Guilty as charged. That was the verdict handed down by the European Commission against Microsoft on March 24 for “violating competition law.” To atone for that sin, Brussels forced Microsoft to share technical information with its rivals in order to make their operating systems more compatible with Microsoft Windows. Moreover, Microsoft must launch a version of Windows that does not include the Windows Media Player. Finally, Microsoft must pay a fine of 497 million euros. That is the highest fine that Microsoft and founder Bill Gates have ever faced – and it may wind up even higher. Will all these measures be enough to force Microsoft to change its ways? Will its rivals make additional demands? Will Microsoft continue to grow?


“The penalty imposed by Brussels does not involve any irreparable damage to Microsoft,” notes José Mario Alvarez de Novales, professor at the Instituto de Empresa, a business school in Spain. “Although it is the largest fine in the history of the Commission in a case involving competition, it represents barely 22 days of Microsoft’s annual profits. (The company earned $9.99 billion). You need only compare it with the compensation Microsoft paid to AOL to stop its support of Netscape to show that this is not a meaningful figure for Microsoft.”


Ramon Casadesus Masanell, a professor at the IESE business school, shares that view, noting that “497 million euros is a considerable amount, but it is not enough to get Microsoft to change how it behaves.” After all, Microsoft has cash reserves of $50 billion.


Beyond its economic impact, the Brussels decision is important because it establishes a basis for further legal action against Microsoft. First, it recognizes that the company is engaged in monopolistic practices. Second, the judgment will serve as a reference point for future investigations. “For example, it is widely expected that the next version of Windows (known as Longhorn) will include an Internet search engine in which companies such as Yahoo and Google enjoy an advantage over their competitors. This decision by Brussels can prevent Microsoft from acting the way it did in its battle against Netscape. If so, it would mean a major boost for innovation and for the creation of value,” says Masanell.


This is not the first time Microsoft has emerged from a legal battle no worse for the wear. In June 2001, the Appeals Court of the District of Columbia nullified a [lower court] decision that forced Microsoft to break up in two. That happened despite the fact the appeals court recognized Microsoft engaged in monopolistic practices. Even today, there a chance that another judge, Bo Vesterdorf, president of the EU’s Court of the First Instance, will suspend at least some of the measures taken by the Commission. The trickiest issue for the software giant is the requirement that it share part of its Windows code. The company alleges that unveiling those secrets would constitute a violation of its Intellectual Property rights.


“In the final analysis, the company will have to reveal at least part of that information,” notes Novales. “But I don’t think it will mean any great damage for Microsoft. Technology companies are continually launching new versions of their products. By the time Microsoft’s rivals know the secrets of Windows and can use them to make their operating systems more compatible, Microsoft will launch a new version. Its rivals will always be a step behind.”


The Shield of Synergy

Microsoft’s trump card is its high degree of synergy. “They realized that the market demands a standard, and they bet on integration – not only when it comes to products but also technology for creating new layers that they add onto previous layers. That way, they are always bringing out new versions and new products that work with other new products,” notes Francesco D. Sandulli, professor of management at the Complutense University of Madrid. Sandulli is also an Internet business consultant for DMR Consulting.


One of Microsoft’s great strengths is its capacity for innovation. Each year, the company allocates 20% of its sales figures to Research and Development. That allows Microsoft to launch one new version after another, says Rosa García, the company’s top manager in Spain, soon after the Brussels decision.


That way, Microsoft keeps dodging the attacks of its competitors, experts agree. For example, requiring Microsoft to launch a version of Windows without Media Player will have no impact if the company offers its customers the opportunity to access its multimedia players by using other Microsoft products. “Just because Microsoft has to remove this piece [from Windows], it doesn’t mean that they can’t offer it another way,” says Novales. “If Microsoft had no other product than Media Player, and no other way of running things, this would have an impact. However, Microsoft can manage [distribution of Windows Media Player] from its Power Point [program] or from its Internet Explorer [browser]. Microsoft’s competitors do not maximize their synergy with this sort of approach. For example, IBM includes Windows in its PCs, but Bill Gates would never allow his operating system to be sold with Lotus instead of Word.”


In an earlier Knowledge at Wharton article, “Europe puts Microsoft to the Test,” Casadesus argued that Brussels should force Microsoft to “combine Windows with products that compete with Media Player. That way, the Commission would engage in a market test that shows which multimedia player the market considers the best.” Actually Microsoft offered Europe the option to include three competitive versions [of a multimedia player], along with its Windows Media Player.


Beyond those two options, there remains this question: What is best for consumers? On the one hand, if Microsoft is really engaged in monopolistic practices, that damages the marketplace because consumers have fewer options. On the other hand, if the company can offer one standard model that satisfies customers’ needs, that is something positive.


According to Sandulli, “The ideal thing is always integration — standards that simplify the use of technology and allow you to have everything you need on one platform. That is why Microsoft argues that customers ask for their products to be integrated. Actually, Microsoft has been condemned for its monopolistic practices; not for integrating its products. The company argues that, if a company has managed to establish its standard, it is because they are the best. What is not so clear is whether this approach has been developed in order to achieve this position of leadership.”


“Microsoft’s strategy has always been to use its position of leadership in operating systems in order to add new applications that allow it to enter other markets and take advantage of its dominant position,” says Novales. That is how Microsoft managed to leave Netscape trailing in the dust. Casadesus defines this strategy as ‘adopt and spread out.’ When Microsoft launched Internet Explorer, it was compatible with Netscape but the more Explorer increased its market share, the more that compatibility disappeared.” The secret of getting Netscape to disappear was Microsoft’s strategy of distributing Explorer with Windows.


Now Microsoft is leveraging this model to diversify and enter new markets. “The purchase of Navision is a clear example. The deal shows Microsoft’s interest in expanding in the market for integrated business solutions, such as ERP software. It means that Microsoft will collide against new competitors, such as SAP, the German firm, and Oracle from the U.S.,” explains Sandulli.


Strength from Unity

Beyond any fines imposed by governments and the denunciations of its competitors, the real danger for Microsoft lies in free software. “At the moment, it is not a danger because Linux lacks a unified plan of action,” explains Sandulli. “Microsoft’s competitors support Linux, and they are united around it as an alternative. However, Linux is still a pipe dream – a mass of people who are continuing to develop the solution, but without any commercial strategy.” He adds that “free software will only begin to take off when a broad range of consumers welcomes it. If we reach that point, the market will break out, and a lot of damage will be done to Windows as well as everything that stands behind it at Microsoft.”


According to Novales, “Lots of advances are being made in the technology, with a goal of developing free software. But there are still plenty of commercial problems. That makes it very hard for a company to decide to drop Windows and use something that has been developed by an enormous community, but which is not recognized [in the marketplace].” Nevertheless, Novales recognizes that “the backing that some governments are giving to Linux is a great help for its widespread acceptance.”


According to IDC, the consulting group, annual spending on Linux could grow from $80 million (in 2001) to $280 million by 2006. That would mean an annual growth rate of 28%. Moreover, according to a study done by IESE and Harvard Business School, the support that some governments have provided for Linux, as well as the backing that companies such as IBM have provided, could act as an extraordinary springboard. As a result, some free software projects could surpass their usual market share.


If it gets to that point, Sandulli believes that the only strategy left for Microsoft would be to launch a very aggressive campaign to get companies to withdraw their efforts on behalf of Linux. “One possible strategy would be the university and public- company strategy, where people are now betting on Linux. Microsoft’s ploy would involve offering those people its [Windows] products, free of charge.


“To compete against Microsoft, competitors should give up their independence and get together. On the contrary, the competition is very disorganized and it often competes against itself. You can see that in the case of IBM’s Lotus, which is fighting against Sun’s Open Office. Coming together was the strategy that the allies took in the Second World War, when they managed to defeat Germany by uniting – instead of making war, one-by-one, each on his own.”