[Ecommerce] Financial Times: When Microsoft and Brussels went separate ways

[Thiru Balasubramaniam]

When Microsoft and Brussels went separate ways

By Tobias Buck in Brussels
Published: April 20 2006 19:18 | Last updated: April 20 2006 19:18

Steve Ballmer, Microsoft=92s hard-charging chief executive, grasped for
the first time just how much trouble he was in not long after lunch on
March 16 2004.

Hours earlier, as the software giant=92s five-year battle with the
European Commission entered its endgame, he had landed in Brussels from
the US to lead the final stage of negotiations.

His team was in high spirits, confident it was just a whisker away from
an agreement that would allow the company to escape both a massive fine
and a ruling that denounced its behaviour as anti-competitive. All the
CEO would have to do, his high-priced legal talent was sure, was put his
name to a deal.

But suddenly Mario Monti, the European Union=92s competition commissioner
who had issued a settle-or-else ultimatum the previous day, had raised
the stakes once more.

To avoid punishment, the company had thought, it needed simply to agree
measures to address the two main concerns thrown up by the Commission=92s
probe.

To that end, it was prepared to license potentially sensitive
information about its operating system to rival companies keen to
develop server software that would function smoothly with its Windows
operating system. It was also prepared to create a level playing field
in the market for media player software =96 by carrying three rival
sound-and-vision products alongside the group=92s own Windows Media Player.

The optimism evaporated, however, when corporate chief and commissioner
met in the competition directorate=92s sleek new building in a quiet
Brussels side-street. The outcome would provide salutary lessons for
executives worldwide about how to handle regulators who seek to trammel
their business ambitions in the name of the public interest.

As they sat down together in Mr Monti=92s private conference room, the
contrast between the Italian and the American could hardly have been
greater: Mr Monti, an ascetic man who spoke with professorial precision
and never departed from his written brief, faced Mr Ballmer, a
ruddy-complexioned, beefy-handed extrovert known for having the loudest
voice in any room he occupied and possessor of an enthusiasm and
self-belief that tended to drive all before it.

But now it was Mr Monti who was calling the shots. First he demanded a
succession of small improvements to Microsoft=92s offer. Mr Ballmer
accepted them without a murmur.

Then Mr Monti dropped what Microsoft saw as a bombshell (an
interpretation the Commission rejects). The company had to agree not to
integrate further programs of its own into Windows unless it also
offered an =93unbundled=94 version that did not contain the new program.
Consumers would be served by nothing less, he insisted.

Mr Ballmer and Brad Smith, Microsoft=92s general counsel, felt
blind-sided. They believed the demand went beyond anything mooted in the
months of discussions the team had held with Mr Monti=92s subordinates.
Microsoft, they told the commissioner, could not sanction a deal that
would severely limit the company=92s ability to improve its flagship
product. =93They said: =91Any wording of this kind goes against our
fundamental business model of developing an integrated system=92,=94 one
Commission official recalls.

Mr Ballmer and Mr Smith asked to meet alone with Philip Lowe, the
competition department=92s top civil servant who for months had headed its
negotiating team, and Mr Monti. According to two participants, the
Microsoft executives took the gloves off =96 warning that if the case came
to court, big legal weaknesses would be exposed and supporters in the
industry would desert the Commission. =93You will have to face this battle
alone,=94 Mr Smith told Mr Monti.

According to people present, he added: =93I want you to know that at the
moment you have a bunch of companies asking you to do this but at the
same time they are coming to us, asking for a settlement, asking for
money. By the time this goes to the court, every one of these companies
will abandon you. They will all settle with us.=94 (His prediction proved
accurate: Sun, Novell, RealNetworks and the Computer and Communications
Industry Association representing numerous other makers, all settled
their disputes with Microsoft =96 forcing the group to pay out more than
$5.3bn in the process.)

Mr Monti stood his ground. The Commission, he told the two men, had
joined battle with Microsoft not to help the company=92s rivals but to
uphold the law and, ultimately, defend the interests of European
consumers. He told a deflated Microsoft delegation they must draft a new
=93letter of commitments=94 to present to the Commission the next morning.

Mr Ballmer, Mr Smith and other lawyers worked on the letter deep into
the night. At 2am Bill Gates, the company=92s billionaire founder,
endorsed the new offer by telephone. But when talks resumed it was
immediately obvious that for Mr Monti it was too little, too late. One
senior Commission official says: =93On the future, [Microsoft] basically
said: =91We will consult you=92.=94

It was irresistible force versus immovable object. The Commission was
determined that Microsoft should accept real constraints on its future
ability to integrate elements into the Windows package. With equal
adamance, Microsoft opposed an outcome that would undermine the very
strategy on which the group=92s success had been built.

When the two sides parted later that Wednesday, the Microsoft team was
all but certain that the battle had been lost. The next day, they knew
it for sure. There was a last meeting between Messrs Monti, Lowe,
Ballmer and Smith. The atmosphere, one participant recalls, was
=93cordial=94 and there were even some jokes. Mr Ballmer winced when he
learned the official ruling would probably be issued on March 24 =96 his
48th birthday. =93I am not sure that is what you wanted as a present,=94 Mr
Monti told him.

<>Fortunately, perhaps, the two sides were unaware that this was to be
the warmest meeting for months. Soon afterwards, they began to argue
over the precise meaning of Mr Monti=92s ruling and the obligations it
imposed on Microsoft, in what turned into a pernicious cycle of mutual
obfuscation and incomprehension.

Everyone has a theory about why Microsoft failed to secure a deal. In
private, several members of Microsoft=92s defence team do not hide their
anger, alleging that the Commission was bent from the start on ruling
against them. One says: =93We were tried and convicted when the process
was started. That=92s our feeling. The rest was just formality.=94

A senior Microsoft attorney couches his criticism of the Commission in
the form of =93regrets=94. Above all, he regrets that the Microsoft team di=
d
not insist on negotiating with high-level Commission officials earlier.
=93If we had started talking in June 2003 [with Mr Lowe] we might just
have been able to make more progress,=94 he adds.

Naturally, officials at DG Comp, the Commission=92s directorate-general
for competition and state aid, recall the negotiations very differently.
Officials maintain it took Microsoft until the beginning of 2004 =96 only
weeks before the final ruling =96 to make a meaningful offer. =93Everything
they did, they did too late. They were playing poker games,=94 one member
of the case team declares.

Arguably, the negotiations had been bedevilled from the start by a clash
of cultures. Microsoft approached the Commission as if theirs was a
disagreement between equals. Yet the Commission felt towards Microsoft
as a judge towards a thief caught red-handed =96 the notion of negotiating
with the group on level terms was preposterous.

Microsoft=92s decision to employ tactics similar to those it would have
used with suppliers or customers annoyed a regulator charged with
defending the public interest.

The Commission, meanwhile, never believed its job was to grease the
wheels of a deal. DG Comp had identified a problem, which Microsoft
could choose to resolve by coming forward with a solution. If not, it
would be resolved through the imposition of a formal ruling. Since the
end would be the same, DG Comp had no preference as to means.

Microsoft was by no means the first US group to misread the Brussels
regulator. General Electric famously failed to realise at first that its
takeover bid for Honeywell required Commission approval, and later made
things worse through its none-too-subtle lobbying tactics. Even European
companies are regularly bewildered by the complex procedures and awesome
powers of DG Comp =96 a problem felt all the more keenly by executives
from the other side of the Atlantic.

And yet, despite these differences, the two came surprisingly close to
agreeing terms. Mr Monti notes approvingly that the group never resorted
to the heavy-handed approach GE deployed. Yet he is clear about why
agreement between the two sides proved impossible.

Ultimately, he says, =93it was really about a crucial aspect of their
business model that was incompatible with competition law and consumer
interest=94. Compromise =96 for either side =96 was just not an option.

It is now more than two years since Mr Monti issued his ruling =96 years
in which relations between the two sides have become more fractured than
ever. He left office in November 2004 and now serves as president of
Italy=92s respected Bocconi university and an =93international adviser=94 t=
o
Goldman Sachs, the investment bank. He is considered a potential Italian
finance minister.

Today the EU competition directorate is headed by Neelie Kroes, a former
Dutch transport minister and businesswoman. Microsoft had hoped her
arrival would mark a fresh start.

But the complexity of Mr Monti=92s ruling swiftly came back to haunt the
new commissioner.

Through much of 2005, the officials in Brussels and the lawyers at
Microsoft found themselves in a stand-off as frustrating as the one they
had experienced ahead of Mr Monti=92s ruling. At its heart was a
disagreement over how much technical information Microsoft was obliged
to surrender to rivals.

The group says it was waiting for the Commission to say exactly what it
should do. However the team at C3, the DG Comp electronics unit headed
by Cecilio Madero, a Spanish ex-banker, thought their opponent was
trying to stall the process. They felt Microsoft had failed to draw up
=93complete and accurate=94 interoperability information as required by the
ruling.

The case is continuing but the Commission appears poised to impose fresh
fines on the group =96 they will be levied until it is satisfied that
Microsoft has fully complied with the 2004 ruling. Brussels has
threatened to impose a daily penalty of up to =802m.

Every conflict produces winners and losers, yet in the case of the
six-year antitrust battle between the Commission and Microsoft the two
are not easy to distinguish.

True, Microsoft singularly failed in its drive for a negotiated
settlement and has failed ever since to draw a line under the costly
battle with Brussels. But the Commission has little cause for
celebration. Even DG Comp=92s supporters in the software industry admit
the two remedies imposed by the Commission over Media Player and
interoperability have failed to achieve their desired effect.

More than two years after Mr Monti=92s ruling, no more than 1,400 versions
of unbundled Windows have been shipped to PC manufacturers and
consumers. As many observers predicted at the time, a failure to force
Microsoft to price the bundled and unbundled versions differently meant
there was little incentive for anyone to buy Windows without Media
Player. The interoperability remedy, on the other hand, proved so
complex that, far from resolving the case, it has spawned an entire new one=
.

To date, no company has taken out a licence on Microsoft=92s technical
documentation (showing, in Microsoft=92s mind, how pointless the order was
and, in the Commission=92s view, how successful the group has been in
torpedoing it).

In the meantime, Microsoft=92s share of both the media player and server
market has continued to increase. Despite the Commission=92s efforts, the
group=92s use of its monopoly power in operating systems to conquer
adjacent markets has been wildly successful.

Much hangs on the outcome of the appeal hearing that opens next week at
the European Court of First Instance =96 not only for the Commission but
for Mr Monti personally.

Although he is still widely admired in Brussels for his integrity and
intellect, Mr Monti also presided over several other highly
controversial rulings, some of which were thrown out by European courts.
Critics see that as an embarrassment but supporters believe it smacks of
personal courage. One lawyer says: =93Mario Monti had all these negative
court cases against him. He was on the ropes and then he took on the
biggest company in the world. That is impressive.=94

Even some Commission officials glumly acknowledge, though, that the
balance of power may have tilted against the regulator. Microsoft, some
say, is simply too big, too powerful and able to fight on too many
fronts simultaneously to be curbed by Brussels.

=93If they are successful in even half the things they are trying to do, I
believe Microsoft will become a real problem. You cannot have so much
power in so few hands,=94 one DG Comp official laments.

Already, the group=92s rivals are complaining that Microsoft is busy
stamping out the next competitive threat =96 the challenge posed by
internet-based applications. Again, they have turned to the Commission,
filing a complaint to Brussels in late February. Mr Madero=92s C3 unit is
once more leading the charge. The software industry is again lining up
behind the two camps. Law firms are being hired and more complaints may
be filed.

To the officials and lawyers who fought each other almost to a
standstill in the five years from December 1998 it must all provide an
unsettling sense of deja vu. Throughout the long days and nights they
worked on the case, they knew they were taking part in something
momentous: the biggest antitrust fight in European history.

But the real war, it seems, may have only just begun.