Microsoft vs. European extortion

Alan Reynolds
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Posted: Mar 25, 2004 12:00 AM

As I feared last August, the European Union just shoved its grasping hand deep into the pockets of a leading American firm -- Microsoft -- while also attempting to dictate the features of Windows and expropriate intellectual property rights of its creators.

Microsoft is to be fined about $600 million, which is essentially a foreign tax on the primarily American owners of Microsoft stock. The EU also ordered Microsoft to share more information about Windows with competitors, which amounts to compulsory licensing at best.

The commission claims the rising popularity of Windows software in small business servers (as opposed to larger servers, dominated by Linux) must be caused by an unfair advantage rather than a better product or price.

PC World reviewed three leading rivals of Windows Small Business Server software on Feb. 3: Novell's small business suite, and two Linux-based suites from SuSE (now owned by Novell) and NITIX. Windows won that contest, largely because it "presents the most intuitive interface by far." Perhaps more surprisingly, Windows also beat the two Linux alternatives on price in many cases and was also cheaper than Novell's until recently. Even Sun Microsystems, which took this gripe to the EU in 1998, sounds far less victimized on its website: "Sun demonstrated significant gains in the sub-$25K server market (all OS), where it grew unit and revenue market share faster than the top 3 vendors in the category quarter-over-quarter."

The EU requirement that Microsoft create a discount-priced Euro-Windows without Media Player has drawn the most ire. If the EU could get away with that, it could also exercise veto power over improvements expected in the next version of Windows, such as built-in virus protection and Internet search capability. This also amounts to European price controls on a U.S. firm, which is appalling.

Reporters were quick to draw false analogies between the Media Player in this case and Netscape's role in the U.S. antitrust case. "In both cases," wrote New York Times reporter Steve Lohr, "Microsoft was accused of being a nasty monopolist that bundled new software into Windows, gave it away and engaged in bullying tactics ..." The key phrase is "gave it away." Netscape and Real Networks initially had such a commanding lead in browser and media player software that they took advantage by charging hefty fees. When free software from Microsoft made gouging impossible, Netscape ran to Washington for help. And Real Networks ran to Brussels.

Although the U.S. antitrust suit was mostly about the "browser wars" a decade ago, that war occurred because Microsoft had a rosy view about opportunities in Internet content (such as sidewalk.com and Slate) and Netscape's near-monopoly of browsers directed users to its then-dominant portal. The rise of AOL, Yahoo and Google means neither Microsoft nor Netscape (AOL) has a financial stake in which browser you use today. That's why AOL never bothered to improve or promote Netscape's browser.

The U.S. antitrust fuss over browsers involved nonsensical speculation about browsers somehow evolving into rival operating systems. That would be even more nonsensical if applied to media players, as I explained in a 2002 study of the U.S. case.

So what is to be gained by mandating a stripped-down Windows for Europe? The commission reasons that computer manufacturers will install some media player with new PCs anyway, and claims such corporate choices "will reflect what consumers want." But anyone who has ever bought a computer knows the free software pre-installed or included on a CD is rarely terrific. Such freebies usually do include Real Player, in my experience, but not Apple's QuickTime.

Microsoft had offered to get three media players installed on most new computers, but the EU apparently prefers to inconvenience European consumers by uninstalling the Windows Media Player rather than installing two more.

In any case, the underlying idea that docile consumers just stick with whatever software the computer company gives them is almost insulting in an era where even novices are constantly downloading software. Real's website notes that "hundreds of millions of RealPlayers have been downloaded throughout the world to take advantage of RealNetworks, Inc. world-class media creation, delivery and playback technology." Hundreds of millions is a number considerably larger than the entire U.S. population. That makes it downright silly to pretend the company is suffering any lack of name recognition or access. Real Player's loss of market share in usage (as opposed to installation) has not been because the software is hard to get, but that it has become famously annoying to use.

Rob Pegoraro's Washington Post tech column was recently titled "RealPlayer 10 Adds New Mistakes to Old." As Pegoraro noted, RealPlayer "is both widely used and widely despised," largely because "the company's relentless use of it to sell unrelated services and features has made this program little better than spyware in many users' eyes." What Real sells is no bargain: "The $19.95 extra for full MP3 support is $10 more than the cost to add this option to Windows Media Player and $19.95 more than Apple's free, fully MP3-compatible iTunes." Real's new music store, Pegoraro added, "is an appalling mess." Meanwhile, RealNetworks is spending at least $12 million a year suing Microsoft. Scapegoats can be handy.

Nielsen/Net Ratings says 34 percent of U.S. Internet users used Windows Media Player for music or video in February -- far from a monopoly -- compared with 20 percent for Real and 9 percent for QuickTime. Other software, such as MusicMatch Jukebox, makes up the balance. But no company is going to get rich by giving away the largest amount of free software. Microsoft, Apple and Real all hope to get people to use their proprietary software to make films or music, but generic formats such as jpeg and mpeg are more popular. Real Networks gets 75 percent of its revenue from subscription services, for such services as news and music. Apple's music service is flourishing, too, as is the iPod player.

American outrage over this heavy-handed European meddling in American business affairs is emerging as I anticipated last August. Senate Majority Leader Bill Frist, R-Tenn., called the EU ruling "preposterous," adding that, "I now fear that the U.S. and the EU are heading toward a new trade war -- and that the commission's ruling against Microsoft is the first shot."

Trade wars are always mutually destructive, but allowing foreign antitrust czars to pander to whining companies at the expense of consumers is destructive, too.