International Think-Tank on Innovation and Competition
Innovation and Competition in the EU and the Microsoft Case
June 9th, 2005
This week saw a positive turn in the European Commission’s long-running confrontation with Microsoft, with the announcement by Commissioner N. Kroes that the Commission has provisionally accepted the company’s latest terms for complying with March 2004 competition decision (the Court’s decision on the appeal is expected next year). The announcement suggests that Kroes is paying attention to the real needs of competition and innovation in the New Economy and to the proper goals of industrial policy, whose priority should be promoting efficient competition and innovative activity.
The last year’s decision, beyond inflicting on MS the largest fine in the history of antitrust, has created two dangerous precedents: the first was the principle for which antitrust authorities could indirectly forbid price reductions, since MS was punished for giving Media Player (an application able to download audiovideo contents) for free with its operating system Windows; the second was the possibility for antitrust authorities to reveal business secrets which are the fruit of years of research for a company (almost like asking Coca Cola to reveal its secret formula). In general, the first factor reduces competition, the second jeopardizes investments in R&D by high-tech companies.
MS made available a version of Windows without Media Player since last January: the market will show whether this was really needed for the consumers, which at the moment does not seem to be the case - something to think about! Recently, the main sticking point in discussion was the (new) requirement for MS to make communications protocols available for free and without being able to protect the confidentiality of its Intellectual Property Rights (IPRs), despite the fact that both the original Commission decision and the December ruling by the Court of First Instance had contained important safeguards in this respect. Anyway, MS made significant concessions, including making some communications protocols available royalty-free, extending the geographical scope of the licensing programme from EU to worldwide, and developing 40 different possible combinations of licenses so that potential licensees do not have to pay for information they do not need to develop their own products. As a consequence, the threat of $ 5 million per day fines has receded, while the Commission “market tests” the MS proposals. By stepping back from the most extreme approach, the Commission has avoided caving into a self-defeating, ideological pressure by a hard core within the open source community.
Commissioner Kroes’s move is also an opportunity to remind ourselves that in today’s software market, proprietary software can coexist with open-source software. Many firms operating under an “open source” model routinely implement proprietary technology, such as the Windows communications protocols, in their products. These firms distribute software implementing proprietary technology under a separate license, together with open source licenses for underlying technology. There are lots of examples in the marketplace of such hybrid architectures, and they are in fact the predominant distribution model for Linux by vendors such as RedHat and Novell. Promoting this coexistence, rather than imposing mandatory free open-source licensing, must be the way forward if competition policy is to contribute to the achievement of the EU’s economic objectives on competition and innovation. Now the Commission needs to keep its eye on the ball as it examines the MS proposals in the coming weeks. Kroes will come under strong pressure, but the EU economic and social agenda should not be sacrificed to ideological anti-Americanism (or to anti-historical protectionism).
Turning to a more general analysis, the last developments go in the right direction for the future of European competitiveness and innovation in the sectors of the New Economy. In these sectors, characterized by rapid technological progress, a substantially free access to markets and strong network externalities, old fashion antitrust analysis does not apply. Recent economic research in the New Industrial Organization (a new field of research on the industrial economics and policy for the New economy) has emphasized the beneficial role of market leaders in these sectors: as long as entry is free, dominant firms have a “pro-competitive” role reducing market prices, improving product quality and, when IPRs are protected, enhancing innovation. The fact that these firms are dominant is the consequence of these positive actions and of their costly investments and not the evidence of a monopolistic power.
The practical implication of this new research on market structures and industrial policy is that antitrust authorities should focus on promoting free entry and protecting investments in R&D rather than fighting against market leaders, their price-reducing (or bundling) strategies and their IPRs. In all fields of the New Economy. Today there seems to be a chance that such a view could gain wider consensus in the EU. Protection of IPRs, and in particular of patents, is key to the promotion of investment in innovation, especially in high-tech sectors, and hence to the future of Europe in the global economy.
