Highlights from ECIS testimony on Day 1 of the Microsoft Oral Hearing in Luxembourg

The European Court of First Instance Hearing on Microsoft’s appeal of the European Commission’s March 2004 Decision opened here this morning. ECIS is an Intervener in these proceedings and will give evidence in support of the Commission’s Decision.

This afternoon, the Court heard evidence from the European Commission and others on its side, including ECIS, concerning the Commission ruling that Microsoft illegally tied its Windows Media Player to its monopoly Windows PC client operating system.

(Monday afternoon, 24 April)

The Commission’s Decision shows how Microsoft has used its operating system monopoly to gain control over the market for streaming media players. Rather than competing on the merits of its own media player, Microsoft ensured that Windows Media Player would be present on every desktop. This fundamentally and deeply distorted competition.

Microsoft’s decision in 1999 to tie Windows Media Player to the Windows monopoly was motivated by a growing strategic competitive threat, not by the prospect of improved user benefits :

  • …streaming media players are “a strategic area and we need to win it.” Bill Gates
  • “Winning the streaming battle means three things: winning the file format war, the (player) war, and winning the (media) server war.” Internal Microsoft correspondence
  • “RealNetworks is still significantly ahead of us and not slowing down (and is) beating our (Netshow) v3 in reviews and is ahead in a few key feature areas.” Microsoft should therefore “reposition (the) streaming media battle from Netshow vs. Real to Windows vs. Real,” and “follow the (Internet Explorer) strategy wherever appropriate.” Anthony Bay, Microsoft Executive, to Bill Gates

Less than five months later, Microsoft tied Windows Media Player with the new Windows 98, and PC makers where prohibited from shipping previous unbundled versions on new systems.

This morning Microsoft repeated its claim that the Commission’s assessment of foreclosure of the market is speculative. But there is nothing speculative about that assessment. Microsoft specifically intended the foreclosure effect, their internal correspondence shows that they foresaw it, and indeed it had happened by the time of the Commission’s Decision.

Until mid-1999, RealPlayer had many times more users than Windows Media Player, which was losing ground rapidly. Since the tie of Windows Media Player to the Windows monopoly almost 90% of users use Windows Media Player and around 60% do so exclusively.

Microsoft has presented no evidence from 1999 that they tied Windows Media Player to the Windows monopoly in order to improve performance. Technical efficiencies were neither the goal nor the effect of the tie. Rather, the purpose was to ride the wave of the Windows monopoly.

This is a replicable strategy, because the ubiquity obtained through a tie to Windows beats the quality of competing products. Just as this strategy eliminated the Netscape Browser and now Real Player, unless stopped it will do the same to other technologies whenever MSFT deems them to be “strategic” to their business interests.

Microsoft says there are successful competitors to Windows Media Player, and specifically cites Adobe’s Flash as a media player which has been successful competing with Windows Media Player. Technically, this is comparing apples and oranges. But the more important point is that this actually conforms to the established pattern of Microsoft behavior, because the highly-regarded Flash is itself today pre-installed in Windows, just as Real Player was before Microsoft bundled Windows Media Player. Meanwhile, Microsoft is busy trying to develop the functionality which Flash provides but Windows Media Player cannot.

There are two alternatives to the closed, proprietary Windows video streaming standard, either a de facto standard emerging through a process of free and fair competition, or an industry-created open standard. Both would preserve the incentive to innovate which is destroyed by Microsoft standardization through monopolization.

Microsoft supporters complain that their products will not run on, or with, an unbundled Windows with a third party player. But the root cause of their problems, if any, is not the Commission’s unbundling order, but Microsoft’s behavior. They have had little option but to invest in Microsoft’s format, and now they are hooked. This addition cannot be accepted as a justification for Microsoft’s tying.

In summary, Microsoft’s position is that there should be no limits to its tying and that it knows what is best for users and PC makers. ECIS says that when innovators create new markets, Microsoft should not be allowed to appropriate them by tying and foreclosing consumer choice. Consumers, and not super-dominant firms, should be allowed to decide what solutions ultimately succeed. That’s what competition law is all about.