With Microsoft ruling, a precedent for IT in Europe

Court ruling has significant implications for Microsoft business strategy

Microsoft suffered a humiliating legal defeat Monday when it lost a court appeal to overturn the European Commission's 2004 antitrust ruling against it.

The decision took most observers by surprise. The Court of First Instance, Europe's second highest court based in Luxembourg, sided squarely with Europe's top antitrust regulator on the two central issues in the case. Most commentators expected a mixed verdict.

While the details of the lengthy court decision are still being examined in their minutiae, some consequences are already clear: The ruling pulls a legal rug from under Microsoft's strategy of bundling software onto its Windows operating system, providing a powerful legal reference point for any future antitrust litigation against the company, and it strengthens the Commission's authority, especially when dealing with antitrust abuse in the fast-moving information technology industry.

The Commission was right to rule against Microsoft's strategy of bundling its Media Player application into the Windows operating system, the court concluded, after three years deliberation.

Similarly, Microsoft acted illegally by refusing to share the required interoperability information needed by rivals to build server operating systems that work smoothly with Windows, the court said.

Microsoft's most senior lawyer, Brad Smith said the court decision was "disappointing." He hasn't decided whether to appeal it to the top court, the Court of Justice. If Microsoft does this, it can only dispute points of law, not facts established in Monday's ruling

Smith said Monday's court ruling has important implications for Microsoft's strategy of bundling together a range of applications with the Windows operating system.

This strategy has proved effective in the past. Microsoft eclipsed Netscape in the mid 1990s when it bundled in its Internet Explorer application into the operating system. And RealPlayer dominated the market for streaming media applications until Microsoft started bundling its Media Player into Windows in 1999.

The Commission initially hoped to save RealPlayer from Netscape's fate by ordering Microsoft in 2004 to sell a second unbundled version of Windows, but it was too late. The market had tipped irreversibly in favor of Microsoft even before the 2004 ruling.

The Commission's remedy to restore competition to the streaming media software market in 2004 was to order Microsoft to sell a second version, later dubbed Windows N, with Media Player stripped out. But the remedy has had no impact on the market.

Nevertheless, winning the bundling argument in court was the most important victory of the day for the Commission, and for other companies that believe they suffered from Microsoft's unfair bundling strategy, according to Commission officials and lawyers following the case.

"This is an important precedent, not just for this particular product on this particular market," said Competition commissioner Neelie Kroes at a press conference Monday.

There isn't a queue of complainants lined up, she said, but she added that "they are welcome."

Thomas Vinje, legal counsel for the European Committee for Interoperable Systems, (ECIS) a Commission ally in the case, said the Commission's authority to regulate competition in the IT industry has been strengthened by the court ruling.

"It has strengthened their hand," he said, adding that he will encourage the Commission to move swiftly ahead with the antitrust complaint ECIS filed to the European regulator two years ago.

However, he dismissed claims made during the day that the ruling would be a threat for all successful companies. "The Microsoft case is very rare in that it concerns a super-dominant company," he said.

"The Commission may be emboldened by the endorsement of the court to take action against other companies in the IT industry -- There may be issues to be addressed concerning Google's dominance of search, or with its plans to take over DoubleClick, but they bear little resemblance to the specific issues in the Microsoft case. The only real implications from the Microsoft case are for Microsoft itself," he added.

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