What is the European Union and why it scares the hell out of me…

Twitter is alight these days with discussions about the European Union and the fines they seem to dole out so nonchalantly. I regularly talk about how much I am frustrated with them because they effect my job so heavily. But like any good blogger, I decided to do a little reading and post some facts about the EU in order to add some validity to my position.

So What is the EU as it relates to Antitrust Laws?

In a word, scary. Imagine if you will, an organization that accounts for $18.4 Trillion, or 30% of the Gross World Product. It is comprised of 27 member states, mostly in Europe, and maintains common policies on trade, agriculture, and regional development. It also seems that it’s reach exceeds it’s member states’ borders significantly. The laws and fines they regulate apply to any company that operates within their bounds.

The mind boggling part is that not only is there little to no recourse for US companies, but there is really no accountability for the European Union and they don’t seem to fine based on the business being done within their borders but the value of the overall company in question. The amazing part is the countless billions that they assess in fines are not in any way used to help the markets that they are protecting competitiveness within, but kept and used to fund it’s own projects.

The Competition Commissioner, Neelie Kroes, is considered to be in one of the most powerful positions in the world, notable for the ability to affect the commercial interests of trans-national corporations. In 2001 the Commission for the first time prevented a merger between two companies based in the United States (GE and Honeywell) which had already been approved by their national authority. Another high profile case against Microsoft, resulted in the Commission fining Microsoft over $1 Billion following nine years of legal action.

Microsoft: The Big Target

Since 2000, the European Union has raised 42 lawsuits against Microsoft, but it’s not just about the money. Originally Microsoft was being sued because Novell said that we were blocking competitors out of the market using anti-competitive practices. The complaint was based on Microsoft requiring computer manufacturers to pay a royalty for the operating system even if the machine shipped without it. Microsoft settled in 1994 ending some of these licensing agreements.

In 1998, Sun Microsystems got involved complaining that Microsoft did not properly disclose interfaces in Windows NT. Somehow the European Union also reached out to look into how streaming media technologies were included in Microsoft Windows.

In case you are keeping score, we are in trouble at this point for trying to uphold licensing agreements that hinged on discounts provided to manufacturers for agreeing to only sell Microsoft’s product (a common practice), not completely documenting the inner workings of proprietary software, and allowing the customer to stream video over the internet with our operating system, but wait, there’s more!

To please the EU, Microsoft shipped Windows XP N, a version of Windows without Windows Media Player included. Of course the customer could still download it voluntarily, but somehow making us take it out and requiring the end user to go find, download and install (or potentially purchase) software to stream media (which nobody really did with Media Player at this time) is a better solution. You will see this pattern over and over, screw Microsoft, screw the customer, and help the competition.

At the same time, Microsoft released the source code, but not the technical specifications to Windows Server 2003 SP1 to members of it’s Work Group Server Protocol Program.

But Wait, There’s More

In 2005, the EU announced that Microsoft had not complied with the ruling by not completely disclosing all the details of it’s server products. The EU threatened to fine Microsoft roughly 3.2 million US dollars per day until it felt they had completely complied with the ruling.

In 2006, the EU fined Microsoft another half a billion dollars ($2.39M per day from 12/16/05 – 05/20/06) and threatened to increase the fine to $4.8M per day if Microsoft did not comply by July 31st, 2006.

In 2007 Microsoft lost their appeal against the EU case and nearly $800M in fines were levied. Along with this were requirements on interoperability information and bundling of Media Player. Adding insult to injury, Microsoft was forced to pay 80% of the EU’s legal fees.

Luckily it was rejected, but the EU also attempted to require that an independent monitoring trustee have unlimited access to Microsoft’s internal company organization in the future.

In 2007 Microsoft announced intent to comply and did not appeal the decision further. In 2008, the EU fined Microsoft an additional 1.44 Billion dollars for failure to comply with the March 2004 decision, representing the single largest penalty ever imposed in the 50 years of the EU Competition Policy.

The 2008 Microsoft Annual Report stated:

The European Commission closely scrutinizes the design of high-volume Microsoft products and the terms on which we make certain technologies used in these products, such as file formats, programming interfaces, and protocols, available to other companies. In 2004, the Commission ordered us to create new versions of Windows that do not include certain multimedia technologies and to provide our competitors with specifications for how to implement certain proprietary Windows communications protocols in their own products. The Commission’s impact on product design may limit our ability to innovate in Windows or other products in the future, diminish the developer appeal of the Windows platform, and increase our product development costs. The availability of licenses related to protocols and file formats may enable competitors to develop software products that better mimic the functionality of our own products which could result in decreased sales of our products.

I can personally attest to the validity of this statement. Shake the monopoly war stick if you want, but show me another company that is required to so publicly document the inner workings of proprietary products at the detriment of their value and at the same time struggle against these kinds of technical handcuffs while still staying relevant and innovative in such an incredibly competitive marketplace. Who is protecting the investors in Microsoft?

$2.5 Billion Dollars Later

Currently the EU is investigating potential fines against Microsoft for it’s Microsoft Office Open XML file format as well as for bundling Internet Explorer with the Windows Operating system. My last blog post about browser fairness is a good read if you are curious about the impacts that could have on Microsoft.

The questions I pose are, should an organization have this much power over what results in the products, services and developments of companies in today’s marketplace? Is there some argument to be made for Corporate Darwinism? I often ask my friends and colleagues, “Who is in charge of the Monopoly Gauge?” meaning who decides when we are no longer big enough to have to comply with these rules? It’s the logical question since other very powerful companies like Apple, Sun, Oracle and many more gain significant advantages by the restrictions placed on Microsoft by the European Union.

Although some of my friends at AMD will shift uncomfortably in their chair when I say this, it looks like Intel is next on exclusive list of US companies fined billions of dollars by the European Union. I for one am a capitalist and a Darwinist. I believe that with a few exceptions (life sustaining services for example) this country and it’s businesses were built on competition, and if companies can’t create products and services compelling enough to compete, no government organization should create what is in effect “big business affirmative action.”

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