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The Microsoft case : will dream and day unite ?

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The Europublican

As the ECJ finally rejected the appeal of Microsoft against the CFI ruling that broadly confirmed the 2004 Commission decision, a bitter taste remains in the mouth. On the paper, the villains were defeated and have been severely punished. But everyone agrees that it is more of a Pyrrhic victory for the Commission and EC competition law in general.

Half a billion euros in sanctions, an obligation to disclose inter-operation information to competitors and compulsory distribution of a “reduced” version of Windows, this may seem impressive.

But the least we can say is that it is “too little too late”. First, half a billion euros is very little compared to Microsoft’s profits and does not seems to be a real deterrent to future anti-competitive behaviours. Second, it must be remembered that the application was filed by Sun Microsystems in 1998. Considering the pace at which software evolves, this is nothing but a mockery.

So we are faced with a clear case of regulatory failure. The intervention of the law is late and inefficient. In front of such a problem, the response of the dominant economic trend would be: cut intervention then! Let the market function and on the whole it will stabilize. And after all, what you are doing now is uselessly punishing the most efficient operator. So we don’t need competition law in that case.

This is the lazy answer. It basically means: since we can’t solve the problem, let’s pretend there is none…

But there is a problem. It does not come from Microsoft’s ultra-dominance on the OS market. If Windows is the best product, fine. But it comes form the fact that is using this other dominance to leverage on other markets. I will not restate the debate on this aspect. I think it is clear for everyone that such leverage is both efficient and profitable for Microsoft.

So what do we do? My point is that rather than cutting intervention we should increase it. Yes, it may look like an old-fashioned statist position. But I told you, I’m a left-oriented competition lawyer. Can’t help it!

In most network industries, the recourse to competition law has been in great part replaced by ex ante regulation. This was due to the structure of those particular markets. First, most national markets were dominated by a state monopoly. Second, most of these activities had huge barriers to entry. To be short, both these aspects had the effect of giving the incumbent the possibility to efficiently prevent the entry of new competitors. Therefore, the behaviour of economic operators had to be regulated, mainly by a national regulatory authority.

I think we should do the same with software industry. This market presents features that are comparable with electronic communications for example. There are important investment costs, a necessity to recoup them over a long period of time and the presence of an historic quasi-monopoly. But this time, the monopoly does not come from past state intervention, but from the market itself.

Regulation would act ex-ante, with the help of a regulatory agency. It would control Microsoft’s conditions for access to software specifications and prevent other anti-competitive behaviour, like tying or discriminatory prices. This would be much more efficient because it would give legal and economic certainty to actual or potential competitors.

So, why this hasn’t been done yet? Because there is no Internal Market issue! In the case of energy, telecoms or posts, we were faced with national monopolies, which had the effect of preventing circulation of services and firms. Here, it is a global quasi-monopoly. So yes, there is little effect on the existence of an Internal Market for softwares. But that doesn’t mean there is no effect on the functioning of this market.

So, if we are to regulate the software industry, we must go clearly European. This means that the agency in charge can only be a Community one. National regulatory authorities would be inefficient or even counter-productive. Therefore, we have two problems to solve.

The first one is the legal basis. We cannot use treaty articles relating to the Internal Market. Second, we must definitely get rid of the Meroni doctrine as to community agency with autonomous decision power. Maybe an ad hoc Council decision, creating the agency and giving a specific competence to the ECJ to control it could be a possible solution?

There is no valid solution for all markets and specific industries such as OS softwares deserve a specific answer. Only then will dream an day unite.