September 26th, 2007

Europe's new 'monopoly' tariff on Microsoft bypasses WTO

Posted by George Ou @ 4:00 am

Categories: Desktop, Development, Hardware, Intel, Linux, Microsoft, News, Processors, Servers, Technology policy, Vista

Tags: World Trade Organization, European Commission, Operating System, Market Share, Tariff, Microsoft Corp., Computer, Globalization Institute, EC, Microsoft Windows

The European Commission has just levied a new $689,900,000 “fine” (read: tariff) on American software company Microsoft under the pretense of anti-trust which conveniently bypasses WTO agreements.  The Brussels based think tank Globalization Institute has published a paper (PDF) where it recommends a ban on OS (Operating System) bundling for all PCs sold in Europe.  At the end of the paper it writes:

Policy recommendation
This paper’s recommendation is that the European Commission should require all desktop and laptop computers sold within the EU to be sold without operating systems.

Scott M. Fulton, III wrote an excellent news piece here where he covers the key issues and points of views and our own bloggers John Carroll and David Berlind weighed in on the issue.  Alex Williams of the Adam Smith Institute says “This neo-protectionist economic agenda is forming a policy cloak for the anti-Americanism of many European Commissioners, and it is European citizens who stand to suffer from it.” and I agree with him.

The Globalization Institute says their recommendation will produce more “choice” but I can’t possibly see how this would produce more choice when 90% of the population wants an Operating System (not necessarily Windows) bundled with their computer and they have no desire to install their own OS or pay someone to do it.  I can even agree on a matter of principle that computer makers should be forced to sell no-OS computers as an easy option for consumers or businesses though the savings won’t be as big as some people think since hardware makers don’t pay full OEM (Original Equipment Manufacturer) pricing or anything close to it.  But to tell European Consumers and they can’t buy a computer with a heavily discounted pre-configured Operating Systems is asinine in my opinion and it is the absolute antithesis of choice.

When a PC maker bundles Windows Vista Home and sells the entire computer to the consumer at $350, does anyone think they pay $100 single-quantity OEM cost let alone the $199 retail price?  There’s absolutely no way and I would venture to guess that the true cost of Windows Vista Home is in the vicinity of $60 because Microsoft sells at a significant quantity discount.  The computer comes with the OS and hardware qualified drivers integrated in to the system and everything works out of the box which is what 90% of the population wants.  Dell (and other PC makers) have started offering users the option of getting Linux bundled with the PCs because of MARKET demand but now some Bureaucrats in Brussels wants to tell Dell and others that this is now going to be against the law?

The last time the EC (European Commission) in their infinite wisdom decided to ban the bundling of software forced Microsoft to ship a version of Windows without Windows Media Player installed.  To the EC’s consternation, no one bought that crippled version of Windows and they kept buying Windows.  Now some of these same people want to consider crippling PC companies and force them to sell worthless hunks of metal to people with no operating system installed and people will have to figure out how to install their own OS and device drivers or pay someone else to install it for them not to mention the additional cost of buying single-unit OEM OS.

The European Commission is frustrated that despite all their meddling these last few years, Microsoft has doubled their market share in the “Workgroup Server” market from 40% to 80% thought this is another one of those arbitrary definitions like the Apple iTunes monopoly definition.  When you factor in all those unregistered or roll-your-own copies of Linux running in the market place, you can hardly declare Microsoft a monopoly in the server space.  Within that narrowly defined market segment, perhaps the EC should consider the fact that people prefer paying $600 perpetual licenses for Windows Server plus a very occasional $250/incident support fee (typically 4 times a year for all Microsoft issues for my old company) over a $1300/year/server support contract for Red Hat Enterprise Linux.  Those tens of thousands of copies of Linux being run by Google and millions more by other companies don’t count in the eyes of the EC when they need to define Microsoft a monopoly.

The EU Competition Competitor Neelie Kroes said that the EU now expects a “significant drop” in Microsoft’s overwhelming market share.  In fact Kroes even hinted that perhaps somewhere around 50% but not exactly is the correct market share.  Kroes’ spokesman Jonathan Todd clarified that:

“Once illegal abuse has been removed and competitors are free to compete on the merits, the logical consequence of that would be to expect Microsoft’s market share to fall,”

So I can translate this (via the contrapositive rule of logic) that if the market share doesn’t fall, then that “logically” must means that free competition doesn’t yet exist and illegal abuse must still be rampant.  That leaves absolutely no other possible explanation for Microsoft’s dominant market share so what’s next if crippling PC makers doesn’t work?  Will the EC then order ISVs (Independent Software Vendors) to port all of their applications to Linux with equivalent performance, functionality, stability, and validation if they wish to continue doing business in Europe?  Where does the madness end?

I have no doubt some people are jubilant about the fact that someone is sticking it to Microsoft, but do they honestly believe that an EC that tastes the fruit of their fines (tariffs) will stop with just Microsoft?  They’ve already declared Apple’s iTunes a monopoly so what is to keep them from imposing a new WTO-bypassing tariff on Apple?  What happens when the EC declares Cisco a monopoly in routers because their market share is too big and not because they’ve actually broken any anti-trust laws?  Will the EC come up with all sorts of creative remedies to force Cisco to drop their market share to ~50%?  What happens when the EC declares Oracle a monopoly in their respective market?  Should Intel’s market share be knocked down to ~50% too?

The American people and their politicians need to wake up to the fact that the EC is imposing tariffs under the guise of anti-trust merely on the basis of market share.  Europeans need to realize that their politicians are doing no favors for them with these draconian rules and that they will end up paying higher prices and greater hassles.  Trade is a two-way street and there will have to be repercussions and the side that has the trade surplus bleeds the most.

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