The EU Slams Microsoft, Again

Sorry for the number of posts from the Financial Times today, but it happens to have stories no one else is carrying (yet).

The FT tells us today that the EU has ordered Microsoft to hand over what the company calls “sensitive and valuable technical information about its Windows operating system for next to no compensation.” This is one of those rare cases where the FT isn’t quite on top of the story.

To give a very very crude recap, as in the US, Microsoft has been in the crosshairs of antitrust regulators. However, unlike the US, Microsoft did not get the lucky break of having defeat turned into victory. Readers may recall that Microsoft lost its famous anti-trust case, but the original judge, Thomas Penfield Jackson, who clearly intended to put the Redmond company’s feet to the fire, was replaced in the penalty phase with a judge who seemed comparatively clueless and called for relatively little in the way of remedies.

Not so the EU. In 2004, Microsoft 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. Microsoft was fined a record $613 million. It lost its appeal.

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.

In very crude terms, what we are talking about here is the API layer, which one developer describes as:

If you’re writing a program, say, a word processor, and you want to display a menu, or write a file, you have to ask the operating system to do it for you, using a very specific set of function calls which are different on every operating system. These function calls are called the API: it’s the interface that an operating system, like Windows, provides to application developers, like the programmers building word processors and spreadsheets and whatnot. It’s a set of thousands and thousands of detailed and fussy functions and subroutines that programmers can use, which cause the operating system to do interesting things like display a menu, read and write files, and more esoteric things like find out how to spell out a given date in Serbian, or extremely complex things like display a web page in a window. If your program uses the API calls for Windows, it’s not going to work on Linux, which has different API calls.

Now what Microsoft has taken to doing is not being very nice about publishing its API. This is a comment by FlyingGuy on Slashdot on the FT story:

I will give you one simple example….and let you take it from there.

MAPI ( the Mail API ) – This was a specified API to allow different programs to interact with e-mail. It was supposed to allow any program to send whatever their work product was, along as an attachment to an e-mail, and to generally interact with any e-mail system installed on the computer.

When MAPI was 1st published it had a well defined set of interfaces and API calls that were documented and reliable. This was all well and good until well the competition started writing better e-mail systems. These were all fully MAPI compliant and worked very well.

As we all know by now, MicroSoft cannot handle competition. So what did Microsoft do? What they always do, they changed the API and then didn’t tell anyone. So now all kinds of MAPI compliant applications started breaking, well except theirs of course, since they had all the documentation and the rest of the word didn’t.

This is the basic Microsoft pattern. If someone comes up with something better then they have and it relies on an API controlled by them, they simply change it and then dont tell anyone they did so, thus stopping the competitions product from looking so good or even working at all

That, by definition, is anti-competitive behaviour.

So remember, Microsoft used to publish its API protocols for free until it decided to milk them for competitive advantage. Then it started to publish protocols that were deliberately incomplete.

So consider the royalty structure Microsoft proposed in the server market: 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.

One can see why the EU was not amused. Microsoft was in essence acting in bad faith. This is the sort of thing than angers regulators and leads to punitive action. But in this case, the requirement that Microsoft publish its information, is tantamount to a 0% license, which is what the expert recommended. This is not even punitive, it’s simply in line with the 2004 decision. Yet the FT article gives undue prominence to Microsoft’s aggrieved comments:

Microsoft will be forced to hand over to rivals what the group claims is sensitive and valuable technical information about its Windows operating system for next to no compensation, according to a confidential document seen by the Financial Times.

The group is required to license the technical information to competing groups under the terms of the European Commission’s antitrust ruling issued three years ago. Brussels hopes the order will allow rivals to design server software that runs more smoothly with Windows.

The Commission last month accused Microsoft of demanding excessive royalties from licences.

Microsoft wants up to 5.95 per cent of companies’ server revenues as a licence fee.

But the confidential statement of objections from the Commission in the long-running dispute makes clear that Microsoft will at best be allowed to levy a tiny fraction of the royalties it is demanding.

According to calculations by the Commission’s technical expert, Prof Neil Barrett, Microsoft’s demands would mean that rivals could recoup their development costs after seven years.

The Commission’s expert, who was suggested for the post by Microsoft, goes on to calculate that even an average royalty rate of 1 per cent would be unacceptable for licensees. Prof Barrett states that a 0 per cent royalty would be “better” and adds: “We can only conclude on this basis that the Microsoft-proposed royalties are prohibitively high […] and should be reduced in line with this analysis.”

Three Microsoft rivals that have reviewed the group’s pricing scheme extensively – understood to be IBM, Sun and Oracle – come to the same conclusion: “The prices charged by Microsoft are prohibitive and would not allow them to develop products that would be viable from a business perspective,” the Commission charge sheet says.

A spokesman for the US group said: “Microsoft will respond to the latest statement of objections in full by April 23. We believe we are in compliance with the March 2004 decision and that the terms on which we have made the protocols available are reasonable and non-discriminatory.”

Update: I have to partially take back my comment about the FT being perhaps a tad too indulgent of the Microsoft line. They did give more on the EU’s point of view in a separate story, “More Window pain to come.” However, the first story ran as the lead item in the second section, while the second piece was on page 19 in the US print edition (and incorrectly listed in the first article as being on page 21).

The second article makes it clear how unhappy the EU is with Microsoft’s conduct relative to its proceedings:

In March 2004, the European Commission issued an antitrust ruling against Microsoft, hoping its move would redraw the competitive landscape in a key segment of the global software market.

More than three years later, that hope has given way to frustration. Microsoft’s market share for server operating systems – one of the markets in which the group was found guilty of abusing a dominant position – has risen steadily. The group’s competitors still complain they are being frozen out of the market.

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.

Microsoft insists that its pricing proposal is “reasonable and non-discriminatory”, and in line with the wording of the 2004 ruling. The group also points to a study by PwC claiming Microsoft’s royalties are “at least 30 per cent below the market rate for comparable technology”.

However, the Commission charge sheet dismisses that claim outright, saying “the licences examined by PwC are, in fact, not technically and economically comparable” to the Microsoft protocols. In particular, it points out that some of the licences used for comparison include access to source code and object code, which are considered more valuable than interoperability information.

Microsoft has already clocked up close to €780m in fines during its nine-year battle with the Commission. With the regulator threatening fresh fines of up to €3m for every day of non-compliance since August last year, Microsoft’s tussle with Brussels is likely to become more expensive still.

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