Transcript The CFI Judgment in Microsoft

The CFI Judgment in Microsoft
September 21, 2007
Key principles and outlook
© 2007 Cleary Gottlieb Steen & Hamilton LLP. All rights reserved.
Overview
 Implications of the Judgment
 The CFI’s analysis of Microsoft’s refusal to supply
interoperability information
 The CFI’s analysis of Microsoft’s tying
 Concluding remarks
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Implications of the Judgment
Important Precedent for Application of EC
Competition Rules to Microsoft
 Microsoft is not immune to EC competition rules
– IP not a per se justification for Microsoft to refuse interoperability
information (¶¶ 689-690)
– Tying of software products with Windows not per se lawful
 Doubtful to what extent case can serve as a precedent for other
companies or industries
– Turns on the specific facts of the case
– Applies orthodox legal analysis
 Affirms basic EC competition law principles
– Dominant company must compete on the merits of its products
– Dominant company may not rely on its market power to compete in
neighboring markets
– Close link between competition, innovation, and consumer welfare
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Key Facts
 Extraordinary market power of Microsoft
– Not mere dominance but virtual monopoly
 Particular nature of operating systems
– By their nature intended for interoperation
– By their nature intended to be complemented with third-party
products
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The CFI’s Analysis Of Interoperability
Analytical Framework
 Grounded in established case law
– ICI, Volvo, Bronner, Magill, IMS
 Four pronged test
– Information indispensable
– Refusal risks eliminating effective competition
– Refusal prevents appearance of new products
– MS does not demonstrate objective justification
 CFI gives MS the benefit of the doubt
– “Strictest legal test” applied (¶ 284)
 Detailed assessment of the facts and evidence
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The Role of Innovation
 New product test:
– Manifestation of consumer harm analysis under Article 82(b). Question
here whether refusal limited technical development in line with (¶ 647)
 Key facts taken into account:
– Foreclosed products have superior qualities (¶¶ 652, 661)
– Prior to refusal third-party products characterized by a high degree of
innovation (¶ 654)
– Information at issue is protocol specification – requires own development
efforts (¶ 655)
– Competitive situation forces third-parties to innovate (¶ 658)
 Balance against innovation incentives of Microsoft
– Supply of interoperability information will not lead to cloning (¶ 700)
– Disclosure of interoperability information a normal feature of the industry
(¶ 702)
– Gates: “What we are trying to do is use our server control to do new
protocols and lock out Sun and Oracle specifically” (¶ 771)
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The CFI’s Analysis Of Tying
Analytical Framework
 Grounded in established case law
– Hilti, Tetra Pak II
 Five pronged test
– Microsoft is dominant in the tying product (Windows)
– The tying and tied product (WMP) are two separate products
– MS denies customers choice to obtain Windows without WMP
– MS’s tying forecloses competition
– MS does not demonstrate objective justification
 Detailed assessment of the facts and evidence
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Windows and WMP are separate products
 Analysis based on the concrete facts of the case
– Existence of independent media player suppliers. Innovator was
RealNetworks. (¶ 927)
– MS released WMP as separate product and still does (¶¶ 837, 929)
– MS promoted WMP as a separate product in direct competition to
RealPlayer. (¶ 930)
– WMP offered for different OS (¶ 928)
– Other OS suppliers apply less restrictive policies (¶ 941)
– Nature of the products – infrastructure vs. application (¶¶ 916, 926)
 No objective justification for tying
– MS admitted that there were no technical reasons for tying WMP to
Windows (¶ 936)
– Bay to Gates: “Our strategy: 1. Change the rules: reposition streaming
media battle from Netshow vs Real to Windows vs Real – follow the IE/IIS
strategy where ever appropriate” (¶ 937)
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Standardisation and Innovation
 MS uniform platform argument
– Amounts to suggestion that because monopolization leads to de facto
standard, tying should be justified
 Interim Measure Order of CFI President defines question:
– MS argument “requires an examination of whether any positive effects
associated with the increasing standardisation of certain products may
constitute objective justification or whether, as the Commission
contends, the positive effects of standardisation may be accepted only
when they result from the operation of the competitive process or from
decisions taken by standardisation bodies” (Order, ¶ 401)
 Judgment answers:
– “Although, generally, standardisation may effectively present certain
advantages, it cannot be allowed to be imposed unilaterally by an
undertaking in a dominant position by means of tying” (¶ 1152)
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Standardisation and Innovation
 Impact of tying on innovation
– Competition for the standard drives innovation (¶ 1088)
– Tying loads the dice against innovators (¶ 1088)
– Deters investment (¶ 1088)
– Reputation effects (¶ 1088)
– Suppression of qualitative superior player (¶¶ 1046, 1057)
 Commission decision (¶ 978):
– “The Commission does not purport to pass judgment as to the desirability of
one unique media player […] However, the manner in which competition
unfolds […] to maintain competitive markets so that innovations succeed or
fail on the merits is an important objective of Community competition policy”
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Concluding Remarks
Concluding Remarks
 CFI applied same strict and careful review as in Airtours,
Schneider, Tetra Laval
– Commission evidence found to be accurate, reliable, and consistent
– MS arguments found to be vague, unsupported, formalistic, and
contradicted by own evidence
 Judgment confirms that both Commission and CFI can handle
complex cases successfully
 Judgment does not open the “floodgates”
 Judgment does not create a “gulf” with US law
– US consent decree requires MS to disclose interoperability information
– DC Circuit held that MS tying should be analyzed under rule of reason
approach. The Commission and the CFI did just that
– Analysis based on effects of conduct and harm to consumers
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Windows XP Embedded Target Designer
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Multimedia infrastructure and Multimedia Applications
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WMP is not part of the multimedia infrastructure
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WMP is a multimedia application
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Government Exhibit 1576, U.S. v. Microsoft Corp
http://www.usdoj.gov/atr/cases/ms_exhibits.pdf
Annex A.RN.9
Billg and Paulma made the decision that (1) we
need to win the streaming battle against
progressive networks
Bill‘s comment was ‘this is a strategic area and we need to win it’
Muglia’s comment was ‘PN is like Netscape the only difference is we
have a chance to start this battle earlier
in the game.
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Government Exhibit 1576, U.S. v. Microsoft Corp
http://www.usdoj.gov/atr/cases/ms_exhibits.pdf
Annex A.RN.9
Winning the streaming battle means three thingswinning the file format war, winning the client
architecture war, and winnning the server war.
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Reposition competition to Windows vs. Real
Plaintiff’s Exhibit 501, U.S. v. Microsoft Corp
http://www.naag.org/issues/microsoft/pdf/PX0501.pdf
Annex A.RN.11
RN is still significantly ahead
of us and not slowing down.
They have not yet made any
major mistakes. G2 is beating
our v3 in review and is ahead
in a few key feature areas…
Our strategy
1. Change the rules:
reposition streaming
media battle from
Netshow vs Real to
Windows vs Real – follow
the IE/IIS strategy where
ever appropriate
Memorandum from Anthony Bay, January 3, 1999
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Impact on Competition
 Commission need not wait until competitors are “eliminated
from the market” (¶ 561).
 It is not necessary to demonstrate elimination of all
competition, but elimination of effective competition (¶ 563).
 Analysis based on careful assessment of the facts and the
evidence
– Standard of proof: accurate, reliable, and coherent evidence (¶ 564).
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