International Think-Tank on Innovation and Competition
Antitrust, Innovation and the Microsoft Case
June 1st, 2006
In these weeks, two crucial processes are likely to reshape the future of innovation and competition in Europe: the debate on the reform of EU competition enforcement in the area of abuse of dominance, and developments in the EU Microsoft case.
In line with the recent evolution of US antitrust policy, Dutch Commissioner Neelie Kroes is trying to implement an important reform, moving from a formal approach to antitrust toward a more modern welfare-based approach focused on the protection of consumers and of competition (rather than of competitors): the idea is that a particular behavior should not be condemned for being abusive per se, but only when it creates net losses for consumers. While the apparent shift in direction is positive, we have some concern that it is not being fully carried through at the level of specific proposals, beginning with the Commission’s recent Discussion Paper on the Application of Article 82 of the Treaty to Exclusionary Abuses.
For instance, in this Discussion Paper, still in line with old economic views, dominance in a market is associated too closely with a large market share and the efficiency defence - the chance for the dominant firm to prove that its aggressive strategy is not abusive if it enhances consumer welfare or improves the allocation of resources - is virtually excluded in case of market shares over a given threshold. Such an approach to the finding of dominance can be extremely dangerous with respect to the fast-moving markets of high-tech and New Economy industries (computer hardware and software, online businesses, mobile telephony and biotechnology). These industries are often characterised by massive R&D investments, strong reliance on IPRs and other intangible assets, first-mover advantages, high fixed sunk costs and low marginal costs. Competition in these markets is dynamic in the sense that it is often competition for the market in winner-takes-all races. Leading firms in these markets may enjoy high market shares yet be subject to massive competitive pressure to constantly create better products at lower prices, due to the threat from innovative competitors and potential entrants. Companies that hold a significant share of the market at any given point in time may see this share decrease rapidly and significantly following the development and supply of a new and more attractive product by an actual or potential competitor (the launch of the iPod by Apple and its impact on the distribution of so-called “MP3 players” is a good example of such rapid and drastic market developments). Hence, a static definition of dominance based on market share that fails to take account of the entry and technology conditions may be highly misleading.
Parallel to this debate, Microsoft’s appeal of the Commission’s March 2004 antitrust decision has been heart by the European Court of First Instance at the end of April. In this landmark decision, the Commission imposed the largest fine in the history of antitrust, required Microsoft to issue a version of its Windows operating system without Media Player, and mandated the licensing of intellectual property to enable interoperability between Windows PCs and work group servers and competitor products. The last point has turned out to be the most problematic: the picture that is emerging from Bruxelles is of a Commission that has continued to extend the scope of the information required, while it is not clear what exactly would constitute compliance with the remedy. Even the recent Microsoft's offer of access to Windows source code, including for technologies that are covered by patents and trade secrets, does not appear to be sufficient. Nevertheless, the Commission is aware that its case is much weaker than two years ago. Microsoft offered Windows without Media Player and nobody bought it, which strongly suggests that the “bundling” strategy was at least not damaging consumers. Microsoft was forced to licence more than a hundred technologies and in Europe not one of its competitors has taken out a license, a sign that the existing level of interoperability was not as low as it was depicted.
A crucial issue for the future of innovation in Europe is whether the final decision of the European Court of Justice will insist on forcing the disclosure of intellectual property rights that are the fruit of years of work and huge investments, something which may seriously jeopardize future investments in R&D not only in the software market, but in all the high-tech sectors. Notice that the Commission’s current proposal on exclusionary abuses deals with refusals to supply intellectual property rights to ensure interoperability in an ambiguous way: in particular, it states that defending patents and trade secrets is fundamental to promote investments, but opens the door to uncertain conditions under which forced disclosure can be required, in a way that seems to go beyond the carefully balanced case law. This could have chilling effects on incentives to invest and innovate and could ultimately end up protecting inefficient competitors that may free ride on the risks and investments of successful companies, in apparent contradiction to the Commission’s important and positive objective of protecting competition on the merits.
