DealLawyers.com Blog

Experts expect that the European Court of First Instance will issue its decision whether to uphold the European Commission’s decision concerning Microsoft’s bundling of its Media Player with the Windows Operating System any day. The decision of the Court will be momentous, regardless of whether it affirms or reverses the decision of the EC, and will have a profound effect on Microsoft’s OS-application bundling practices. Let’s recap where we are today, and after the decision is issued, I’ll highlight the Court’s decision and reasoning.

On March 24, 2004, the EC announced that it concluded its five-year investigation into Microsoft’s business practices. Among other things, the EC concluded that Microsoft abused its position of dominance in the OS market, in violation of Article 82, by tying WMP to the OS. The Commission fined Microsoft €497 million, and ordered Microsoft to sell a version of its Windows OS without WMP within 90 days of the issuance of the decision.

In the EC’s decision, the Commission decided that under a rule-of-reason analysis, the forced bundling of WMP with the Windows OS was illegal, balancing the procompetitive justifications proffered by Microsoft for its practice against its negative effects on the media player market, in a manner similar to that set forth by the D.C. Circuit in its Microsoft case. The EC analyzed Microsoft’s conduct and reached its decision to condemn Microsoft’s bundling practice
Microsoft’s bundling practice has been dubbed “technology tying” in antitrust parlance, and has been treated leniently under U.S. antitrust laws (in fact, the same practice condemned by the EC has been generally okayed here in the States).

The development of the law of technology ties are likely to have a profound effect on the development of future operating systems and the long-term viability of many independent application providers who offer products that function in such OS’s. With dominant OS providers like Microsoft reaching further into the application world—through the development and/or acquisition of applications that function on their dominant OS environments—OS providers increasingly are becoming competitors to independent application providers, while at the same time providing the industry-standard OS on which these applications run.

The ability to technologically tie a dominant OS to an application raises some significant antitrust issues. On one hand, the ability to bundle a dominant OS with an application may provide some technological benefit to consumers with more seamless integration, reduced transaction costs, and the ability to provide application interfaces to content developers. On the other hand, such bundling may foreclose independent application providers from space on the OS, significantly diminishing their ability to compete, and as a result, limiting consumer choice. Moreover, with the ability to tie applications to their OS’s, companies like Microsoft may have a reduced incentive to develop premier applications for their OS’s, since they know that most OEMs and customers will simply accept an inferior bundled product, rather than spend the additional money to purchase an independent application, even if superior to the bundled one. Especially in the computer industry, where margins for OEMs are already razor thin, the temptation for OEMs will be to accept free, forced bundles to the exclusion of separate applications that must be installed, and potentially maintained and serviced by the OEMs. The end result is a potential threat to competition and to consumers as well.

Next time, we’ll look to see how the Court of First Instance comes down on the technology tying issue and analyze what the decision means for OS providers like Microsoft as well as the law of tying in general.