Acton Commentary

Letter from Turin: The EU’s Immoral Case Against Microsoft


Last week, European Union commissioner Mario Monti inflicted a € 497 million fine on Microsoft — the highest fine in the history of European antitrust regulation. The case against Microsoft was waged, in Europe as it was in the United States, by its competitors. What these companies don’t want is for Microsoft to “prevent” them from succeeding in the European market. What competitors really fear is Microsoft’s ability to satisfy consumers better than they do, at a cheaper price.

A few days before the ruling was made public, Mr. Monti complimented Microsoft Chief Executive Officer Steve Ballmer and his executive team, who desperately tried to reach an agreement, for their cooperative efforts. Still, Mr. Monti believed it was far more important to send a message, loud and clear, to the industry than it was to work on a cooperative settlement of the issue.

Mario Monti’s ruling wasn’t just about bundling, by the way. As Brian Groom has written in the Financial Times, “this case has always been more about Microsoft's business model – the leveraging of its dominance over personal computer operating systems into other markets - than specific issues about servers and media player programs.” Considering that many of Monti’s decisions have been reversed, it is indeed possible that the same will happen with the Microsoft’s case.

Mr. Monti substantially accepted the view of Microsoft’s competitors. His recent ruling belongs to a school of thought that believes that pluralism in supply is per se a value, and that competition is basically a quantity. In other words, a market needs a lot of producers. This view has its roots in neoclassical economics, but is very far from reality.

We know that competition isn’t a quantity; it is a process. It is the process by which entrepreneurs forecast and discover the preferences of consumers. Microsoft proved to be very good in such an undertaking, and punishing the company for its own success does not just weaken a free economy; it is plainly immoral.

With this ruling, the European Commission demands that, first, Microsoft should provide information to competitors to allow them to interface with its servers. Second, it should also sell a version of its Windows operating system that does not include MediaPlayer, which permits users to download and play film images and sound files. How this latter point will influence the software market remains to be seen. Clearly, even if the Media Player-free version of Windows will be sold at a cheaper price, such a decision is most likely to harm consumers.

A product that is currently given away for free within the Windows operating system will be sold at a new price, and one particular feature – the ability to play music and videos with your computer –will become a separate tool, to be bought separately.

The EU revived the issue of “bundling” in its attack on Microsoft. This was the same strategy purshed by the U.S. Department of Justice in its investigation against the company. In the United States, Microsoft was challenged for complementing Windows with Microsoft Explorer. The usual suspects (Microsoft’s competitors) predicted the catastrophic consequences of allowing Explorer to become the dominant Internet browswer. Bill Gates was characterized by his competitors as the new “Big Brother.”

But the pessimistic forecasts proved to be all wrong. Explorer broke the dominant position of Netscape, without hampering competition. Microsoft Network, another program that has been integrated into Windows since 1995, is far from reaching a dominant position. But, by the virtue of Microsoft Network’s presence, it triggered a dramatic decrease in the prices similar applications. This is also of software prices in general: as Stan J. Liebowitz and Stephen E. Margolis demonstrated in their excellent book, Winners, Losers, and Microsoft: Competition in High Technology, the company never did operate as a monopolist. Its entrance in a market always brought about lower prices, not price increases.

And Microsoft is far from the only practitioner of integrated applications. Apple integrates and bundles its own software for Internet browsing (“Safari”) as well as for multimedia applications (“Itunes”).

In the parable of the talents (Matthew 25:14-30), the “wicked and lazy” servant who hid his talent in the ground is punished and the money is taken away from him. The productive and the entrepreneurial are praised, whereas the lazy is blamed. Antitrust rulings such as Mario Monti’s turn the Gospel upside down. They aim to take away from the productive and to reward competitors who are less effective at satisfying consumers.