Article published on EU Reporter on October 24, 2005.
On 5 October, the European Commission appointed a British computer scientist to help monitor Microsoft’s compliance with the sanctions imposed in March 2004. It was then found to be in violation of antitrust legislation and ordered to pay a record fine of 497 million euros, to sell a version of its operating system without its multimedia software and to share information with its competitors to allow interoperability between their programmes and its Windows operating system. Last December the European Court of Justice rejected an appeal asking for sanctions to be suspended until the end of the trial. So Microsoft paid the fine. But the IT giant had to face the other penalties.
After many reprimands from the Commission such as the statement declaring that Microsoft “had not put into action measures to improve interoperability” and a new threat for Microsoft to pay an additional fine of 5 million dollars a day, an agreement seems to have been found regarding the monitoring trustee. How it can be claimed that interoperability does not work if the person in charge of monitoring and making this judgement has not yet been appointed remains a mystery, but this should not distract us from the core issue: are the principles upon which the trial is based sound?
The European Commission quotes consumer interest as the reason for the Microsoft trial. This is what legitimises antitrust legislation in the eyes of public opinion. So it is crucial to look closely at the economic basis of the law to understand what represents an advantage or a disadvantage for the consumer in this case. Microsoft allegedly harms consumers through anticompetitive behaviour. Its dominant position in the operating system market supposedly gives it an unfair advantage in the software market. It is true that Microsoft’s developers benefit from having all the information necessary to make their programmes compatible with Windows. They are best placed to resolve interoperability problems between their software and the operating system. In addition, Microsoft tends to integrate its applications into Windows, which makes buying competing software unnecessary for many consumers. So Microsoft allegedly uses its quasi-monopoly of the operating system market to monopolise the software market at the disadvantage of customers because the “dominant position” so obtained would allow Microsoft to sell lower quality products at higher prices than it could otherwise.
The picture painted by the prosecution is a deformed version of reality. If Microsoft’s developers are really at an advantage because of their specialised knowledge of the operating system, it is equally true that their competitors, above all, are third party beneficiaries of Windows’ success. By developing an integrated and user-friendly operating system, Microsoft has achieved the standardisation necessary for the development of information and communication technology. This approach has allowed thousands of software designers to develop applications that they could not have sold otherwise. All software that relies on use by others has seen its market appear and grow thanks to the talents of Bill Gates’ collaborators. As consumers, we can observe daily the results of this market process: better quality products, which respond to wide-ranging professional and recreational needs, and falling prices across the whole IT sector. These happy developments have not taken place in spite of Microsoft. The information technology giant is, on the contrary, at the root of them.
But doesn’t being both the creator of a universal operating system and a software developer still give Microsoft an unfair advantage? Isn’t competition distorted in a way that is harmful to consumers? Here we come up against some serious errors in dominant theories of economic analysis of competition. In the “ideal” world of pure and perfect competition, consumers are better served when rival manufacturers are identical and perfectly informed, so that they are on an equal footing in the race for consumer preference. Any situation which is different from this supposed consumer paradise is therefore considered inferior and in need of corrective state action. However, the information advantage that Microsoft holds over its competitors is what makes its customers prefer its software. Microsoft could well have greater market share as a result, but this is because its customers have chosen it, demonstrating what they think of the quality of Microsoft products. The “dominant position” of a company is not proof that it is harmful to consumers. It is precisely by allocating market share to the best producers that competition guarantees consumers the best service possible.
If this privileged access to information is responsible for the success of Microsoft’s software, will consumers not still be better off if it is forced to share that precious Windows knowledge with its rivals? Microsoft’s critics do not seem to realise that achieving this advantage was a main reason for developing and improving the operating system in the first place. Today the same advantage is a powerful incentive to continue improving Windows and the other applications consumers are so keen on. Banning Microsoft from developing and maintaining this advantage amounts to depriving the company of the fruits of its investment. Forcing it to share information that it would prefer to keep secret will allow its competitors to cash in on its efforts. The inevitable consequence of such expropriation is that neither the winners of this arm-twisting, nor Microsoft itself, have the same incentive to innovate and invest as they would have done if the public authorities had instead held back their interventionist tendencies. If investment and innovation pay less, production will be relatively reduced, of poorer quality and less affordable for the consumer.
Xavier Méra is an associate researcher at the Molinari Economic Institute