Fined: Microsoft penalized by EC for not explaining interoperability

Posted by Scott M. Fulton, III

Brussels (Belgium) - In a not surprising, yet still puzzling, ruling this morning, the European Commission made good on its promise to fine Microsoft for what it described as the company's failure to "supply complete and accurate interface information which would allow non-Microsoft work group servers to achieve full interoperability with Windows PCs and servers." The fine amounted to €1.5 million per day since the warning period of 15 December 2005, or about $356.6 million.

It is not the €2 million per day maximum penalty that had been threatened; that penalty would apparently have been imposed if Microsoft had failed to produce the second of two components the EC required, which was a version of Windows XP without Windows Media Player. Microsoft did deliver Windows XP N, to astoundingly low sales, throughout Europe. But rather than slash the fine in half, the EC decided to reduce it by only a quarter. The reason, the EC explained in an official statement this morning, is because the longer Microsoft waited to produce reliable documentation, the less effective the documentation would have been in explaining the problem. "Of the two elements of non-compliance identified in the Article 24(1) Decision," the EC statement reads, "complete and accurate interoperability information is a prerequisite for interoperable work group server operating systems to be developed. Microsoft's non-compliance in this regard has eliminated the effectiveness of the remedy."

"It is more than 18 months since an Order from the President of the Court of First Instance required Microsoft to comply with the Decision without delay," stated EC Commissioner for Competition Policy Neelie Kroes in a press conference this morning. "The European Commission cannot allow such illegal conduct to continue indefinitely."

In a decision reached late last March with the independent trustee appointed by the EC to monitor Microsoft's compliance, Dr. Neil Barrett, Microsoft agreed to provide a set of interoperability documentation in seven stages. The first six stages have already been completed, with the final stage due for delivery next week. Since the agreement was reached, the EC scheduled a hearing to determine and set the final penalties for non-compliance, for the week before the final deadline.

"The real issue here is not about compliance, it is about clarity," said Microsoft general counsel Brad Smith in an official response this morning. "Having received a clear definition of the documentation requirements this April, we already have met nearly all those requirements in just three months. We have dedicated massive resources to deliver high-quality documentation according to the aggressive schedule set by the Trustee and the Commission. We have delivered each of the first six milestones on time and have over 300 employees working around the clock to meet the seventh and final delivery date for this project, scheduled for July 24. It is hard to understand why the Commission is imposing this enormous fine when the process is finally working well and the agreed-upon finish line is just days away."

The EC's explanation involves something of a technicality: Currently, Microsoft charges royalties for companies wishing to review its communications protocols. Previously, Microsoft stated that it would review its royalty structure once it had completed the seventh and final stage of its documentation rewrite process next week. In the EC's statement this morning, the Competition Policy panel concluded it could not reach a reasonable conclusion about how the relative effectiveness of any of Microsoft's documentation for potential licensees, until the company had decided how much to charge for that documentation.

Specifically: "A final assessment on the degree of innovation, if any, that is contained in the interoperability information, and hence the reasonableness of the royalties that Microsoft charges, can only be made once the technical documentation embodying that interoperability information is complete and accurate," the EC statement reads.

Despite that statement, Commissioner Kroes said this morning that her panel had already reached the conclusion that the documentation it had received was ineffective. "The Commission has looked carefully at numerous reports by the Monitoring Trustee," she said. "It has looked in depth at Microsoft's documentation. It has considered very carefully the replies by Microsoft and its experts to the objections raised by the Commission. Having carefully weighed all of the evidence, only one conclusion was possible: From 16 December last year to 20 June of this year...Microsoft did not even come close to providing complete and accurate specifications."

In a response statement this morning, Ken Wasch, president of the Software and Information Industry Association, wrote, "From the beginning, the requirements facing Microsoft were clear. Implementing this remedy is important to the software industry. We hope that, with this essential step, the interoperability documentation will be forthcoming promptly and effectively."

"When you consider Microsoft's massive efforts to comply with this ruling," states Microsoft's Brad Smith, "and the fact that more than a dozen companies are already using similar documentation provided in the U.S. to ship actual products, we do not believe this fine is justified. In the meantime, we will continue to work with the Trustee on the final steps in the work plan established by the Commission in April."

In her press conference this morning, Commissioner Kroes threatened to impose further fines of up to €3 million per day, starting 31 July, for any further failure her panel perceives to provide explanatory documentation. Indications from an early morning press conference from Microsoft are that the company is planning another round of appeals.