EU antitrust nonsense

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Last month, a European court upheld a decision against Microsoft for anticompetitive conduct. While Microsoft faces hefty fines and orders to share practically all its server trade secrets, other companies doing business in Europe should be asking, “Are we next?”

Antitrust laws exist to protect against restraints on competition that could force customers to pay more or get less. But a company’s dominant market share is not, alone, anticompetitive. Theory and practice teach regulators to instead ask whether there is actual harm to consumers, which requires analyzing tough questions of technology and economics.

The published decisions by European authorities are so lacking in such serious technological and economic analyses that they make one wonder what is really driving their outcomes. Indeed, European Competition Commissioner Neelie Kroes recently said she did not care about Microsoft’s conduct in the server and player markets, which her commission said it was protecting. She instead focused on the operating system market, wanting “Microsoft’s market share to diminish to significantly less than 95 percent.”

Microsoft was accused of leveraging its dominance of the operating system market into dominance of the media player market by bundling its player into its operating system. But why be so afraid this leverage would triumph when most media producers routinely provide their content in the formats of multiple players, and most producers of media players routinely produce players that read content encoded in multiple formats? In fact, the one media player installed on about 99 percent of Web-connected computers is Adobe’s Flash, used by popular sites like YouTube.

The European regulators were so unconvinced by their own arguments that they did not impose a remedy that would seriously impact consumers. They allowed Microsoft to sell a version of the operating system with the player still included, and to give away the player via free download. The most the court could include about this order in a 248-page opinion was one sentence calling it “legal.” The court didn’t even discuss whether the order was well conceived or effective.

The European decision also raises questions about the terms under which large innovators must share R&D; with competitors. The touchstone of the complaint against Microsoft is the single request by a large Microsoft competitor, Sun, for Microsoft to show how its servers could better interconnect with Microsoft servers. Microsoft offered tool kits, training seminars and technical support. Although the Europeans say they would not require Microsoft to give competitors a full clone of its server, would anything less would have avoided triggering this huge regulatory attack?

What might explain the trouble Microsoft has faced in Europe? Perhaps European officials were motivated by a desire to earn political points from a big win. Perhaps they wanted the hundreds of millions in huge fine revenues. Perhaps they responded to anti-Microsoft lobbying. Note that the primary beneficiaries of this ruling are Microsoft’s U.S. competitors in the server market: IBM and Sun.

Perhaps the real motivation is ideological. The European officials may have an aversion to markets and intellectual property, favoring communal approaches such as open-source and government intervention. They also may harbor hostility toward large U.S. corporations.

One lesson from this Microsoft case is that others should fear getting caught in the European Union’s crosshairs. Recent actions against diverse other U.S. innovators, including Apple, Qualcomm, Intel and Rambus, suggest few are immune. Intel is castigated for the horrible sin of charging lower prices. Rambus, a small but leading developer of DRAM technologies, was allegedly dominating and controlling the DRAM market even though its business model depends on untiring efforts to broadly license its technology. The European Commission overlooks the team of truly large manufacturers dominating the DRAM market, including Infineon, Hynix and Samsung, who have collectively pled guilty to the third-largest criminal price-fixing case in U.S. history.

A second lesson is that what happens in Europe may not stay in Europe. The presiding European judge, Bo Vesterdorf, said it would be better to impose personal liability for individual executives in some cases, including jail time. Americans also should note that in a recent interview a European commissioner said that, having seen the Chinese follow a European approach in their new antitrust laws, she intends to contact U.S. regulators, who may be more open to suggestion depending on how the pending presidential election goes.

The likely results? Consumers will pay more to get less. Business may be driven offshore. Any U.S. company that competes hard enough to earn a leading market position might be the next target of Europe’s antitrust regulators. The one comfort is that the European court expressly limits its decision to the facts of these markets as they existed nine years ago in Europe, leaving no grounds for this case to be a precedent in the United States today.

Stephen H. Haber is a senior fellow at the Hoover Institution and a professor at Stanford University. F. Scott Kieff is a research fellow at Hoover and a professor at Washington University in St. Louis. Troy A. Paredes is a professor at Washington University.

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