The maneuvering of Microsoft

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The European Commission (EC) recently ruled Microsoft in violation of competition laws, fined the company a record $613 million and issued a new set of restrictions that would replace innovators with regulators when it comes to deciding how to upgrade products. Ultimately, the EC has put Microsoft on notice that any further attempts to improve its flagship Windows operating system may be illegal.

Unfortunately, this ruling does more harm than good, with widespread repercussions for technology, the competitive marketplace, U.S.-European relations and consumers. The European Commission opted to protect a handful of Microsoft’s competitors to the detriment of everything else. Most importantly, consumers may be especially hard hit by the decision’s deference to regulators’ control over innovation and the addition of new features to products to meet changing consumer demands.

In many ways the European antitrust case is a rehash of the U.S. case, which was settled back in 2001. As a matter of concern for our own system of justice, the European case revolved around American companies who perhaps were unsatisfied with the American courts and sought another bite at the apple. In both cases, competitors have pressed Microsoft to share software code and challenged new functions that have been incorporated into the operating system.

Sanctions from the U.S. case largely address the EC’s concerns, with requirements that Microsoft share and license software code to allow greater interoperability with products from other companies. In addition, Microsoft was required to alter its operating system so certain applications can be hidden and replaced with rival products.

While the U.S. settlement addressed the major concerns raised by the Department of Justice, it also provided Microsoft the ability to innovate and continue to improve its products to meet consumer demand. Consumers continue to benefit from competition in a marketplace where rivals compete through innovation. Ideally, the U.S. settlement should be a model for a global resolution to antitrust challenges to Microsoft.

However, the European Commission’s ruling has allowed the EC to become a de facto court of appeals for parties dissatisfied with antitrust decisions reached in the United States. The ruling ignored an agreement between the United States and the European Union that codifies the age-old diplomatic principle of comity between nations when it comes to enforcing antitrust. Under this principle, the commission should have deferred to the U.S. decision to avoid conflict since the case is largely an American affair.

Instead of accepting a ruling that would undermine the U.S. settlement and impinge on the company’s fundamental ability to operate, Microsoft appealed the commission ruling to Europe’s Court of First Instance in Luxembourg. Microsoft’s odds on appeal are good, as the Court of First Instance has struck down several other recent rulings from the European Commission. The appeal also serves notice that competition belongs in the marketplace rather than the bureaucracy, and Microsoft will stand against efforts to use governments rather than markets to gain market share. Unfortunately, the appeals process could take another four or five years, leaving technology markets uncertain and consumers in a lurch.

Contradictory antitrust rulings are creating roadblocks to innovation and competition. The United States and Europe need to find common ground on antitrust. Otherwise, the trend will continue, with more U.S.-based companies facing regulatory barriers in Europe and U.S. antitrust rulings effectively being re-written by EU regulators. This system establishes an unacceptable dynamic whereby mercenary companies can turn to the political arena rather than the marketplace to gain market share — all at the expense of consumers.

C. Boyden Gray is the former White House counsel and currently co-chairman of Citizens for a Sound Economy.

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