EU Threatens Innovation in Action Against Microsoft

Microsoft’s work group server competitors claim they can’t keep up with the complexity of Microsoft’s product upgrades. “We are, in many fields, ten years behind Microsoft. And the lag is growing with every new step Microsoft takes,” according to Volker Lendecke of the Samba Users Group, an organization dedicated to free software that anyone can copy.

If they are forced to play catch up on their own, it will be costly, risky and take a lot of time. The European Union’s plan to hand them Microsoft’s work group server interface specifications would be a lot easier. It would hopefully stimulate price competition in the short run and arguably promote the kind of innovation that results in improvements around the edges of what is already on the market. But in the long run, this approach would diminish everyone’s incentive to push for transformational innovation.

Microsoft violated EU competition law (Microsoft has appealed) by refusing to “supply Sun and other [competitors] with the specifications for the protocols used by Windows work group servers … and allow [competitors] to implement such specifications for the purpose of developing and distributing interoperable work group server operating system products.” (See Mark Ryland’s account of the ruling.) In the EU, the usual rule that you are free to choose your business partners does not apply to Microsoft, which the EU estimates has a market share of at least 50%. 

One point to remember is that presently there is interoperability between the work group servers of Microsoft and its competitors. But Microsoft has added some features and made some enhancements, and its competitors want to be able to match the Microsoft offering without having to reverse engineer it themselves.

Another point is that although the EU claims there is a “risk that competition could be eliminated,” it concedes that there is a negligible risk of Microsoft’s competitors going out of business. According to the EU’s decision handed down in March, 2004: “The overall financial health of Microsoft’s competitors, in particular Sun, is only remotely connected to the competitive situation in the market for work group server operating systems, as the activities of these companies in that market account only for a limited proportion of their overall revenues.”

Presumably, the Europeans think that it would be fatal if the present group of competitors were to exit this particular line of business, and don’t see how companies in fact can (and do) exit and enter particular lines of business all the time. The EU is trying to preserve the precise contours of a market because it erroneously believes that market is the only source of a competitive threat to Microsoft’s work group server business. 

The EU flatly rejected the essential argument put forward by Microsoft’s lawyers that the continuing rise of processing power has led to shifts from mainframes to PCs, the growth of the Internet and the popularity of non-PC devices — with more upheavals likely — and that traditional notions of market dominance consequently may not be applicable to this fast moving industry. According to the EU, “Even if it were to be the case that a dominant position might be limited in time, this does not itself constitute a limitation to the present market strength of the dominant company.”

If the finding of monopolization weren’t so questionable, the requirement that Microsoft license its server-to-server protocols to competitors might not seem so drastic. Notwithstanding its appeal, Microsoft has complied with respect to its non-open source competitors. The problem is that Microsoft’s open-source competitors are required to share their source code. So if Microsoft licenses its protocols to its open-source competitors, its intellectual property will be copied and distributed for free.

By creating a situation where the producer of a successful product must allow the product to be cloned and given away for free, the EU risks severely undermining everyone’s incentives to innovate. The EU is establishing a set of precedents in this case that ultimately couldn’t be worse for innovation. For Europe, the solution is not to penalize Microsoft’s success, but to unshackle its own economy(ies) — which increasingly can’t claim technological leadership in anything.