‘Crime’ must not pay for monopolists

Two MEPs discuss competition and innovation.

Mary Honeyball

European competitiveness depends on our ability to create innovative products and services. To its credit, the European Union is showing leadership by fostering blue skies thinking through initiatives such as the Joint Technology Initiatives and the Seventh Framework programme for research. The European Institute of Technology may also prove a strong vehicle for technological innovation. Competitive economies require technological advance as well as strong competition.

On the face of it, Microsoft’s recent defeat over its breaches of anti-monopoly rules and the abuse of dominant market position was all about stifling competition. The case, however, is much more serious. Microsoft certainly acted to stamp out competition. It has aimed to smother any innovation, which would undermine its own interests.

Innovation is becoming increasingly democratised. Research and innovation once took place only in huge and lavishly funded laboratories. Nowadays most innovation takes place in small start-up companies. This is very much the case of innovation on the web. It is also true that most innovation in the biotechnology and pharmaceuticals industries takes place in small dynamic companies. Large multinationals, who often struggle to come up with new ideas and designs, are often quick to buy up these innovative companies.

Microsoft was fined a record €497 million by the European Commission in 2004 and subsequently €280m in 2006 for failing to comply with the earlier judgement. The ruling from the European Court of First Instance (CFI), which broadly sided with the Commission, goes to the heart of the debate about open standards. When IT standards are open, companies can compete on a level playing field. Common shared standards, such as GSM, allow companies to compete on the basis of creative ideas - rather than economies of scale, which give multinational firms the overwhelming advantage.

The consensus seems to be that other large software firms will sit up and take notice at the European Commission’s court victory. The Commission will certainly feel emboldened by its recent victory on mobile phone roaming charges closely followed by this successful targeting of anti-trust violations.

But the ruling from the CFI together with Microsoft’s subsequent acceptance is not a clear-cut victory for either side. The European Commission has used up much valuable staff time in pursuing the case, Microsoft has realised that it can get away with anti-competitive behaviour by dragging its feet, which has denied the consumer innovative new services and cheaper software.

Microsoft’s annual revenues are in the order of $60 billion (€41.1bn). A fine of less than $1bn (€0.69bn), aggregated over several years, was probably judged a price worth paying for less competition over those years. Microsoft may have in the end been convinced to soften its stance by murmurs in the newly emboldened Commission about the ultimate antitrust sanction - a break-up order.

The case against Microsoft risks encouraging the Commission to focus on targeting anti-competitive behaviour in the courts rather than fostering innovative and competitive economies that make anti-competitive behaviour less beneficial. Big fights between large organisations are damaging on all sides. Management time is taken up on legal issues rather than business ones. However, Microsoft’s backing down has not, I suspect, been accompanied by a change of corporate ethos on anti-competitive behaviour.

Large organisations that have lost their innovative streak will always be tempted to take the short-term view that they can protect their business models by stifling competition. We should continue to ensure that our regulatory framework supports those who innovate - so the market punishes those who do not. We in Europe must do all we can to foster technological innovation and promote innovative enterprises. Only then will companies like Microsoft realise that, in the long-term, anti-competitive behaviour is just not in anyone’s interest.

• UK Socialist MEP Mary Honeyball is a member of the Parliament’s committee on industry, research and energy.

Andrea Losco

The most important aspect of the Microsoft case was not the extraordinary penalty of €497 million that the corporation was ordered to pay, but the fact that the European Court of First Instance (CFI) in Luxembourg supported the European Commission’s conclusion pretty much in its entirety. In the past, the CFI has rather tended to quash other Commission decisions.

There is a deep distance that separates Europe from the US in this respect.

In fact it is not a trade war between Europe and the supremacy of the American economic giant, but a clash of two different forma mentis, two different conceptions about the meaning of safeguarding free markets or about the way to achieve fair competition.

The Microsoft investigation began in December 1998, with the backing of Mario Monti, former European competition commissioner, after a complaint filed against Microsoft by Sun Microsystems, another US company. It is important to emphasise that, despite the common belief that the EU was trying to protect its market, the case was initiated because Microsoft was denounced by an American competitor.

After an exhaustive investigation of more than five years, with three statements of objection, the European Commission reached the conclusion that Microsoft had violated article 82 of the EC Treaty’s competition rules by abusing its near monopoly in the market of personal computer operating system in 2004.

In particular, it was argued that Microsoft was bundling the software Windows Media Player in a ‘unified package’, Windows 98, and deliberately restricting interoperability between Windows PCs, which represent almost the totality of the world market, and non-Microsoft work group servers.

The European Commission does not prohibit dominant positions as such, merely the abuse of such a position in a specific market. In this specific instance the Commission has not, therefore, disputed Microsoft’s lawful and legitimate success in being leader of the global market, but rather, the fact that the company, through the abusive exploitation of its position of economic strength (holding 96% of the relevant market), has distorted competition in intra-Community trade, limiting other companies’ entry into the market.

As a convinced pro-European, I have the same political opinion shared by both Mario Monti and the current European Commissioner for Competition, the Liberal Neelie Kroes.

In this field the EU represents a strong power in the world and it should exercise its strength to assert the principle of consumer protection.

Therefore it is not a way, as many commentators have remarked, to punish innovative enterprises, pushing them out of the EU and weakening patent rights, thus removing every possibility of reaching the objectives of the Lisbon Agenda for growth and jobs. It is just the opposite.

The EU believes that only if real and full freedom of the market and healthy competition is guaranteed, the culture of business can be improved and sustainable growth, employment and economic wealth can be assured.

While observing rules which guarantee intellectual property rights, it is necessary to establish a level-playing field that allows other operators to survive. This is the best possible scenario for industrial policy.

As such, the EU seeks to avoid the emergence of monopolies, where this kind of control of the market limits production, markets or technical development to the prejudice of consumers. Only fair competition encourages efficient production, innovation and efficient use of assets. What has happened in the last few years shows that it is very hard to innovate when an economic power such as Microsoft dominates the market, as was the case for Netscape.

The European internal market offers opportunities not only to European enterprises, but also to any multinational company. The US colossus has to accept, against its will, EU conditions. It cannot ignore the EU market and its rules and regulations.

• Italian Liberal MEP Andrea Losco is a member of the European Parliament’s committee on economic and monetary affairs.

Two MEPs discuss competition and innovation.

• Primary Source