Democracy & Technology Blog Here’s a tip for promoting innovation through “competition” law: Define market to get results you want

Microsoft Windows now represents 34.2% of the server market according to the most recent statistics reported by IDC this month. Microsoft is considered a “dominant” company in Europe only because the European Union measured “price band” and “workload” so it could carve the market just so, isolate a particular segment and report that its intended victim, in this case, Microsoft, has a share of “at least 60%.”
Richard Rahn pointed out once that, “If you define products and markets too narrowly, you will see all types of monopolies where, in fact, none exist. You may find Ford Motors has a 90 percent market share for 4X4 pickup trucks in a certain weight category in the color red in Albany County, GA.”

Using statistics compiled by IDC, the EU focused only on servers costing less than $25,000 — the “low-end server market” or the “volume server market.” This happens to be the segment in which Microsoft performs best. The EU concluded that Microsoft’s share of this segment of the market was 61.0%. Next, the EU noted that looking only at price band would obscure the fact that some servers are devoted to specific tasks outside work group networks.

So, the EU divided the volume server market into eight “workload categories” corresponding to the detail reported by IDC to isolate Microsoft’s strength in the file/print sharing category (65.7%) and networking (65.2%) and its relative weakness everywhere else, e.g., firewall (26%) and mission-critical applications (46%). As the EU acknowledged, Linux vendors had only 3.9% of file/print sharing and 10.8% of networking, but they had 21.4% of scientific/engineering, 21.2% of security, 20.3% of Web serving, 19.2% of proxy caching and 15.6% of streaming media.

Linux’s mascot, Tux

Linux now represents 12% of the market, and spending on Linux servers continues to grow roughly twice as fast as on Microsoft servers (this has been the trend for years). Microsoft pointed out that Linux’s success as a new entrant strongly suggests that the work group server operating system market does not exhibit barriers to entry. Therefore, the degree of dominance is not critical because it is not secure. If Microsoft abused its customers, it would merely invite existing competitors to double their efforts and/or new competitors to enter the market.
The EU blew off that argument, citing a litany of considerations, e.g., technicians are more interested in acquiring skills related to the most popular products and buyers look for an established record as a proven technology and at expected long-term vendor support and development of the platform. These are advantages which accrue to any hard-working competitor, but the rewards for success can get you into trouble in Europe — or at least they got Microsoft in trouble. Microsoft was too successful. The decisive consideration was probably this: The EU said that in order for the rivals to compete “more aggressively,” their products would have to be “substantially modified.” Not that it couldn’t be done, or that the rivals would go bankrupt (the EU specifically noted that they would not).
The EU accused Microsoft of acting as a “brake on innovation,” but the EU is depriving an innovator — Microsoft — of the rewards of their innovative effort and reducing the challenges on Microsoft’s competitors. In essence, the EU is removing the carrots and the sticks and thinks it has done a great job promoting innovation. Maybe that’s why Europe’s most recent technological breakthrough was the supersonic Concorde.
Rick Rule, a former Assistant Attorney General for Antitrust and an attorney for Microsoft, pointed out that a lot of people like to think that what happens to Microsoft “really doesn’t apply to anybody else,” but

If a company is dominant in an unrealistically narrowly defined market, then under [the EU’s] decision, even if there are competitive alternatives, and even if the competitors have found ways of either duplicating or mimicking the technology at issue so that it’s difficult to argue that the technology is indispensable, the EC’s decision suggests the dominant company must share its technology. Under the decision, if there are competitors who want your technology, who say that not having the technology puts them at a competitive disadvantage (and I just would point out, technology is pretty worthless unless it gives its owner some competitive advantage), then it would appear that you may have an obligation to license that technology to your competitors in the same market.

See:Volume Servers Lead Worldwide Server Market to Modest Growth in Second Quarter, According to IDC,” 23 Aug 2006
See:COMMISSION DECISION of 24.03.2004 relating to a proceeding under Article 82 of the EC Treaty (Case COMP/C-3/37.792 Microsoft)
See:Commission concludes on Microsoft investigation, imposes conduct remedies and a fine,” Mar. 24, 2004
See:“The EC Decision Against Microsoft: Windows on the World, Glass Houses, or Through the Looking Glass? An ABA Section of Antitrust Law Brown Bag Program,” June 30, 2004

Hance Haney

Director and Senior Fellow of the Technology & Democracy Project
Hance Haney served as Director and Senior Fellow of the Technology & Democracy Project at the Discovery Institute, in Washington, D.C. Haney spent ten years as an aide to former Senator Bob Packwood (OR), and advised him in his capacity as chairman of the Senate Communications Subcommittee during the deliberations leading to the Telecommunications Act of 1996. He subsequently held various positions with the United States Telecom Association and Qwest Communications. He earned a B.A. in history from Willamette University and a J.D. from Lewis and Clark Law School in Portland, Oregon.