The CFI Judgment in Microsoft

© 2007 Cleary Gottlieb Steen & Hamilton LLP. All rights reserved.

The CFI Judgment in Microsoft

Key principles and outlookSeptember 21, 2007

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Overview

Implications of the Judgment

The CFI’s analysis of Microsoft’s refusal to supply interoperability information

The CFI’s analysis of Microsoft’s tying

Concluding remarks

Implications of the Judgment

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Important Precedent for Application of EC Competition Rules to Microsoft

Microsoft is not immune to EC competition rules

– IP not a per se justification for Microsoft to refuse interoperability information (¶¶ 689-690)

– Tying of software products with Windows not per se lawful

Doubtful to what extent case can serve as a precedent for other companies or industries

– Turns on the specific facts of the case

– Applies orthodox legal analysis

Affirms basic EC competition law principles

– Dominant company must compete on the merits of its products

– Dominant company may not rely on its market power to compete in neighboring markets

– Close link between competition, innovation, and consumer welfare

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Key Facts

Extraordinary market power of Microsoft

– Not mere dominance but virtual monopoly

Particular nature of operating systems

– By their nature intended for interoperation

– By their nature intended to be complemented with third-party products

The CFI’s Analysis Of Interoperability

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Analytical Framework

Grounded in established case law

– ICI, Volvo, Bronner, Magill, IMS

Four pronged test

– Information indispensable

– Refusal risks eliminating effective competition

– Refusal prevents appearance of new products

– MS does not demonstrate objective justification

CFI gives MS the benefit of the doubt

– “Strictest legal test” applied (¶ 284)

Detailed assessment of the facts and evidence

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The Role of Innovation New product test:

– Manifestation of consumer harm analysis under Article 82(b). Question here whether refusal limited technical development in line with (¶ 647)

Key facts taken into account:

– Foreclosed products have superior qualities (¶¶ 652, 661)

– Prior to refusal third-party products characterized by a high degree of innovation (¶ 654)

– Information at issue is protocol specification – requires own development efforts (¶ 655)

– Competitive situation forces third-parties to innovate (¶ 658)

Balance against innovation incentives of Microsoft

– Supply of interoperability information will not lead to cloning (¶ 700)

– Disclosure of interoperability information a normal feature of the industry (¶ 702)

– Gates: “What we are trying to do is use our server control to do new protocols and lock out Sun and Oracle specifically” (¶ 771)

The CFI’s Analysis Of Tying

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Analytical Framework

Grounded in established case law

– Hilti, Tetra Pak II

Five pronged test

– Microsoft is dominant in the tying product (Windows)

– The tying and tied product (WMP) are two separate products

– MS denies customers choice to obtain Windows without WMP

– MS’s tying forecloses competition

– MS does not demonstrate objective justification

Detailed assessment of the facts and evidence

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Windows and WMP are separate products Analysis based on the concrete facts of the case

– Existence of independent media player suppliers. Innovator was RealNetworks. (¶ 927)

– MS released WMP as separate product and still does (¶¶ 837, 929)

– MS promoted WMP as a separate product in direct competition to RealPlayer. (¶ 930)

– WMP offered for different OS (¶ 928)

– Other OS suppliers apply less restrictive policies (¶ 941)

– Nature of the products – infrastructure vs. application (¶¶ 916, 926)

No objective justification for tying

– MS admitted that there were no technical reasons for tying WMP to Windows (¶ 936)

– Bay to Gates: “Our strategy: 1. Change the rules: reposition streaming media battle from Netshow vs Real to Windows vs Real – follow the IE/IIS strategy where ever appropriate” (¶ 937)

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Standardisation and Innovation MS uniform platform argument

– Amounts to suggestion that because monopolization leads to de facto standard, tying should be justified

Interim Measure Order of CFI President defines question:

– MS argument “requires an examination of whether any positive effects associated with the increasing standardisation of certain products may constitute objective justification or whether, as the Commission contends, the positive effects of standardisation may be accepted only when they result from the operation of the competitive process or from decisions taken by standardisation bodies” (Order, ¶ 401)

Judgment answers:

– “Although, generally, standardisation may effectively present certain advantages, it cannot be allowed to be imposed unilaterally by an undertaking in a dominant position by means of tying” (¶ 1152)

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Standardisation and Innovation

Impact of tying on innovation

– Competition for the standard drives innovation (¶ 1088)

– Tying loads the dice against innovators (¶ 1088)

– Deters investment (¶ 1088)

– Reputation effects (¶ 1088)

– Suppression of qualitative superior player (¶¶ 1046, 1057)

Commission decision (¶ 978):

– “The Commission does not purport to pass judgment as to the desirability of one unique media player […] However, the manner in which competition unfolds […] to maintain competitive markets so that innovations succeed or fail on the merits is an important objective of Community competition policy”

Concluding Remarks

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Concluding Remarks CFI applied same strict and careful review as in Airtours,

Schneider, Tetra Laval

– Commission evidence found to be accurate, reliable, and consistent

– MS arguments found to be vague, unsupported, formalistic, and contradicted by own evidence

Judgment confirms that both Commission and CFI can handle complex cases successfully

Judgment does not open the “floodgates”

Judgment does not create a “gulf” with US law

– US consent decree requires MS to disclose interoperability information

– DC Circuit held that MS tying should be analyzed under rule of reason approach. The Commission and the CFI did just that

– Analysis based on effects of conduct and harm to consumers

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Windows XP Embedded Target Designer

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Multimedia infrastructure and Multimedia Applications

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WMP is not part of the multimedia infrastructure

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WMP is a multimedia application

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Bill‘s comment was ‘this is a strategic area and we need to win it’ Muglia’s comment was ‘PN is like Netscape the only difference is we have a chance to start this battle earlier in the game.

Government Exhibit 1576, U.S. v. Microsoft Corphttp://www.usdoj.gov/atr/cases/ms_exhibits.pdf

Annex A.RN.9

Billg and Paulma made the decision that (1) we need to win the streaming battle against progressive networks

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Winning the streaming battle means three things-winning the file format war, winning the client architecture war, and winnning the server war.

Government Exhibit 1576, U.S. v. Microsoft Corphttp://www.usdoj.gov/atr/cases/ms_exhibits.pdf

Annex A.RN.9

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RN is still significantly ahead of us and not slowing down. They have not yet made any major mistakes. G2 is beating our v3 in review and is ahead in a few key feature areas…

Our strategy1. Change the rules: reposition streaming media battle from Netshow vs Real to Windows vs Real – follow the IE/IIS strategy where ever appropriate

Reposition competition to Windows vs. Real

Annex A.RN.11

Memorandum from Anthony Bay, January 3, 1999

Plaintiff’s Exhibit 501, U.S. v. Microsoft Corphttp://www.naag.org/issues/microsoft/pdf/PX0501.pdf

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Impact on Competition

Commission need not wait until competitors are “eliminated from the market” (¶ 561).

It is not necessary to demonstrate elimination of all competition, but elimination of effective competition (¶ 563).

Analysis based on careful assessment of the facts and the evidence– Standard of proof: accurate, reliable, and coherent evidence (¶ 564).