EU Really Losing Patience With Microsoft

Microsoft’s bad behavior may finally catch up with it. The EU is now threatening new sorts of punishment for Microsoft’s intransigence and bad faith dealings in what in the US would be called the remedy phase of its antitrust case.

To recap the story: in December 2004, Microsoft lost its final appeal on an EU antitrust case in which it was found guilty of tying its operating system to its media player, undermining competition and hurting consumer choice, and for failing to give rivals the information they needed to compete fairly in the market for server software, The Redmond company was fined a record $613 million.

To address the server complaint, Microsoft was ordered to license technical information to enable outside companies to design products that would run well on Windows (called API, the application program interface). Note that this isn’t a particularly onerous request. Microsoft makes that sort of information available for free except in areas where it is trying to leverage its monopoly.

Microsoft has been acting in less than good faith through this entire exercise. It appears to be delaying rather than complying. For example, Microsoft was asked to propose royalties for its API. Now consider Microsoft’s response: up to 5.95% of revenues. The EU’s technical expert, Neil Barrett, who was recommended by Microsoft, calculated that it would take software companies 7 years to recover their development costs. Now how many products last 7 years? And in particular, how many software products last for 7 years? Cost recovery looks like a fantasy. Barrett determined that even a 1% royalty would be too high, and 0% would be more appropriate.

An April 4 Financial Times story summed up the then-current state of play:

The Commission believes the failure of its 2004 decision is entirely Microsoft’s fault, accusing the group of ignoring key parts of the ruling, and especially an order to license technical information about its Windows system to rival companies.

In July, the Brussels regulator imposed a €280.5m ($375m) fine on the group for failing to supply “complete and accurate” documentation that would allow rivals to design server software that can run smoothly alongside Windows-driven products.

Last month, the Commission raised the stakes even further, issuing fresh antitrust charges against Microsoft for demanding excessive royalties for the licences.

According to a copy of the charge sheet seen by the FT, Microsoft’s rivals have told the Commission the royalties demanded by the group are “exorbitant” and would not allow them to develop products at a cost that makes economic sense.

The regulator also points to a string of examples where software companies, including Microsoft itself, have licensed so-called inter-operability information for free. Coupled with the Commission’s conclusion that there is virtually no innovative value in the information, this finding also strongly suggests that Microsoft will be forced to hand out licences for a nominal fee at best. Although Microsoft claims that many of the protocols are covered by patents, the Commission finds that the majority of patented technologies “merely relates to and solves problems specific to the Windows operating system” – and thus are of no use to potential licensees.

The latest bit of Microsoft intransigence: having been sent back to the drawing board to come up with a new royalty proposal, Microsoft waits until its deadline to come to the EU and ask them instead to say what the royalties should be.

Microsoft really may have gone too far. The EU has drawn a new line in the sand. So far, what they have applied are “behavioral” remedies, meaning they are requiring Microsoft to do things differently or pay a fine. Microsoft is willing to pay large fines rather than cooperate. The EU has officially taken note of that fact and is now warning Microsoft that they will have to consider structural remedies, meaning breaking up the company.

Microsoft is no doubt betting that the EU wouldn’t or couldn’t go that far, that there would be a firestorm of protest from the US. But that would leave the EU within its rights to bar Microsoft from selling new product.

From BetaNews:

Barely meeting a deadline to respond to the European Commission’s Statement of Objections that was issued March 1, Microsoft today asked EU regulators what it should charge for Windows Server protocols, if they feel current prices are “unreasonable.”

As previously reported by BetaNews, Microsoft divides its intellectual property in categories based on the degree of confidentiality of IP information licensees would be receiving. Certain protocols which may fall outside the realm of patentability are given a separate classification, and for those, Microsoft wants to charge a flat fee; but for technologies for which it claims patent rights, the company proposes either US dollar rates per server or percentages of revenue.

Some individual technologies within the premium tier, such as Kerberos authentication, are actually free of charge; though others, such as Base Authentication Services (used to grant authentication to clients accessing Windows Server resources) are relatively expensive – as high as $17.50 per server seat.

But the EU Commission said in March that Microsoft agreed to base Windows Server protocol pricing on innovation, not patentability, adding that some protocols are not innovative enough to warrant a premium charge. The Commission also said that those protocols which aren’t patentable should not require a fee at all.

In acknowledging the work of its designated trustee, Dr. Neil Barrett, the EU said it examined 160 Microsoft claims to patented technologies, and concluded that among those, only four may only deserve to claim “a limited degree of innovation.”

As BetaNews stated previously, the ramifications of this claim go far beyond whether the EC would impose new fines on Microsoft – which would be at a rate of 3 million euro per day retroactive to August 1 of last year. The EC now appears to be accumulating the interoperability information Microsoft has given it, to perhaps mount a challenge to the very originality of Windows itself, disputing the company’s rights to exclusivity over its own operating system.

Although its initial public response to the Statement of Objections disputed such findings and warned the EU may be overstepping its bounds by assuming it can determine royalty rates that are in place in many countries outside Europe, Microsoft’s response Monday was far more measured.

“We continue to seek to resolve these recent issues. We need greater clarity on what prices the Commission wants us to charge,” Brad Smith, Senior Vice President and General Counsel of Microsoft, said in a statement.

Microsoft added that it would not seek an oral hearing on the matter, saying that it believed such clarity “is more likely to come from a constructive conversation than from a formal hearing.” The EU Commission says it will “study” the Redmond company’s response “carefully.”

But the European Union is growing ever more impatient with Microsoft. In a transcript of remarks made by EU Competition Commissioner Neelie Kroes last week and provided to the media Monday, Kroes says it may be time to reconsider the penalties if monetary fines aren’t working.

“It could be reasonable to draw the conclusion that behavioral remedies are ineffective and that a structural remedy is warranted,” Kroes stated. While it may strike many as odd that the European Union could order a company located in the United States to split up or otherwise modify its structure, Kroes noted the possibility of such remedies is specifically mentioned in EU antitrust law.

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