European court rejects Microsoft’s appeal

22 Dec 2004

The Court of First Instance, the EU’s second highest court, has upheld all of the sanctions imposed on Microsoft last March, including a €497.2m fine and remedies that will strike at the heart of its business model.

In March, the European Commission fined the software giant €497.2m for abusing its market power in the EU and gave the company 120 days to provide rival vendors with the interfaces to make Windows interoperable in the work group server market as well as 90 days to offer PC manufacturers a version of Windows without Windows Media Player.

Almost instantaneously Microsoft decided to appeal the decision within 70 days to the Court of First Instance.

This morning it emerged that the court decided to uphold all of the sanctions against Microsoft. However, instead of being disheartened, it appears Microsoft is still clinging to a bridgehead and may appeal the decision due to certain favourable aspects in this morning’s ruling.

In a statement Microsoft said: “We are in the process of reviewing the order by the Court of First Instance. Although the court ruled against Microsoft’s request for interim measures, we are encouraged by a number of aspects of the court’s discussion of the merits of the case. While the court did not find immediate irreparable harm from the European Commission’s proposed remedies, the court recognised that some of our arguments on the merits of the case are well founded and may ultimately carry the day when the substantive issues are resolved in the full appeal.

“While we had hoped that the court would suspend some or all of the remedies in the case, we are encouraged that the court has recognised that Microsoft has a number of powerful arguments that must be considered in the full appeal. As the court said, Microsoft established a prima facie case in support of our position on both of the major elements of the case.

“We are hopeful that the issues highlighted by the court will create an opportunity for the parties to discuss settlement. As we have always stated, we believe that there are better ways to address such complex and technical issues, with a minimum of harm to European consumers and the European technology sector,” it stated.

Microsoft said that it believes that the European Commission’s remedies will bring very few benefits to competitors and consumers in Europe, and will in fact harm many users of the Windows operating system (OS) and the thousands of companies across Europe that have built their businesses on the Windows platform. “We believe that the code removal remedy, obliging Microsoft to release a degraded version of the Windows OS, will be harmful to consumers and competition, and undermines the technology integration that has been the backbone of the IT revolution over the past three decades.

“We will take a close look at the order before deciding on our next steps but we will, as we have always said, comply fully with the court order when it comes into force, pursuant to contingency plans that have been discussed with the European Commission,” Microsoft said this morning.

In a research note on the court’s decision, Ovum research director Philip Carnelley said: “It will come as a surprise to many that the judge’s decision was so firm, dismissing Microsoft’s appeal completely. Microsoft’s hope that it could negotiate a settlement with the EU is clearly now unrealistic. The consequences for Microsoft, and the industry as a whole, are potentially very wide-ranging.”

Carnelley continued: “In a sense, the Windows Media Player sanction is of itself a comparatively minor irritant for Microsoft. It has already created a stripped-down version of Windows XP without the media player and, ultimately, the presence or absence of the media player is not the issue: it’s how the media is encoded. Because there are a lot of WMA media files out there, most users will download Microsoft’s player at some stage – or indeed buy a version with it bundled (which will be available).

“But the big issue raised is this: In the absence of legal definitions of what constitutes an operating system and with no industry regulator, this will lead to ambiguity about Microsoft’s freedom to follow its normal business model – i.e. bundling in functions to make its own products ever-more attractive at the expense of independent players. For example, will Microsoft be able to offer anti-virus software or anti-spyware software in Windows, or will Symantec etc. appeal to the EU?

“The ‘interoperability’ sanction is also deeply worrying to Microsoft, as it appears to relate to the internal protocols used between different Microsoft components. According to Microsoft, the sanction is designed to allow, for example, a Microsoft server to be replaced with a competitor’s server in a clustered configuration. This could pose significant issues for Microsoft’s design and engineering strategy for Longhorn and beyond. For example, in the Longhorn client, the Avalon and Indigo components will communicate using Microsoft-proprietary protocols. Does this decision mean that, for example, it should be feasible for Macromedia to replace Avalon (the Longhorn user interface) with Macromedia’s Flash?”

Carnelley concluded: “Going forward, this judgement may well be seen to have altered the course of the industry. Until this time, bundling was the clear winning strategy and in line with the maturity and consolidation theme we have articulated so often -mainly because it played to CIOs’ and consumers’ desire for less complexity and management overhead in their computer systems. The EU has changed the ground rules and it’s not clear who the winners will ultimately be.”

By John Kennedy