Commission examines the impact of Windows 2000 on competition
Brussels, 10 February 2000
Commission examines the impact of Windows 2000 on competition
On the basis of information received from end-users, SMEs active in the IT (information technology) sector and competitors of Microsoft, the Competition Directorate General of the European Commission has formally requested Microsoft to provide information about the new technical features of Windows 2000 in the context of EC competition law. This information should allow the Commission to verify allegations that Microsoft has designed Windows 2000 in a way which will permit leveraging of its dominance in PC operating systems onto the market for server operating systems and ultimately that for thriving e-commerce.
According to allegations received by the Commission, Microsoft, by virtue of Windows 2000, has bundled its PC operating system with its own server software and other Microsoft software products (i.e. "middleware" which provides functionality enhancing the performance of client/server operating systems such as back office or security tasks) in a way which permits only Microsoft's products to be fully interoperable. Microsoft's competitors, which do not have access to the interfaces would therefore, according to the allegations, be put at a significant competitive disadvantage which would ultimately allow Microsoft to extend its dominance in PC operating systems into the closely related markets for server operating system software and "middleware". According to the allegations, in order to ensure full exploitation of functionalities embedded in Windows 2000 for PCs, customers would de facto be obliged to purchase Windows 2000 for servers.
As a result of the information it has so far obtained, Competition DG has sent a formal request for information to Microsoft in accordance with Article 11 of Regulation 17/62. The Commission will examine whether the above allegations concerning an infringement of EC competition law caused by the design of Windows 2000 are well founded.
MICROSOFT EXAMINATION BACKGROUND
How does this investigation relate to the US vs Microsoft trial?
It is important to differentiate between the trial in the USA and our first step in a preliminary examination of the allegations we have been approached with. The issue of the US proceedings and the allegations we have been confronted with are different. The allegations which we have now decided to examine more closely centre on Microsoft leveraging its dominance from one market (PC operating systems) onto other markets whereas in the US the main thrust of the proceedings seems to revolve around Microsoft protecting its dominance on the market for PC operating systems.
Timeframe & next steps: What are the timeframe and the next steps in the Commission's investigation?
We have given Microsoft four weeks to respond to our questions. Their answers will then have to be carefully analysed. It is on the basis of this analysis that the Commission will decide its next steps. At this stage it is impossible to anticipate the outcome of the examination.
Generally speaking, DG Competition's options are laid down in Regulation 17/62. In this perspective, if we consider that EC competition law is being infringed we can initiate a formal examination procedure by sending a statement including the objections raised against the company concerned.
At this stage, this is only one option among others depending on the outcome of the examination. We need to examine Microsoft's answers and supplementary information from other sources first to be able to assess the merits of the allegations. This is not the first time nor the first examination in which the Commission has been confronted with allegations concerning the competitive impact of Windows 2000.
Legal framework: What is the legal framework in which DG COMP's investigation is situated?
The examination is taking place in the framework of Regulation 17/62 implementing Articles 81 and 82 of the EC Treaty.
The formal request has been sent on the basis of Article 11 of Regulation 17/62. We have thus started a so-called ex officio procedure. It should be emphasised that at this stage we have initiated an examination but have not opened a formal procedure against Microsoft.
Sources of information & allegations: How come you are concerned about Windows 2000?
We have been approached by end-users, SMEs active in the IT sector and competitors of Microsoft who had been given access to beta-versions of Windows 2000. The parties who have contacted us do not want to be named. Nevertheless, their submissions were sufficiently substantiated to justify our formal request to Microsoft for information.
Charge in legal terms: What exactly is Microsoft accused of?
There is no accusation yet. This is important to remember. Competition DG is currently in a preliminary examination stage.
The allegations we are confronted with would indicate the applicability of Article 82 of the EC Treaty. Article 82 prohibits abusive and exclusionary behaviour by undertakings in a dominant position.
According to the allegations we have received Microsoft, through Windows 2000, has bundled its PC operating system with its own server software and other Microsoft software products (i.e. "middleware") in a way which permits only Microsoft's products to be fully interoperable. Microsoft's competitors, which do not have access to the interfaces would therefore, according to the allegations, be put at a significant competitive disadvantage which would ultimately allow Microsoft to extend its dominance in PC operating systems into the closely related markets for server operating system software and "middleware". According to the allegations, in order to ensure full exploitation of functionalities embedded in Windows 2000 for PCs, customers would de facto be obliged to purchase Windows 2000 for servers. Microsoft would thereby shift outwards to the server market the technical barriers to entry which so far have afforded it its arguably strong position in the market for PC operating systems.
E-commerce: What about the danger for e-commerce?
We will, no doubt, need to obtain further clarification on this point, both from Microsoft and its competitors. What we have understood so far is that whoever gains dominance in the server software market is likely to control e-commerce too. According to what is claimed by Microsoft's competitors and customers, Microsoft's Windows 2000 will leverage Microsoft's dominance in PC operating systems to server operating systems. This could tip the e-commerce market to Microsoft's favour.
Past Commission cases involving Microsoft:
· Microsoft Licensing Agreements with PC Manufacturers
In 1993, the US Justice Department took over a deadlocked investigation of Microsoft. At about the same time Novell filed a complaint with the Commission concerning Microsoft. By mid 1994, largely due to constructive exchanges of views on the issues, the two investigations had reached a common set of concerns about Microsoft's licensing of its MS-DOS and Windows products to PC manufacturers.
Negotiations between Microsoft and a joint DG COMP/US Justice Department team led to an agreed settlement where Microsoft accepted to change its licensing agreements with PC manufacturers and which took the form of an Undertaking to the Commission and a Consent Decree in the US. The Undertaking was received by the Commission in July 1994 and ratified by the US court in 1995.
· Santa Cruz v. Microsoft
In 1997 Microsoft's competitor Santa Cruz Operation (SCO), a Californian software company specialised in systems for network computing, complained to both DG COMP and the US Justice Department about its contractual relationship with Microsoft invoking restraints of competition due to the agreements and referred to Microsoft dominant position. We discussed the case with the US Justice Department. The Justice Department felt that it would take more time to address these concerns under US Law. They agreed to us moving first. A Statement of Objections was sent and Microsoft waived its rights under the contract clauses to which we objected before a scheduled oral hearing. These changes addressed the competition concerns in both the EEA and the US. The case was closed.
· Microsoft Internet Explorer
In early 1997, DG COMP launched an ex-officio investigation of certain Microsoft contracts with European Internet Services Providers (ISP). During this inquiry, Microsoft was informally requested to re-examine the agreements in the light of European competition rules to ensure that they did not contain restrictions that might have the effect of illegally foreclosing the market for Internet browser software from Microsoft's competitors and of illegally promoting the use of Microsoft's proprietary technology on the Internet. Microsoft subsequently amended its agreements and notified the revised agreements to the Commission. Considering that Microsoft removed illegal clauses and that the notified agreements no longer infringe EU competition rules, the Commission cleared the agreements by way of a comfort letter pursuant to Article 81(1). The comfort letter only covers the agreements between Microsoft and ISPs. In this particular case, the Commission did not give any ruling on the global behaviour of Microsoft concerning a possible abuse of dominant position.
· Micro Leader vs Microsoft
The charge brought against Microsoft is that it applied different prices to equivalent transactions with trading partners.
Recap: Micro Leader is a wholesaler of software in France. It imported Microsoft software (operating systems, application programs) from Canada to France to sell it there. The software was allegedly identical to that supplied by Microsoft's French distribution channels but cheaper. Microsoft considered that the imports lead to unfair competition in France and brought to bear its intellectual property rights concerning the software. Micro Leader filed a complaint with the Commission relying both on the concept of an abuse of a dominant position and on the concept of agreements between companies with a view to restricting competition (Article 81 of the Treaty). The Commission decided to reject the complaint on the grounds that the complainant had not provided sufficient evidence for its charges. Micro Leader appealed at the Court of First Instance (CFI).
The CFI upheld the Commission's arguments as far as the charge of restrictive agreements contrary to Article 81 was concerned. Nevertheless, it annulled the decision with reference to Article 82: according to the judgment, Micro Leader had provided sufficient indications that Microsoft did charge higher prices in France than in Quebec. The CFI furthermore stated that in exceptional circumstances intellectual property rights would not necessarily constitute a valid defence if a conduct were found to constitute an abuse of a dominant position.
We have already started re-examining the case in accordance with the CFI's findings. Microsoft will have to provide information on its pricing-policy and provide reasons for any possible differences in prices for prima facie identical products.