of competition (I) • Neighbouring product market • Elimination of ‘effective’ competition • Elimination does not have to be immediate • In this case, trend clearly confirmed • Including by Microsoft’s own surveys

13. Elimination of competition (II) ‘Microsoft’s assertions are scarcely credible, having regard particularly to the consistent increase in its market share on the relevant product market throughout the period covered by the abusive refusal in question’ (para. 592) ‘The fact that there may be marginal competition between operators on the market cannot therefore invalidate the Commission’s argument that all effective competition was at risk of being eliminated on that market’ (para. 593)

14. New product (I) • Couched very clearly in terms of Article 82(b) • Detailed analysis of impact on consumer • Lock-in, elimination of competition, denial of consumer choice • Microsoft has an ‘artificial advantage’ • Competition occurs on the basis of parameters other than interoperability • Innovative features of other products

15. New product (II) ‘The Commission was careful to emphasise … that there was ample scope for differentiation and innovation beyond the design of interface specifications. In other words, the same specification can be implemented in numerous different and innovative ways by software designers’ (para. 655) ‘The results of the third Mercer survey show that, contrary to Microsoft’s contention, consumers consider non-Microsoft work group server operating systems to be better than Windows work group server operating systems on a number of features to which they attach great importance’ (para. 661)

16. Objective justification (I) • Intellectual property in itself cannot be a justification • This would be a contradiction • No reduction in Microsoft’s incentives to innovate • Rivals can’t copy/clone Microsoft’s products • Aim of Decision is interoperability • US Settlement (settlement with Sun)

17. Objective justification (II) ‘Microsoft itself expressly acknowledges in its written submissions … [that] its competitors will not be in a position to develop products which are ‘clones’ or reproductions of Windows work group server operating systems by having access to the interoperability information at which the contested decision is aimed’ (para. 241) ‘Microsoft … did not sufficiently establish that if it were required to disclose the interoperability information that would have a significant negative impact on its incentives to innovate. Microsoft merely put forward vague, general and theoretical arguments on that point’ (paras. 697-698)

18. Conclusion • Case is an important precedent • But not for every company in the whole world • Rigorous and detailed assessment of facts relating to specific circumstances • Competition must always be assessed on the merits of the products • Consumer choice and innovation are key, particularly in the IT sector

19. BIICL Conference London, September 25th 2007 The EU Microsoft case:refusal to supply Nicholas Banasevic DG Competition, European Commission (speaking in a personal capacity - the views expressed are not necessarily those of the European Commission)