Grand Designs, Competition ‘by Other Means’ and New Vistas

Abstract

The development and marketing of computer software by market leaders such as Microsoft has a latent potential to ‘lock-out’ competitors and thus raises regulatory concerns for antitrust and competition law authorities. Within Europe the announcement of ‘Vista’ generated complaints from competitors, and other interested parties, to the competition directorate of the European Commission. The complaints alleged that aspects of Vista seemed to be likely to breach Article 82 EC (abuse of a dominant position).

Notes

1 See Reuters IT Management News ‘Rivals accuse Microsoft of bullying tactics’, http://news.zdnet.co.uk/itmanagement/0,1000000308,39285666,00.htm (accessed 7 February 2007).

2 Particularly Symantec. See ‘Microsoft Vista gets criticism before its launching in Europe’, http://www.edri.org/edrigram/number4.18/vista (accessed 7 February 2007). In response to representations from the European Commission Microsoft subsequently disclosed various details relating to this objection.

3 See International Herald Tribune ‘Rivals accuse Microsoft before Vista's introduction’, http://www.iht.com/articles/2007/01/26/business/vista.php (accessed 7 February 2007).

4 See Reuters IT Management News, op cit, note 1.

5 See COMP/C-3/37.792, currently under appeal to the Court of First Instance as case T-201/04.

6 The enforcement application of both articles is currently detailed by Regulation 1/2003.

7 The … industries that make up what I am calling the new economy differ markedly from most of the ones in which antitrust doctrine developed, and particularly from the production and distribution of traditional physical goods … [t]he traditional industries are characterised by multiplant and multifirm production (indicating that economies of scale are limited at both the plant level and the firm level, or in other words that average total costs are rising at relatively modest output levels), stable markets, heavy capital investment, modest rates of innovation, and slow and infrequent entry and exit. The new-economy industries tend to lack these features. They are characterised instead by falling average costs (on a product, not firm basis) over a broad range of output, modest capital requirements relative to what is available for new enterprises from the modern global capital market, very high rates of innovation, quick and frequent entry and exit, and economies of scale in consumption (also known as ‘network externalities’), the realisation of which may require monopoly or interfirm cooperation in standards setting. (R A Posner Antitrust Law, 2nd edn, University of Chicago Press, Chicago, 2001, pp 245–6)

8 For example, the regulatory assumptions applicable to a producer of a valuable chemical having a market share of 90% should not unthinkingly be equated with a software producer currently blessed with a similar market share.

9 This is of course to say nothing of the existence of ‘left-field’ alternatives such as Linux based programmes, which appear to thrive despite conditions that are frequently represented to be inimical to such enterprises.

10 ‘Not until 1998 did Microsoft's software sales exceed IBM's. In 1999 Microsoft became the most valuable company in the world by stock-market valuation, but its total revenues ($19.7 billion) were dwarfed by IBM's ($84.4 billion).’ M Campbell-Kelly From Airline Reservations to Sonic the Hedgehog: A History of the Software Industry, 1st edn, MIT Press, Massachusetts, 2003, p 232.

11 See, inter alia, R A Posner Antitrust Law: An Economic Perspective, 1st edn, University of Chicago Press, Chicago, 1976, p 228, and the updated and revised second edition of this text, Posner, op cit, note 7, pp 274–5; E A Snyder and T E Kauper ‘Misuses of the antitrust laws: the competitor plaintiff’, 90 Michigan Law Review 551, 1991; W J Baumol and J A Ordover ‘Use of antitrust to subvert competition’, 28 Journal of Law and Economics, 247, 1985.

12 Baumol and Ordover, op cit, note 11, p 252.

13 The reader may be more familiar with the phrase ‘predatory pricing’, which refers to the practice of cutting prices below marginal cost levels so as to drive one's competitors out of the market, thereafter to allow the predatory undertaking to raise its prices to reap super-profits. The term ‘Predatory Innovation’ is used by Baumol and Ordover, ibid.

14 In part this is because the complainants and the regulator have used Article 82 EC. This provision being currently out-of-step with the European Court imposed requirement that proceedings under either Article 81 EC (or the Merger Regulation) be justified and rational in terms of their economic impact: thus far Article 82 EC has seemingly escaped this requirement.

15 See J Appeldoorn ‘He who spareth his rod, hateth his son? Microsoft, super-dominance and Article 82 EC’, European Competition Law Review Vol 26, No 12, pp 653–658, 2005.

16 Fraunhofer Gesellschaft.

17 See S Vezzoso ‘The Incentives Balance Test in the EU Microsoft case: a pro-innovation “economics based” approach’, European Competition Law Review Vol 27, No 7, pp 382–390, 2006.

18 See COMP/C-3/37.792, under appeal to the CFI as case T-201/04, the hearings are completed and the decision is expected imminently.

19 Which in itself is to turn Article 82 EC on its head and make the acquisition of dominance the ‘abuse’.

20 Whatever may be the outcome of the appeals, it is at least clear that the Commission's order that Windows be made available without a bundled media player was spectacularly unsuccessful in practice. Consumer disinterest in the reputed competitive ‘benefits’ of the unbundled version of Windows and outright hostility from the retail sector having, by all reports, rendered the Commission's order effectively null. See J Oates ‘How many copies of XP without media player have you seen?’ Reg Developer, http://www.regdeveloper.co.uk/2006/04/24/ms_trial_first_morning/ (accessed 31 March 2007).

21 An ironic consequence of such atrophication is that the unpractised skills thereby become even more likely to generate mistakes, which are then punished by litigation.

22 However, if antitrust laws are used in a similar fashion in the USA, this unfortunate outcome could become more likely.

23 A very basic point is that the very long development period which was attached to Vista was, in part, a consequence of the need to ensure that the new operating system be sufficiently backwards-compatible to allow earlier programs—authored by Microsoft and authored by others—to continue to function when Vista is installed. Such actions do not seem to be particularly indicative of the lock-out intent which some would claim to deduce from the launch of Vista. See also the highly sceptical magazine article by S Liebowitz and S Margolis ‘Chicken Little comes home to roost: a misplaced and flawed theory bedevils Microsoft’, Upside Sept 1995 (this article is available from Microsoft—which tends to disclose the tenor of the piece—at http://wwwpub.utdallas.edu/∼liebowit/upside.html).

24 Exemption from the illegality generally imposed upon cartels requires that some benefit to the consumer be demonstrated.

25 See the change in tone from the earlier decision in the Article 81 EC Dyestuffs case (Case 48/69 ICI v. Commission [1972] ECR 619) to the later Article 81 EC decision in Woodpulp (No 2) (Case C-89/85 [1993] ECR I-1307) where the Commission's poor economic investigation, and astonishing failure to notice the presence of an down-stream oligopsony, led to the quashing of most of its decisions.

26 This trend of requiring good economic data and its relation to consumer interests has been continued by the Court of First Instance in relation to the merger regulation, witness the quashing of various Commission decisions concerning mergers (see, inter alia, cases T-5/02 Tetra Laval v. Commission [2002] ECR II-4381 (which quashed the prohibition decision) and Tetra Laval v. Commission [2002] ECR II-4519 (which quashed the order of divestiture).

27 Such a reform along rational economic lines has been widely supported: see J Vickers ‘Abuse of Market Power’, Economic Journal Vol 115, No 504, p. 244, 2005; B Sher ‘The last of the steam-powered trains—modernising Article 82’, 5 ECLR 243, 2004. See also the report commissioned by DG Comp itself from the Economic Advisory Group for Competition Policy, available at http://ec.europa.eu/comm/competition/publications/studies/note_eagcp_july_05.pdf