- The Washington Times - Wednesday, April 12, 2006

What do two seemingly obscure regulatory acts oceans apart have to do with the U.S. economy? In today’s world, a great deal.

In an alarming decision issued late last year, the South Korean Fair Trade Commission (KFTC) determined that Microsoft cannot sell the version of the Windows operating system that it sells everywhere else in the world. Instead, Microsoft must engineer two new products — one with reduced functions and one that promotes competitor products — to the specifications of Korean regulators.Just recently, the Korea Times reported that a number of Korean firms are now lining up to sue Microsoft based upon the findings of this ruling.

Not to be outdone, European Union (EU) regulators and Microsoft met again in court recently over EU accusations surrounding the company’s implementation of a previous decision. The European Commission, the administrative arm of the EU, has been threatening to impose a daily fine of 2 million euros because the company is attempting to protect its valuable proprietary software even as it complies with mandatory licensing sanctions. In response, Microsoft has announced that it would reveal significant portions of its Windows source code, thereby exposing its technology to cloning. Microsoft’s contention in a recent filing that it is complying with the order — but has been denied access to evidence and given ambiguous requirements — has so far fallen on deaf ears among European regulators. These developments are very troubling and should raise serious concerns among the international business community, the U.S. technology sector, consumers, shareholders and, most of all, policy makers.

For one, the Korean and European actions represent the manipulation of a healthy, competitive market. To be sure, Microsoft is a leader in several software categories, but it cannot prevent other companies from competing. In its own statements about the case, the KFTC noted that Microsoft had lost market share for instant messaging in Korea between April 2004 and June 2005. Yet much of the case hinged on the alleged unfair practice of adding IM capabilities to Windows to meet consumer interest.

In Europe, regulators focused on media playing software, though competitors like Apple and RealNetworks have immediate access to consumers via the Internet. A European order already required Microsoft to design and ship a version of Windows — dubbed “Windows N” — with media playing capabilities removed. There has been virtually no consumer or manufacturer interest in this product. To a significant extent, the KFTC is aiming to transform Windows into something that operates like a public utility. One stripped-down version will be frozen in place, while new functions will be reviewed by the KFTC, much like a utility commission reviews service changes. The European licensing mandate likewise asks Microsoft to shore up its competitors, sharing technology under regulatory rules that parallel the requirements on utilities to service competitors.

This “managed competition” in the telecom industry was intended to complete the transition from the government-blessed telephone monopoly to a more market-based structure, and many experts are skeptical over its success. One thing is certain, however: Such a policy has no place in the software industry, which has thrived on innovation, versatility, and a kaleidoscope of joint ventures, partnerships, and technology sharing. Apple may not choose to partner with other companies in the music-playing business, but AOL and Google work together, Yahoo and Microsoft, Red Hat and IBM, and so on. In any case, these companies do so voluntarily, not by government fiat.

That’s why Microsoft or any other firm facing such action would logically think twice about improving products for the Korean and European marketplaces if it is forced to carry competitor products or share the return on its investments.

But another question to be asked is: Who’s next? Apple for instance allows only its own software to run on the ubiquitous iPod. New legislation coming to a vote in France already threatens to force Apple to allow users to download songs onto competitors’ devices. What if a Korean software company wrote a program that could run on iPod hardware? Should the KFTC compel Apple to carry the software? Should European regulators require Apple to license its music technology to competitors? The list of potential regulatory targets could be ominously long.

In a Dec. 23 story in the International Herald Tribune, antitrust experts speculated that European regulators could be aiming to break up Microsoft. Such a severe action against a company that has grown organically was specifically rejected in the United States. But a decision by American authorities concerning a company headquartered in the United States is meaningless if it can be undone by regulators elsewhere.

Just as it has taken a leading role in trade pacts, our government should advocate the elimination of conflicting regulatory schemes internationally, thereby giving consumers and innovators the opportunities they deserve. After all, what’s at stake involves not only Microsoft, but free markets.

John Berthoud is president of the National Taxpayers Union

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