Lecture 4 Final Complete EC337

Lecture 4 The anatomy of a competition case: 

EC337 Industrial Economics 2: Market Economics, Competition and Regulation Department of Economics University of Warwick Module Leader: Dr. Chris Doyle 17 October 2011 Lecture 4 The anatomy of a competition case

Key elements to a case: 

Key elements to a case Determining the nature of restrictive agreements (art. 101), abuses (art. 102) Establishing the relevant markets Conducting market analysis to address consequences of alleged violations of TFEU Determining penalties and remedies if alleged violations found Enforcement and compliance

The EC Microsoft (MS) Case: Timeline: 

Year Event 1998 Sun Microsystems lodge complaint to EC Claim MS failed to provide technical information needed for servers running Sun’s Solaris operating system to interoperate fully with PCs running Windows 2000 Aug EC issues 1 st Statement of Objections (SO) Claims MS withheld information that would have allowed third party servers to interoperate with PCs running Windows 2000 Nov MS responds MS claims most enterprise customers have heterogenous systems and interoperability is a market reality 2001 Aug EC initiates a second investigation On August a 2 nd SO issued asserting MS held a dominant position in the market for workgroup servers and was hindering interoperability between Windows server and third party server operating systems. It also alleges that MS competes unfairly with Real Networks and other vendors media players by “tying” Windows Media Player (WMP) with Windows (i.e. the purchase of the Windows OS comes with the WMP integrated). The EC Microsoft (MS) Case : Timeline

The EC Microsoft Case: Timeline: 

Year Event 2001 Oct MS respond to 2 nd SO issued by EC MS claim it does not hold a dominant position in the market for workgroup servers, that client-server and server-server interoperability is a reality, and inclusion of Multimedia player in OS is a natural development of the OS and does not prevent third party vendors from developing alternatives 2002 MS enters into discussion with EC Aimed at settling disputes 2003 EC surveys The EC surveys professionals to collect evidence to assess validity of SO 2003 Aug EC issues 3 rd SO On August a 3 rd SO focussed on interoperability and the tying of the Windows media player issued The EC Microsoft Case: Timeline

The EC Microsoft Case: Timeline: 

Year Event 2003 Oct MS respond to 3 rd SO issued by EC MS claims evidence does not support EC case and requests an oral hearing which occurs in November 2004 Mar EC ends discussions and makes Decision On 18 March then Commissioner Monti ends discussions without resolution and on 24 March EC issues Decision finding MS in breach of European law through abuse of a dominant position (art. 102). EC ordered MS to pay €497 million, the largest fine ever handed out at the time, in addition to the previous penalties, which included 120 days to divulge the server information and 90 days to produce a version of Windows WMP 2004 May MS appeals to CFI MS files an appeal with CFI and requests court suspends remedy in the interim 2004 Dec CFI denies suspension of remedy On 21 December CFI denies MS request to suspend remedy. MS delivers first draft of technical document to EC. The EC Microsoft Case: Timeline

The EC Microsoft Case: Timeline: 

Year Event 2005 Jan MS delivers draft licensing program MS licensing program for Window Server communications protocols delivered 2005 Jun MS releases in Europe Windows without WMP Windows XP N released without multimedia functionality 2005 Oct EC announces plan to appoint monitoring trustee Prof. Neil Barrett to become monitoring trustee of remedy implementation 2005 Nov EC states MS fails to comply On 15 November EC adopted a decision against MS alleging the company had failed to comply with the EC Decision of March 2004 in relation to the communications protocols. The decision threatens penalties of €2m a day if MS is not in full compliance by 15 December. 2005 Dec MS issues revised technical documentation 12,000 page document and pricing structure The EC Microsoft Case: Timeline

The EC Microsoft Case: Timeline: 

Year Event 2005 Dec EC issues 4 th SO EC states MS not in compliance with its Decision in regard of technical documentation and daily penalties would apply 2006 Jan MS to release source code MS extends release of technical documentation 2006 Feb MS responds to 4 th SO Responds to 4 th SO and requests oral hearing which takes place in March and includes meeting with monitoring trustee. Further meetings in April agreeing a set of deliverables. Known as ‘Project Circle Line’ 2006 April CFI hearing starts 24 April case starts in Luxembourg for 5 days 13 judges hear detailed arguments about the case 2006 July EC fines MS €280.5m Fine applied for non-compliance with 2004 Decision and announces any further finding of non-compliance will result in fines of up to €3m per day The EC Microsoft Case: Timeline

The EC Microsoft Case: Timeline: 

Year Event 2006 Nov EC announces deadline EC Commissioner Nellie Kroes announces 15 November that revised documentation should be delivered by 23 November (Thanksgiving Day). MS deliver documentation to relevant parties. 2007 Mar EC issues 5 th SO EC asserts MS not in compliance with 2004 Decision in regard of protocol pricing 2007 Apr MS responds to 5 th SO Replies seeking greater clarity for EC on its requirements 2007 Sep CFI judgment CFI judgment on 17 September dismisses MS appeal against EC Decision. The €497 million fine upheld, as were the requirements regarding server interoperability information and bundling of WMP. In addition, Microsoft had to pay 80% of the legal costs of the Commission, while the Commission had to pay 20% of the legal costs by Microsoft. CFI rejected the Commission ruling that an independent monitoring trustee should have unlimited access to internal company organization in the future. On 22 October 2007, MS announced that it would comply and not appeal the decision. The EC Microsoft Case: Timeline

The EC Microsoft Case: Timeline: 

Year Event 2007 Oct MS revises pricing structure for protocols MS announced that it will demand 0.4% of the revenue (rather than 5.95%) in patent-licensing royalties, only from commercial vendors of interoperable software and promised not to seek patent royalties from individual open source developers. The interoperability information alone is available for a one-time fee of €10,000. . 2008 Feb EC applies fines On 27 February 2008, the EC fined MS an additional €899 million for failure to comply with the March 2004 antitrust decision. This represented the largest penalty ever imposed in 50 years of EU competition policy until 2009, when the European Commission fined Intel €1.06 billion for anti-competitive behaviour. This latest decision follows a prior €280.5 million fine for non-compliance, covering the period from June 21, 2006 until October 21, 2007. 2008 May MS appeals to CFI against fine MS claims €899 million fine imposed by EC was excessive and "most undeserved" The EC Microsoft Case: Timeline

EC & Microsoft: Related Issues: 

Year Event 2008 May EC announces new investigation DG Competition announce it is going to investigate MS Office's OpenDocument format support. . 2009 Jan EC announces another investigation In January 2009, the EC announced it would investigate the bundling of Internet Explorer with Windows operating systems saying "Microsoft's tying of Internet Explorer to the Windows operating system harms competition between web browsers, undermines product innovation and ultimately reduces consumer choice“ In response, MS announced that it would not bundle Internet Explorer with Windows 7 to be sold in Europe. 2009 Dec MS announces choice for browsers On December 16 the EC agreed to allow competing browsers with MS providing a "ballot box" screen letting users choose one of twelve popular products listed in random order. The twelve browsers were Avant, Chrome, Firefox, Flock, GreenBrowser, Internet Explorer, K-Meleon, Maxthon, Opera, Safari, Sleipnir, and Slim . EC & Microsoft: Related Issues

Take-away questions: 

Take-away questions The EC relied on arguments about network effects in its decision. Explain in brief what these are. In the MS case it was regarded that consumers were likely to make purchase decisions based in part on how popular an operating system or application is. Thus, demand (underlying utility) is a function of both the product itself and the number of other users of the product. This is an example of a network effect. The EC believed that the media player market was liable to tipping. What does this mean? Tipping refers to a situation where network externality effects are very strong and consumers marginal utility increases in the cumulative number of other consumers making use of the same application. Did the EC under-estimate the effect of multi-homing? At the time of the investigation multi-homing by end-users was not common. Therefore the EC probably did not underestimate multi-homing. MS argued rival media players were available for free and therefore competition was not compromised by tying Windows Media Player in the OS. Do you agree? Factually it is correct for MS to state other players were freely available – or ‘free’ of a purchase price. However, it does not follow that other players were free of a purchase cost – as users would need to devote time to installing another application and familiarise themselves with the application, as well as determining which of the other applications to use (search cost). Given the default position of WMP is low cost, for many these other costs would outweigh at the margin the expected benefits of using another application.