A TALE OF TWO EUROPEAN CASES:IBM and Microsoft

John VickersOxford University

Dutch Association for Competition Law Amsterdam, 15 May 2008

[Based on paper in Competition Policy International, Spring 2008]

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The Microsoft case déjà vu all over again?

► Large US computer company

► Dominant by virtue of proprietary de facto standard and ‘applications barrier’ to entry

► European Commission case following action brought by US Justice Department

► Refusal to supply interface information to enable interoperability

► Technological tying and bundling issues too

The IBM tale

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The US IBM cases

► Context of 1956 Consent Decree

► System/360 launched in 1964, followed by System/370

► Jan 1969: US Government file suit

► 1970s private actions by PCMs DEC, Telex, Memorex, Transamerica, … about interface information, bundling and predatory pricing. Unsuccessful apart from DEC settlement.

► The marketplace and US antitrust law were transformed in that decade

► Jan 1982: US drop case as “without merit”

► (Did it have merit at the outset?)

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The EC IBM case

► Complaints to the Commission from Amdahl, Memorex and others

► Dec 1980 Statement of Objections

► Allegations that IBM abused dominance in markets for key System/370 products (notably CPUs) by

non-disclosure of interface information

bundling of (too much) main memory

software bundling

refusal to supply IPOs

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IBM defence arguments

► Wrong to define markets by reference to IBM-compatibility

► Wrong to define “mainframe” market

► IBM not dominant

► Interface information (whatever that meant) was itself innovative; its disclosure would erode lead time so undermine innovation incentives to the detriment of competition and consumers

► Memory bundling was efficient and pro-consumer

► International law points

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The 1984 IBM settlement

► 1982-3 hearings and informal discussions

► Aug 1984 settlement: IBM undertook to

disclose System/370 interface information within 120 days

offer its System/370 CPUs without (non-essential) main memory

► No decision, no fine, no appeal, no precedents

► A “mild but probably efficacious” outcome? Or (by then) a waste of time?

► Events quickly showed merits of IBM’s dominance defence!

The Microsoft tale

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US Microsoft case: overview

► 1998 US brings case that MS had monopolised markets for operating systems and browsers …

► by engaging in exclusionary practices including bundling Internet Explorer with Windows OS

► 2000 District Court judgment: structural separation + behavioural remedies

► 2001 Court of Appeals judgment

► 2002 US and MS settle behavioural remedies

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US Court of Appeals judgment

► ‘Middleware’ threat from Netscape browser (+ Java) to applications barrier and hence to Windows dominance

► Thwarted by MS integration of IE with Windows, exclusionary contract terms with OEMs and IAPs?

► Court of Appeals, after reviewing anti-competitive allegations and efficiency defences:

largely upheld findings of unlawful maintenance of operating system monopoly

dismissed claims of extension of monopoly to browsers

remanded tying claim back for rule-of-reason treatment

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EC Microsoft case: overview

► March 2004 Commission decision (and €497m fine) that MS had abused dominance by

refusing to supply interoperability information to rivals on the market for work group server OS software

tying Media Player software with Windows OS

► Dec 2004: Court rejects MS request for remedy suspension

► Continuing disputes about compliance with remedies

► Sept 2007: Court judgment upholds Commission decision

► October: Microsoft announces compliance and no appeal

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European Commission decision on interoperability

► Refusal to disclose specifications and allow their use for the development of compatible products

► Analyse the entirety of the circumstances, including

disruption of a previous level of supply ...

of software interoperability information

Microsoft’s rapid rise to dominance in server OS software

Microsoft can impose de facto standard for work group computing of which PCs are a key component, so interoperability essential to compete in server OS software

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European Commission on ‘one monopoly profit’

► Para 767 observes that ‘one monopoly profit’ challenge to monopoly extension theory is based on strict assumptions

► Paras 768ff then stress monopoly maintenance incentives:

“Indeed, a future competitor in the client PC operating system market will need to provide products interoperable with Microsoft’s dominant work group server operating system. As such, by strengthening its dominant position in the work group server operating system market, Microsoft effectively reinforces the barriers to entry in the client PC operating system market”.

► Parallels with upheld part of US case

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The IMS Health criteria

► Lead cases on Article 82 obligation to license IP were Magill (1995) and IMS Health (April 2004)

► Weird cases with peculiar facts?

public domain, by-product information

► (Curious?) four-part test

indispensability of IP

elimination of all competition

new product or services not offered by IP owner

lack of objective justification

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The European Commission’s position

► Communication protocols at issue neither innovative nor IP

► But abuse even on the hypothesis most favourable to Microsoft that the refusal is regarded as a refusal to supply to third parties a licence relating to IP rights (CFI, 107)

► May take account of exceptional circumstances other than those in Magill and IMS Health; those ‘exceptional circumstances’ are anyway present

► Whereas Microsoft relied primarily on the Magill and IMS Health criteria, the Commission contended that their ‘automatic’ application would be ‘problematic’ (CFI, 315-7)

► However …

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The Court’s reasoning on interoperability

► Microsoft failed to show that interoperability information is not indispensable (CFI 436)

► No manifest error in finding risk of elimination of [effective] competition on work group server OS market (CFI 618)

► Not manifestly incorrect to find that Microsoft’s refusal limits technical development to the prejudice of consumers, so the new product test is met (CFI 665, which follows the statement that ‘Microsoft impaired the effective competitive structure on the work group server operating systems market by acquiring a significant market share on that market’)

► Microsoft did not demonstrate any objective justification, in particular that the impact on its incentives to innovate outweighed the exceptional circumstances (CFI 709-11)

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Interoperability right result, unfortunate route?

► The criteria for ‘exceptional circumstances’ were all met with (amazing?) ease

► The Commission over-proved its case in various ways

► Even those, like me, broadly content with the particular result may now wonder

what are the limits on dominant firm duties to supply and sustain rivals, including with IP?

what judicial checks there are on the Commission? how the leadership of DG Competition will attain discipline? what this means for the desirability of private actions?

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EC Microsoft case: tying of Media Player

► Commission risked less and gained less

► Court found four-part test to be met:

dominance over market for tying product (Windows OS)

separate products

consumers can’t get tied product (Media Player) without tying product

foreclosure of competition

► Without justification − MS can still offer bundled version

► But then (without price-difference regulation) what is the practical effect of the finding and remedy?

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Article 82 Guidelines

► All the more needed after Microsoft

► Key features of the Nov 2007 non-horizontal merger guidelines:

consumer orientation and rejection of competitor protection – the issue is anti-competitive foreclosure

recognition of substantial scope for efficiencies

spelling out of main theories of harm to competition and corresponding identification of key questions of fact

► Bring on the 82 Guidelines!