Thursday, September 13, 2007

The Microsoft appeal: The Commission was right

by Simon Tilford

On September 17th the European Union’s Court of First Appeal will rule on Microsoft’s long-awaited appeal against the record fine imposed on the company by the Commission in 2004 for abusing its dominant position in computer operating systems. The decision to fine Microsoft has prompted unprecedented criticism of EU competition policy and even accusations of anti-US bias. If the court upholds the Commission’s decision, demands for it to be stripped of its competence over competition law will no doubt intensify. The criticism of the Commission is without merit.

Indeed, the Microsoft case is a poor choice for critics of the Commission to champion. Attempts to portray its ruling as anti-competitive and as a threat to innovation do not really stack up. This case is not, as Microsoft and its supporters contend, about punishing a company for being successful by compromising its intellectual property. The market for IT is not so different from other markets that the suspension of antitrust law is justified. Rather, the case is about making it possible to compete with Microsoft in its core areas of business.

Supporters of Microsoft tend to conflate various issues. First, they accuse the Commission of undermining competition and hence innovation by placing constraints on dominant firms in the IT sector. According to this argument, dominant companies will only make big investments if they are confident they will face no significant competitors. Second, they argue that the Commission should focus on the impact on the consumer and not on the level of market dominance; that is, it doesn’t matter how much of a market a company (in this sense, Microsoft) controls, if its dominance benefits the consumer.

There are obvious weaknesses to these arguments. If it were the case that companies only innovate when they are confident that they will be allowed a monopoly, no company operating in a competitive market would invest in product development. But of course they do. They have to do so in order to ensure that their product or service is better than that of the competition. Only then can they hope to win a profitable share of the market. It is this need to be better than the opposition that drives innovation and productivity growth.

Similarly, it is not clear how Microsoft’s dominance benefits consumers. Is it because the company’s size (and hence ability to leverage huge economies of scale) allow it to offer products at low prices? If so, this would be an argument for abolishing competition policy. Or is it because consumers benefit from the ubiquity of Microsoft products? This ubiquity almost certainly does provide short-term benefits to consumers. But it is hard to see how allowing such dominance could serve consumers in the long-term if it precludes innovative companies challenging Microsoft.

Just because Microsoft won the race does not mean it should be permitted to dominate huge markets indefinitely. This would not be tolerated in any other market, including other high-tech markets. The IT market is a fast-moving one, but this is hardly a unique characteristic.

EU competition policy is already under attack from member-states that would like to provide their companies with more support and who want to promote national champions to positions of market dominance. A ruling by the Court of First Appeal in favour of Microsoft could not come at a worse time. It would play into the hands of those like France’s President Sarkozy that want to dilute EU competition policy, and who question what competition has done for the EU.

Simon Tilford is chief economist at the Centre for European Reform.

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