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Microsoft Fined €280.5 Million by EU Commission: "No Company is Above the Law"
Wednesday, July 12 2006 @ 07:57 AM EDT

Microsft has been fined €280.5 million, the first time the EU Commission has ever had to do so, and, Neelie Kroes stated at the announcement, hopefully the last. From the press release:
Competition: Commission imposes penalty payment of €280.5 million on Microsoft for continued non-compliance with March 2004 Decision

The European Commission has imposed a penalty payment of €280.5 million on Microsoft for its continued non-compliance with some of its obligations under the Commission’s March 2004 Decision (see IP/04/382). That Decision found that Microsoft had abused its dominant position under Article 82 EC, and required Microsoft to disclose complete and accurate interface documentation which would allow non-Microsoft work group servers to achieve full interoperability with Windows PCs and servers. Today’s Decision, adopted under Article 24(2) of Regulation 1/2003, finds that Microsoft has not fulfilled this obligation. Should Microsoft continue to fail to comply, the Decision also increases the amount of the daily penalty payment to which Microsoft could be subject to €3 million per day.

“The Commission is obliged to ensure compliance with EU law, and I have always underlined my determination to ensure that Microsoft fully implements the Commission’s March 2004 Decision”, said European Competition Commissioner Neelie Kroes. “I regret that, more than two years after the Decision, and despite an Order from the President of the Court of First Instance that the Microsoft appeal to the Court does not suspend Microsoft’s obligation to comply, Microsoft has still not put an end to its illegal conduct. I have no alternative but to levy penalty payments for this continued non-compliance. No company is above the law. Any businesses operating in the EU must obey EU law I sincerely hope that the latest technical documentation being delivered by Microsoft will finally bring them into compliance and that further penalty payments will not prove necessary”.

A major sticking point: interoperability. The full text of Kroes' introductory remarks at the press conference is here. She says that Microsoft didn't even come close to complying. Nor does she buy their story that they didn't understand until recently what was required of them. To inspire compliance, they are raising the ceiling for potential fines to 3 million EUR per day. Groklaw's Sean Daly attended the press conference by feed, and shares with us his notes. Transcript to follow. Update: Transcript is available now. And now News.com has video of the press conference, depending on what kind of player you have. I can't see it, but I can listen to the audio.

Here are Sean's notes from the Question and Answer session, so you can quickly get a feel for the event, and happily he speaks French, so he understood it all:

Q2: When 3 million fines applied ?

A: In a few months Prof. Barrett & his team will make recommendations.

Q3: MS working hard since June 20th?

A: Yes, but why did they wait that long?

Q4 Mary Jacoby: What about ESIS February complaint re: Vista & office? Also, will 2004 Decision set precedent for interoperability & fairness?

A: Second part yes; first part no, no decision yet

Q: Commercially, workgroup market is dead. So what about PDF, Vista, etc.? Also, what will companies have to pay to use these protocols?

A: First part: I informed MS that they should take into account EU problems. Hopefully, next year's launch will take into account 2004 Decision. Re reasonable terms, Prof; Barrett will be focused on that, he will start in 2 weeks, a month later recommendation. Fine possible for that part only.

Q: May be fallout on R&D from these fines?

A: No, on the contrary, will stimulate competition. If no competition, slowdown of research & innovation. If competition, MS will do their utmost to be the best or one of the best

Q: Matthew from Bloomberg : in high-tech industry questions, what about Intel?

A: Nothing yet

Q: Yesterday, MS announced no more support for 70 million Win-98 users, will this decision interest Competition DG?

A: Not our cup of tea. It's their business, but this is why it is important there is not one monopolist which makes us dependent on their business strategy

Q: (French): You showed a graphic, please describe. Also are you worried MS will do nothing during appeals process?

A: No, we are quite clear that they have to behave. Not just money fine, but reputation I imagine they are scared of. Chart: Netware, Linux, Unix each under 10% and losing marketshare these past three years, while MS has had 12% growth.

What I got from the CEO, he is active, he put 300 people after the noncompliance, I am sure that Steve Ballmer is doing his utmost to come out of this situation.

Q: MS plans to appeal?

A: We live in a democracy, when I look at the cooperation with the US DOJ, it is productive. DOJ concerned, now following similar procedure to ours following our reaction. Good cooperation between US and EU competition authorities

Here's the July 12, 2006 decision to impose fines. Finally, here's Microsoft's response, which begins like this:

“We have great respect for the Commission and this process, but we do not believe any fine, let alone a fine of this magnitude, is appropriate given the lack of clarity in the Commission’s original decision and our good-faith efforts over the past two years. We will ask the European courts to determine whether our compliance efforts have been sufficient and whether the Commission’s unprecedented fine is justified.

Despite these fines, Microsoft remains totally committed to full compliance with the Commission’s 2004 decision. We will continue to do whatever the Commission asks to comply with its decision as these issues are considered by the courts.

The record will show that Microsoft has acted in good faith to comply with the Commission’s decision. We delivered thousands of pages of technical documents from December 2004 onward. When it became clear there were disagreements over the technical documentation requirements, we pressed for greater clarity, we delivered revisions promptly, we offered unlimited technical assistance, and we even made our source code available to competitors in an effort to resolve the impasse.

The real issue here is not about compliance, it is about clarity. ...

As you can see, in Microsoft's world, it's the Commission's fault. In short, they will be asking the courts to overturn this penalty. Transcript of Microsoft attorney Brad Smith's press conference.

Media coverage:

  • BBC News: Microsoft has been fined 280.5m euros ($357m; £194m) by the European Commission for failing to comply with an anti-competition ruling. The software giant will appeal the fine that follows a long-running dispute between the US firm and EU regulators.

  • Reuters on Yahoo!: "I don't buy Microsoft's line that they didn't know what was being asked of them, because the March 2004 decision is crystal clear," Kroes said.

    However, she said the company was now finally acting constructively, although it was still some way short of compliance.

  • Bloomberg: The penalty against Microsoft, whose software runs on about 95 percent of the world's personal computers, comes on top of a 497 million-euro fine levied by Mario Monti, the competition commissioner at the time. He also ordered the Redmond, Washington- based company to sell a version of Windows without a video and music player. Microsoft is appealing Monti's ruling to the European Court of First Instance in Luxembourg.

    "Rather than await the court's ruling, the commission has decided to use brute bureaucratic force to implement its decision and to punish what it sees as recalcitrance by Microsoft," Ronald Cass, president of legal consulting firm Cass & Associates and a former adviser to Microsoft, said in an e-mailed statement.

  • Daily Telegraph: The new fine was calculated on the basis of $2.5 million a day, backdated to December 15, the day that Brussels stopped the clocks for Microsoft to comply.

  • Forbes: Kroes also said she had warned Microsoft that it had to take care to avoid antitrust problems with its new operating system Vista, which will include an Internet search and a PDF-type document reader that could pose problems for current rivals.

    "Microsoft is aware of it," she said. "Hopefully it will be in a shape ... that all those items are taken into account."

    Kroes said she had showed restraint on the new fines as the EU can fine a company up to 5 percent of its annual global revenue. This would mean a fine of 4.28 million euros ($5.47 million) a day out of Microsoft's daily revenue of 85.7 million euros ($109.47 million), she said.

  • EITB (Spain): The Commission's hardline approach contrasts with that of the United States, which in 2000 made similar findings against Microsoft but is still awaiting technical documents from the company as ordered by the US Justice Department in 2002.

    By May this year the process was so troubled that Microsoft and the court started over again in a process that took the cue from what a US judge called "the European Commission's direction". Kroes noted this new US approach on Wednesday....

    The bundling issue poses concerns already voiced by Kroes about Microsoft's next operating system, Vista, which could package Internet search functions or software that creates fixed documents and thus threaten Google and Adobe.

  • Seattle PI: Microsoft says it has been doing all it can to comply with the provision, and it cited a series of meetings with Barrett in March as a breakthrough in clarifying what is required as part of the documents. The company says it has met a series of deadlines established by Barrett since then.

    The last of seven deadlines for submission is July 18, and leaders of the Microsoft documentation team say they expect to be able to meet that milestone.

  • MS attorney Brad Smith's internal memo:To meet the demands of the schedule, a team of more than 300 employees was assembled, including some of the company’s most senior engineers. Many of those involved played a central role in writing the protocols covered by the documentation. This team has worked around the clock to successfully meet each of the six previous milestones. Their tireless and persistent efforts and the high quality of their work is a testament to the great things people can accomplish when they pull together in a time of need.

    During the last few months, we’ve been encouraged by positive feedback we’ve received from the trustee. We had hoped that this effort would demonstrate to the Commission that we would be fully in compliance by their July deadline. The fact that the Commission decided to fine us despite our massive compliance efforts is disappointing. And it’s hard to understand why the Commission is imposing this large fine when the process is finally working well and the agreed-upon finish line is still nearly two weeks away.

Update: Here's photo showing the chart that Ms. Kroes refers to. And here's the transcript from Sean Daly of the question and answer session following the announcement by Ms. Kroes, and note that this is in no way an official transcript, but I think you will find the final remarks by Ms. Kroes very interesting indeed:

*******************************

Q&A:

07:36

Jonathan Todd: Do you have any questions, ladies and gentlemen? I saw Marc [inaudible] and then, Conrad?

07:43

Q: [EU simultaneous translation from French] I'll put a question to you in French, madame. Madame Commissioner, the press release says that Article 34 of the 2002 regulation, you can impose a fine up to 5% of the daily turnover. If I've understood correctly, today you have decided to have a fine at 1.5-1.7% of the turnover on a daily basis. But you said that Microsoft's documents and papers were far from complying with the March 2004 Decision. So why are you being so clement? And secondly, do you feel the threat of the 2 million euros per day apparently has not been sufficient for a number of months for Microsoft to fall in line, do you think that 3 million as a threat will have an effect if Microsoft is convinced that nothing's really going to happen?

08:50

Neelie Kroes: Just reacting on your first part of your question, indeed we are allowed to take 5% of the threshold of a company, so in this case that would be for Microsoft -- just to make a clear picture -- that the average daily turnover of Microsoft during the period July 2004 - July 2005 on an average daily turnover, it seems to be an amount of 85.7 million euros. And so that means that the 5% would be 4.28 million euros on a daily base. Why didn't we take the 2 or the 4.28? Because, in itself, it's not the height of the level of the fine at a certain moment, but it is to give a clear signal to Microsoft that they have to deliver, that they have to stop their abuse of this situation.

So the effect of the remedy is absolutely in the center of our decision. So there should be an interoperability that allows viable competition on the merits. This is a clear signal, we took into account, as you are aware, the decision is part of the total decision, so at the end of the day we still have to take into account that this is the interoperability of the whole situation and that about pricing, we have to wait 'til there is the final result of the judging of all those documents that are delivered to Professor Barrett and his team. So, quite clear, then, the next part will be there and then we have to make up our mind. What, for example should be our position, our decision at that point? So, taking into account that this is quite a high level of fine, not asking for absolutely hundred percent of what we could do but the signal is there and hopefully, it will be clear also for the Microsoft people.

11:25

Jonathan Todd: Conrad, and then David.

Q: Commissioner, two questions. First of all, when will the Commission make the next assessment of the Microsoft compliance in order to check whether to impose the 3 million fine daily? And the second question, what if Microsoft calculates that it's better off with not complying, and just getting the profit from its quasi-monopoly on the market? Do you have any other sources, any other tools to use, to make pressure on Microsoft?

11:58

Neelie Kroes: Well, starting with the last point, indeed it is not a quasi-monopoly, it's nearby. If you are looking at this graphic (holds up A4-sized chart), then it's quite clear that talking about estimated market share in the workgroup server operating systems market, that this is the 2005 situation of Microsoft and this are the competitors. So that is quite clearcut. They are at the very high level of their market position. What if they shouldn't change their attitude? I'm very optimistic and certainly after the contact with the CEO and the management board of Microsoft that they are aware that this should be arranged in the way that they have to also behave conforming to EU treaty and direct relations. So I'm not expecting that they are calculating and that it would be worse or -- that it would be better to stay in this bad habit, for what they are doing now is indeed constructive, we aren't yet there, I just got the latest information of Professor Barrett, the 20th of June he still had one out of around seventy documents in which he could just put the remark that it was a [inaudible] stage of that document After the 20th of June, they did an extremely good job, and he is aware of that nearby 50% of the documents are there. So what has to be done: to check if the specifications are correct, if they are accurate, and if they are complete, then the testing has to be done. So, a couple of months from now, we are absolutely aware what it's all about and hopefully, we can just say it's back to normal behaving of an interesting company in this market.

14:29

Jonathan Todd: David, and then Mary.

Q: You partly answered the question yourself, but you say that initially that Microsoft had come nowhere near to meeting the requirements for complete and accurate information. Are you now saying that since the June the 20th, they've actually come more than halfway, or they've gone about halfway; they themselves say they have 300 people working on this, and that they've delivered six out of seven piles of documentation and they hope to complete it by July the 18th. So is that -- I mean, what is Professor Barrett saying in terms of how far they've got since June the 20th?

15:20

Neelie Kroes: The 50%, I'm repeating what I mentioned before, of the documents seems to be at a [inaudible] stage, and that means that then he can test them in the laboratory. So, we have to wait for the final result, but anyhow from the 20th of July -- of June 'til now, so three weeks from now, they did an extremely good job. My only remark, if you allow me to say so, is why waiting that long and why not doing that earlier?

16:00

Jonathan Todd: Mary, and then [inaudible]?

16:06

Q: Mary Jacoby: Yes, Ms. Kroes, I want to look forward a little bit, I know we don't have a decision yet from the CFI [Court of First Instance] on the underlying merits of the case, but this decision today is about interoperability in a specific market, workgroup servers, yet you've got another complaint before the Commission right now which looks at interoperability issues in other areas including, as I believe, Office. Have you made any decision on that complaint which was filed in February by the ECIS group [ED: http://www.e-c-i-s.org/archives/2006/02/brussels_22_feb.html] and do you have any feeling that the March 2004 Decision establishes a broader principle of interoperability that will animate the Commission's decisions as it goes forward?

16:54

Neelie Kroes: The answer on the last part of your question is Yes, and the answer on the first part of your question is No, I don't have yet -- made a decision.

17:09

Jonathan Todd: David.

17:11

Q: Two questions. One is to follow on Mary's question, which is, for the most part, even if you get compliance, commercially, the workgroup server market is dead. The bigger question is things like Adobe -- PDF under Vista -- and possibly Google. I mean, these are the things we are hearing about from some of the groups. How does this decision interact with what you're going to do about Vista and what are you doing about Vista? Secondly, there's a question about the other half of this, which is what will companies have to pay in order to be able to use these protocols? Where do you stand with that, and how soon do you think that will be resolved?

17:56,p. Neelie Kroes: First part, talking about the other interesting challenges. I informed Microsoft already a couple of months ago othat it should take into account -- and I was very clear in my wording -- that the general principle of the 2004 Decision, when designing Vista, has to be avoiding those problems that we are facing now with this situation. So I am consistent in the philosophy and we are absolutely crystal clear what it's all about. So Microsoft is aware of it. By the way, they weren't taking this year as the introduction moment, but they have delayed to next year as you are aware, so the launching next year hopefully will be in a shape in which all those decisions, 2004 items, are taken into account. Your -- sorry - your...

19:09

Q: The 2 million euro fine covered two aspects.

19:15

Neelie Kroes: Yeah. Got it, got it. So indeed, it is now the interoperability information, but then also the reasonable terms in which we should have the feeling that it's indeed reasonable and that it is taken into account what the discussion 'til now has brought. That will be the second part of the job also, the advice of Professor Barrett will be focused on that, and that will -- by a month -- he will start with the exercise two weeks from now, and then normally speaking, he will be finalizing around a month from that moment that he is starting. And then, of course, we have to make up our mind and take a decision, is it completely in line with what we want, or is there still a moment in which we have to take into account that a fine also for that part can be given?

20:20

Jonathan Todd: Gentleman over here.

20:27

Q: There is some another school of thought that which is in academic circles, you mentioned a professor, and I have been speaking to some professors, and they said that there may be a fallout on the R&D activities in this sector due to these fines and these kinds of competition policies. Would you like to comment on that?

20:49

Neelie Kroes: I don't take it serious that this should be an attack on the funding of research and development. On the contrary, it will stimulate the other ones to be active in that field too, and that is what we all have to take into account -- that if there is no competition, or nearby no competition, then at the end of the day there will be a slow of research and innovation. And that is what we just try to stimulate, also the other ones will do their utmost. And in this case also for Microsoft, it means that if there is competition in the market, they will do their utmost to be the best, or one of the best. And when we are talking about their turnover, that won't be a problem, so tell your professors that they don't worry. [laughter]

21:41

Jonathan Todd: Matthew, and then Roberto.

21:49

Q: Matthew Newman from Bloomberg. I know you don't take Article 82 decisions lightly, a lot of research goes into fining these decisions, partcularly in high-tech industries which are constantly evolving, there is another pending investigation involving Intel, I was just wondering if the Commission is approaching any kind of decision on that file?

22:19

Neelie Kroes: Not yet.

22:23

Jonathan Todd: Short and sweet. Roberto.

22:29

Q: Yesterday, Microsoft announced that it's not going to offer technical support for updates to the Windows 98 operating system. And I would like to know if this decision -- which by the way, is owned by apparently over 70 million people -- so I would like to know if this decision has an effect, or will be looked at by your DG, since these 70 million people eventually will be forced to switch to a newer operating system, either the actual one or the future one which could be, according to your investigation against antitrust, EU rules?

23:24

Neelie Kroes: To be very straightforward, that's not our cup of tea, for if the business is taking the decision that a certain product -- and even if it was very successful, it's not any more in the heart of their business -- then they can take the decision. But again, that's also an argument why it's so important that there is not one nearby monopolist in the market and that we are all depending on their business strategy. So if there are more -- then you can make up your mind as a consumer what you prefer for type of product.

24:06

Jonathan Todd: We've got time for one more question. Philippe?

24:13

Q: Philippe: Question en français, s'il vous plaît. You've shown us slides on marketshare, I couldn't quite see, I'm too far away, could you explain how is the market developing since the decision? Has noncompliance had any perceptible impact on the market? Can you give figures? Aren't you afraid that Microsoft is waiting for the Court of Justice decision on this matter before complying? Do you think that Microsoft prefers to wait for a decision as to the substance?

24:58

Neelie Kroes: No, I don't exepct that, because we are quite clear to each other what it's all about -- that they have to behave. And that, by the way, is what we touched upon earlier, it's not only a matter of money, of a fine, that the European Commission is just putting it in public that they are not behaving, to put it in a diplomatic way, conformed to treaty and rules in this market of the European Union, but it is also an image, that, a reputation that they are scared of, I imagine. Talking about this side, it is indeed -- and you can get a copy afterwards, I am sure -- it is the estimated marketshare in the workgroup server operating systems market. If you can't see it, I'm sure, but there are a couple of competitors of Microsoft: Netware, Linux, Unix, and the others. They are all lower than ten percent, losing marketshare by the way; Netware is losing marketshare comparing 2002 to 2005 -- so the three years are compared; and the only one who is really making a big effort is Microsoft, compared to 2002 with 2005, they have done more than 12 percent growing. So, indeed, they did take advantage of the situation, but they are aware it is not allowed, and at the end of the day, it is a situation in which they have to change their attitude. And what I got from the CEO of Microsoft, he is just very active in the whole process himself, he is stimulating his people, and he by the way took his decisions in just putting more than 300 people after the not compliance in the team to be active in this field. So I'm sure of that, Steve Ballmer is aware and is doing his utmost to come out of this situation that he doesn't like at all.

27:39

Jonathan Todd: As one of your colleagues has just woken up [laughter], we'll take one last, last question from [inaudible].

27:46

Q: Just a last question, Microsoft just announced that they would appeal to these decisions, so I just want to have your comment on that?

27:53

Neelie Kroes: Well, we are living in a democracy, so that is taken as a new issue. By the way, then I am misusing your question and I'm getting back to the last quaestion of your predecessor. When I'm looking at the corporation with the US Department of Justice, it is ongoing and it is very productive and I also understand that the Department of Justice has expressed concerns about Microsoft's obligations under its settlement and that it's now following and talking about US ministry of Justice similar approach to ours on this specific issue of technical documentation. So it's not only Europe which is following what they are doing and it's also in the country where they have their head office and we can be aware of a good cooperation between the United States colleagues and ourselves.

29:06

Jonathan Todd: Thank you Commissioner, thank you ladies and gentlemen, there is a press release, a set of frequently asked questions on this decision, plus there is a new section on the DG Competition website -- everything you ever wanted to know about the Microsoft investigation and decisions and its application. Thank you.


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