Microsoft Case Competition Policy - Prof. D. Neven 27 January 2005 Ursula Ferrari, Gözde Oktay, Nathalie Müller, Reinier De Jong
Overview • Chronology • Technical Background • Microsoft’s Behaviour • Relevant Markets • Dominant Position • Abuses of Dominant Position: • Not sharing interoperability information • Bundeling Windows Media Player • Conclusion
Microsoft case COMP/C-3/37.792 Microsoft • Commission Decision of 24 March 2004 relating to a proceeding under art. 82 of the EC Treaty
Parties • Microsoft Corporation, USA, present within all EEA countries * • Sun Microsystem, Inc., USA, present within all EEA countries **
Chronology (I) • 10 October 1998 complaint of Sun againts Microsoft to the Commission*: • 1. Microsoft has an overwhelming dominant position in the PC operating system market • 2. Microsoft is reserving informations to itself for work group server operating system**
Chronology (II) • Two statements of objections (August 2000, August 2001) sent to Microsoft:* • Interoperability issue • Windows Media Player (WMP) • Microsoft responded to both statements of objections and rejected them. • Microsoft requested an oral hearing • Market enquiry of the Commission send to 75 companies**
Chronology (III) • The decision of the Commission, 24 March 2004 : Microsoft abused its dominant position under art.82 of the EC Treaty. • Remedies • fine of 500 million Euros • obligation to give the information demanded for guaranteeing interoperability • obligation to offer a Windows operating system version that does not include WMP.
Chronology (IV) • Microsoft did not accept the decision and went to the Court of First Instance (CFI) in june 2004, for demanding the suspension of the remedies.* • The CFI, 22 December 2004, ordered to dismiss Microsoft‘s application for a suspension of remedies.** • The final decision of the CJE is still pending.***
Chronology (V) • Microsoft case in the US* • In 1998, the US federal government and 20 States made a complaint against Microsoft, saying that there are 4 violations of the Sherman Act on monopoly maintenance.** • The Court’s decision: Microsoft acted illegally in protecting its monopoly and in monopolizing the web-browser market. But there were not sufficient evidence that Microsoft’s product bundling was violating the Sherman Act. ***
Technical Background (I)* • Computer system : • made of hardware and software** • an open system*** interoperability needs to be ensured between products of different suppliers.**** • System software : controls the hardware • Application software : gets instructions from the hardware*****
Technical Background (II) • Operating System (OS) : controls the basic functions of a computer .* • API (Application Programming Interfaces): not always standardised, but proprietary.** • Application network effect : the distributing system of software resources across the network must be transparent.***
Technical Background (III) • Work group server OS • services are used by office workers • function: sharing files that are stored on servers, sharing printers; and determine how users and groups can access these services and other services of the network.
Technical Background (IV) • Media Player • a software product that is able to play back audio and video content* • functionality: to decode, decompress and play digital audio and video files downloaded or streamed over Internet**
Products concerned • MS-DOS client PC operating system Windows 3.0, 3.1; Windows NT* and Windows 2000 which relied on NT technology • WMP, WMP9**
Microsoft‘s behaviour • Commission : Microsoft abused a dominant position under art. 82 of the EC Treaty. They have a dominant position in the relevant market for the supply of client PC OS and also in the relevant market of the work group server OS. • The Commission distinguished two different abuses :
(1) Microsoft’s refusal to supply interoperability information • Sun and the other suppliers of server OS were not able to compete effectively against Microsoft, because they did not have the inter-operability information needed.
(2) Bundling of Windows Media Player with Windows • No version of the Windows PC OS was available without including WMP. This weakens the effective competition in the market for the supply of media players. Reason: it is a very effective form of distributing, but only Microsoft can do it.
The relevant markets • The client PC operating system market* • The Workgroup server operating system market** • The streaming media player market***
Demand side substituability • A relevant product market compromises all those products and / or services which are regarded as interchangeable or substituable by the consumer, by reason of the products characteristics, their prices and their intended use (321)*
Supply side substituability • Suppliers are able to switch production to the relevant products and market them in the short term without incurring additional costs or risks in response to small and permanent changes in relative prices (322)*
Demand Side Substitutability • There are OS especially designed and marketed as OS for Client PC ’s. This means that OS intended for different computers (such as a server) are not used on client PC Hardware* • There is no substitutability between other client appliances and the Client PC OS** • There is no substitutability between Server operating system and Client PC OS***
Demand Side Substitutability • There are no realistic substitutes on the demand- side for client PC OS
Supply Side Substitutability • Software developers not producing client PC OS would not be able to switch their production to client PC OS without incurring additional costs and risks* • Marketing perspective: aggressive advertising, which entails significant costs and risks • Technical perspective: modification of OS for other devices to a client PC OS is very costly and risky.
Supply Side Substitutability • There are no realistic substitutes on the supply- side for client PC OS
Demand Side Substitutability • Other OS (ex: Web serving) are not substitues for work group server OS. • Workgroup servers fulfil a distinct set of interrelated tasks that are demanded by consumers.* • Contrary to other OS, work group server OS are optimised to fulfil these tasks** • Microsoft’s pricing strategy confirms the absence of demand-side substitutability between work group server OS and other server OS***
Demand Side Substitutability • There are no products that exercise sufficient competitive pressure on work group server OS
Supply-side substitutability • „Other OS vendors are not able to switch their production and distribution assets to Work group server OS without incurring significant additional costs and risks and within a timeframework sufficiently short so as to consider that supply side-considerations are relevantin this case“ (399)
Supply-side substitutability • There is no supply- side substitution for Work group Operating Systems.
Streaming media players • Is the streaming media player a product distinct from an OS ? *
Demand Side Substitutability • The classical play back devices (CD and DVD players) are not a substitue for Media Players*. They do not have the same demand. • Media Players with similar functionalities are the only products competitive to WMP** Consumers want a media player wich is able to play and stream audio and video files. So, there is not substitutability in both ways.
Supply Side Substitutability* • To develop, innovate and promote a new media player, including codecs, formats and media streaming technology, significant investments in terms of research, development and promotion are needed. • Market entry is difficult** • The network effects make that there are barriers to entry for new firms
Conclusion Media Player Market • Because there are no subsitutions, neither on demand nor supply side, the market for streaming media players is a relevant product market in this case.
Geographical market* • For PC operating system, work group server OS and media player, the relative geographical market is world-wide.**
Dominant Position Legal background and application to Microsoft Case
Overview • The General provisions set out in Articles 2 and 3 EC Treaty • Article 82 and a general definition of Dominant position • The dominant position in the case of Microsoft
General provisions set out in the EC Treaty (i) • Article 2 of the EC Treaty; The Community shall have as its task, by establishing a common market and an economic and monetary union and by implementing common policies or activities referred to in Articles 3 and 4, to promote throughout the Community a harmonious, balanced and sustainable development of economic activities, a high level of employment and of social protection, equality between men and women, sustainable andnon-inflationary growth, a high degree of competitiveness and convergence of economic performance, a high level of protection and improvement of the quality of the environment, the raising of the standard of living and quality of life and economic and social cohesion and solidarity among Member States.
The General provisions set out in The EC Treaty (ii) • Article 3(g) of the EC Treaty; • For the purposes set out in the Article 2, the activities of the Community shall include, as provided in this Treaty and in accordance with the timetable set out therein: (g) A system ensuring that competition in the internal market is not distorted
They both serve the principals set out in Articles 2 and 3 of The EC Treaty Article 82 impose “special responsability” on companies with dominant position, while Article 81 doesn’t. Relationship between Articles 81 and 82
Article 82 • Safeguards Article 3 (g) by prohibiting abuse of dominant position; “establishing a system ensuring that competition in the internal market is not distorted by firms holding a dominant position”
The two objectives of Article 82 • To protect the degree of competition in a defined market, and therefore its customers and, • To ensure fair play between the companies in this defined market
Definition of a dominant position Article 82 does not provide for a definition “Firms holding a substantial amount of market power in one or more of the markets in which they operate”1 • List in Article 82 is only indicative • Therefore the ECJ states that; “any kind of behaviour by a dominant undertaking that appreciably distorts competition or exploits customers in the market in question”.