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Upside to Microsoft From EU Appeal Denial?

The EU case has been a drag on Microsoft as a business. Not nearly as much of a break as the consent decree that managed to slow down IBM (by fundamentally changing its culture through an Orwellian language prescription) back in the day, but a significant impact on the company’s ability to think straight, for sure. How many senior executive cycles have been burned grinding teeth and bashing heads on tables in frustration? So much wasted energy… So much talent and so many dollars focused on trying to win a case.

With all that mind, you’d think that losing the appeal to the European Court of First Instance would all be bad for Microsoft. Not necessarily – in financial and business terms a lot of the downside is already “priced into” the model.

That is, as long as the EU doesn’t go on in a holy war without working out what winning the case actually means. Has it been a good use of EU resources fighting this pitched battle in the courts? No more appeals from Microsoft hopefully means we can all move on.

I had a really interesting conversation with Erich Andersen, VP & Associate General Counsel, Microsoft EMEA, just a couple of weeks that turned my thinking around somewhat. It seems there has been something of a sea-change at Microsoft about monopoly law in general and the right to bundle in particular.

Lets remember Microsoft recently threw in its own complaint against Google monopoly power – pure hypocrisy, or a function of a changed opinion? The truth is somewhere in between.

Over the years I have sparred repeatedly with Microsoft about the EU case, mostly with a smart and uber combative lawyer called Horatio Gutierrez. He never gave any quarter. I never asked for any. But happily we managed to make the relationship one of mutual respect rather than animosity.

I have strongly argued, for example, that the EU’s case against Microsoft is not just a European attempt to stifle US business. But a question Horatio once asked kept coming back to me.

“If Microsoft can’t bundle an audio player with Windows, why can Nokia bundle a camera with a phone?”

Whatever way I thought about it – that question plagued me. What the hell is the principle involved? Its not just a blunt market share concentration question (Herfindall-Hirschman Index). Its not just a benefits to customers question. So what’s the principle?

Really- there is no clear set of principles to govern technology bundling, at the EU or the DoJ, which makes life hard for companies and regulators. I got the impression Microsoft would actually like to work with the EU to provide a set of useful usable principles in this area. And you know who will be in the firing line if these principles are in place… other major vendors such as Google, Apple and Qualcomm.

I try and work on the basis of principle rather than bias, and the antitrust case has challenged this.

Am I arguing that Microsoft is now all sweetness and light, and won’t be “evil”? Not at all – legally Microsoft only has one responsibility: to shareholders. And just as it uses patent law, standards, copyright, DRM, and trade secrets as weapons – antitrust could become part of the competitive arsenal.

disclosure: Microsoft is a client.

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14 Responses

  1. >“If Microsoft can’t bundle an audio player with
    > Windows, why can Nokia bundle a camera with
    > a phone?”

    How about “because Nokia doesn’t have a monopoly”? Microsoft may frame this as about “freedom to innovate” but courts in both the US and EU have found they have a monopoly and have further found that they have abused it. None of the handy counter-examples involve companies with a similar advantage to abuse.

  2. “legally Microsoft only has one responsibility: to shareholders” … not entirely true – MS has a legal obligation to conform with whatever market abuse/monopoly regulations exist in the markets in which it operates – in both the US and the EU it has been found wanting in this area. There is nothing in its appeal in this case, nor in its attempts to railroad a document standard through ISO, that indicates to me that it has changed its modus operandi. This is a shame, because we all know of some very good individuals working there … but those individuals are either in no position to affect the business model, or have not attempted to/succeeded in their attempt to change it (will Ray Ozzie work some magic yet?). Now I know Simon probably has SOME bias, but I’m with him on his point …

  3. BTW – MS could have saved itself all those management cycles by just accepting that it did something wrong, paying the fine, and fixing its business model – I have no sympathy for them in this.

  4. Simon – at what market share would it have been unacceptable for Nokia to bundle a camera? Seriously – i take your obvious point, but Nokia quickly became the biggest supplier of cameras in the world. Is a monopoly just a monopoly when the courts say so, or is HHI the model?

    Ric – I can’t disagree with you that Microsoft has made a rod for its own back in many respects.

    But I am not sure either of you have engaged with the intriguing idea that Microsoft has actually begun to understand the value of antitrust law, even if not as its currently constituted.

    Ric- the shareholder responsibility thing. The public corporation as currently constituted only has one responsibility – to shareholders. Its not something I approve of, but I agree with the analysis in the Corporation.

  5. I’m no anti-trust lawyer, so I have no idea at what point Nokia should start to get worried. But I do know the argument you cite from Microsoft is specious and an attempt to reframe the matter so as to distract from their guilt.

    They are a monopolist (which is not illegal) and they have been found guilty in both the US and the EU of abuse of that monopoly (which /is/ illegal). That is nothing to do with innovation and everything to do with the maintenance of an open market. This is not about “bundling” or about “freedom to innovate”; it is about monopoly abuse by a company whose guiding principle is to asymptotically approach illegality. It seems their reframing exercise is working well.

  6. ok simon. i get that.

    i still think it would be good to have some clearer principles, so we didn’t need to leave it up to the lawyers quite so much.

    i dont think it is reframing per se. i mean the frame is the same.

    i am sorry but i do believe, whatever their reasons for making the arguments they do, that some clarity would be good in this space. I mean look at the current spat between the EU and the DoJ on the subject.

    It is odd to me that antitrust law allows market dominance through adjacent market acquisition

  7. James – a couple of points:

    If MS took its shareholder responsibility seriously, it would recognise itself as an income play rather than a growth stock and pay more regular and generous dividends.

    I don’t know of any ‘honest’ marketplace where improving shareholder return excuses illegal activity

    As Simon points out, Nokia might be a monopolist camera manufacturer – no problem in itself. It is abuse of that position that is immoral (and illegal in most Western economies) – if Nokia uses its position to prevent (e.g.) Canon from competing in cameras, then it should find itself in Microsoft’s position – convicted and fined.

    Your point about MS appreciating antitrust law reminds me of the telco market here – here in Aus Telstra often mimics MS behaviour as the dominant telco … but complains in NZ about Telecom NZ (dominant there) treating them mean.

    Finally – I certainly “engage” with the notion that there are pockets of MS doing great things, and not ‘being evil’ … but personally I wouldn’t accept an offer of employment with MS without significantly more evidence that their business model was changing from the ‘asymptotically approaching illegality’ (I’m not quite as fervent as Simon, but that’s a good line!)

  8. I am either far more, or far less, cynical than you guys. I don’t see Microsoft as particularly exceptional. Its a corporation and does what corporations do:

    http://www.thecorporation.com/

    Simon works for a company that is pretty unusual in its high standards of behaviour. But even Sun gets dinged for some of its activities.

    Companies of all shapes and sizes ignore laws on, for example, pollution and treatment of waste all the time. GE is a good example, as documented in The Corporation. People says its a good green citizen. I am not sure the Hudson River would agree.
    http://www.cleanupge.org/gemisdeeds.html

    Companies “bend the rules” or break the law all the time, when those laws are seen to interfere with the business of profit. Corporations are about what can be got away with, not just treating all laws as inviolable.

  9. In my recent rereading of Schumpeter, I was struck by his defence of the big company and even monopolies as innovators.

    The world is not as simple as it seems, but I’ll not be surprised if this time next year certain search company is facing similar questions.

  10. Have to side with Simon on this one James. HHI is merely one way of analyzing monopoly power – the real question is how is that power used. As Simon pointed out, having a monopoloy is not per se illegal – it’s what you do with that power. Now if Nokia had 95% of the cell phone market we could talk. Until then, it’s not the best example. Microsoft could have allowed/encouraged competition in the browser market and kept themselves out of antitrust issues – but they didn’t and abused that power. Unfortunately I see new signs of life that they’re going to start doing it again if you look really close at what’s going on with Silverlight, XAML, and the unfortunate “bundling” they require in order to render what should be a standard… now does Moonlight help Microsoft stay out of court? Do patents prevent any real competition?

    Adobe owns much of this market today, not yet a monopolist. The real question is will Microsoft’s monopoly in the OS give them power they could abuse to push Adobe out… it’s the abuse of power that is illegal and which I do think Microsoft needs to keep in check.

    Just my opinion of course. A few years back I did take a course on the subject, but by no means would I consider myself an expert in the practice. I think this is good for the industry, and that’s good enough for me.

  11. It will be a sad day when we see undesirable activity as acceptable because it is common – the subject was MS so I stayed on topic … I never considered them orphans in their “evil”!

    I think you might have seen the light now on the Nokia ambit too …

  12. Groklaw sums up the nokia analogy quite nicely:

    “What antitrust law cares about in this context is leveraging monopolies of one market into another through abusive practices. The Commission found Microsoft employing two abusive practices: bundling and the deliberate obstruction of interoperability.

    Horatio Gutierrez of Microsoft is quoted asking “If Microsoft can’t bundle an audio player with Windows, why can Nokia bundle a camera with a phone?” — the answer seems obvious.

    It is questionable whether Nokia has 95% market share in mobile phones, but even if that were the case: There is currently no separate market for mobile phone add-on cameras, so there is no neighboring market to be be distorted by monopoly abuse.

    If Nokia had 95% domination and if there were such a market, Nokia might find itself in conflict with antitrust authorities if it took active steps to ensure that a) all its phones always came with the camera included and there is no way to buy the phone separately; b) removal of the camera would be very difficult for a normal user and potentially end up damaging the phone; c) the phone would be built in ways to make sure cameras of other vendors would not work and it would be impossible to buy both together.

    Microsoft was found doing all of the above with its media player.”

    Read the rest of the analysis here:

    http://www.groklaw.net/article.php?story=20070923170905803

    Very good read.



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Continuing the Discussion

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  2. […] Gutierrez of Microsoft is quoted asking "If Microsoft can’t bundle an audio player with Windows, why can Nokia bundle a camera […]