Creative capitalism takes a £681m Euro bashing

MARTYN McLAUGHLIN asks if a record EU fine will convince computer giant to give up restrictive practices

IT IS a company whose founder speaks passionately of the need for a "creative capitalism" which will put the welfare of the world's poor before profit.

But behind the philanthropic zeal of Bill Gates and the closed doors of its Washington boardroom, it seems computer giant Microsoft is as ruthless as ever, considering defiance – and the resultant fines – a cost of doing business.

In what was dubbed a "dark chapter" in its corporate history, Microsoft was yesterday served with a record fine by the European Union after defying sanctions imposed for anti-competitive behaviour.

The £681 million fine – the largest ever imposed on a single company – is intended to punish Microsoft for its decision to charge third-party technology rivals "unreasonable" rates for access to its software codes, and marks the culmination of a long and bitter feud between it and the EU. The Washington-based firm has been fined around £1.2 billion by Brussels over the past four years.

The dispute revolves around the company's virtual monopoly of the computing market, and the way in which it has beat down smaller competitors that produce software and media players.

For years, the company has been accused of illegally rigging the market by obliging customers to use Microsoft software with its computers, and by refusing to provide rival firms with the necessary coded information to enable competing software to be compatible with Microsoft equipment.

Its dispute with European officials began four years ago, when the EU fined the firm and told it to make available a version of its ubiquitous Windows operating system that did not use Microsoft's media player, as well as enlightening other firms on the minutiae of the Windows program code, so they could ensure their own products worked better.

Microsoft agreed, but ensured its rivals would be forced to pay a high royalty rate for the necessary information. That, the commission decided, was unjustifiable, and the stand-off continued until last autumn, with additional fines worth hundreds of millions of pounds served in the meantime, before Microsoft finally agreed to reduce the rates. Yesterday's fine, the EU said, was punishment for the three years of protestation and non-compliance.

In a statement, Neelie Kroes, the competition commissioner, made it clear Microsoft's decision to ignore EU sanctions imposed because of anti-competitive behaviour was unprecedented.

"Microsoft was the first company in 50 years of EU competition policy the commission has had to fine for failure to comply with an anti-trust decision," she said. "I hope the decision closes a dark chapter in Microsoft's record of non-compliance."

She denied suggestions the EU took pleasure from levying such an exorbitant fine, insisting it was "reasonable and proportionate". It should, she added, act as "a signal to the outside world, and especially Microsoft, that they should stick to the rules".

The EU fine is the latest in a series of punishments and rulings against Microsoft.

In the late 1990s, a US government anti-trust suit ruled the firm had abused its monopoly in the desktop operating systems market, and it has also waged many legal battles against software firms.

For a company which amassed revenues of more than £8 billion for the last quarter of 2007, the fine will hardly drive Microsoft into the red, and given the long and inglorious history of the row between the two organisations, any PR damage has already been inflicted and absorbed.

Equally, the majority of home and office computer users may be hard-pressed to recognise the changes that will come about following yesterday's fine, given much of the software and information singled out by the EU is used only by IT specialists.

Windows Media Player, arguably, is the most high-profile program involved. A package built in to Windows and used on 90 per cent of home computers, it automatically plays CDs or DVDs.

In the future, Media Player will disappear from copies of Windows, but already rival programs such as Winamp and iTunes are bridging the gap.

Microsoft said the fine was not linked to current procedures and the firm was looking at ways to improve its operations. In a statement, it said: "We are reviewing the commission's action. These fines are about past issues that have been resolved."

Last week, the company announced it would open up the "inter-operability" technology of its software to make it easier to operate its rivals' products.

Microsoft chief executive Steve Ballmer said the company would publish blueprints for some of its key products, such as Office 2007 and Vista, making it easier for them to be connected with third-party software.

Mr Ballmer has also promised the company will no longer sue other firms for development or distribution of those blueprints, which they could previously access only by signing a "trade-secret licence" with Microsoft.

Whatever the future holds, Mr Gates, famed for his aggressive business style, is unlikely to play a major role. He is stepping down this summer from the helm of Microsoft to take up his charity activities at the Bill & Melinda Gates Foundation full-time.

Without him to preside over its dealings, the company – which is currently locked in a £22 billion takeover battle for Yahoo! – needs to remember that Ms Kroes will continue to scrutinise the company's affairs.

The commissioner pointed out that the fine imposed was only 60 per cent of the maximum amount she could have sent Microsoft's way, and reminded everyone she was continuing to investigate two additional complaints against the company regarding inter-operability – inquiries that will last "as long as necessary".

Unless she discovered a genuine change in its corporate behaviour, Ms Kroes said, further fines might be forthcoming.

In a brusque press release, she emphasised it would take more than public relations to convince her Microsoft had cleaned up its act.

She said: "Talk is cheap. Flouting the rules is expensive."

Q & A: WHAT MICROSOFT DID WRONG

Why has Microsoft been fined?

The European Union decided Microsoft had abused its virtual monopoly of the software market to the disadvantage of smaller companies which make the likes of server software and media players.

In March 2004, it fined Microsoft £330 million and ordered it to share "interoperability information" with its rivals within 120 days.

What is "interoperability information" and why is it so important?

It is the combination to an IT lock: technical information which allows rival firms to find out in greater detail how Windows works. Only by having that information can they make their products integrate better.

Is it only the EU that is aggrieved at Microsoft?

No. Rivals such as IBM, Nokia, Oracle and Sun Microsystems have previously complained Microsoft was reluctant to share its software codes.

Why has the stand-off continued for so long?

Microsoft refused to acknowledge the ruling, claiming it was entitled to protect its intellectual property. It made an appeal to the EU's Court of First Instance, which ended in defeat last September. During the appeal process, the EU fined Microsoft a further £175 million in July 2006 for continued failure to obey its orders.

What concessions did Microsoft make?

It allowed its rivals access to the information, but, crucially, it imposed a high royalty rate, claiming it was charging for the innovation involved.

Microsoft initially set a royalty rate of 3.87 per cent of a licensee's product revenues for patents and demanded companies looking for communication information – which it said was highly secret – paid 2.98 per cent of their products' revenues.

Did that satisfy the EU?

No. The EU decided the rate was unjustified. Microsoft continued to levy the charge in most regions until October 2007. Yesterday's fine spans the period of non-compliance from 2004 to then.

Does yesterday's fine mark the end of the spat?

Not necessarily. Only last month, the EU announced it was compiling two new anti-competition investigations into Microsoft, the first examining whether it was fair for the firm to bundle its Internet Explorer browser to Windows, the second further scrutinising the interoperability of Microsoft's Office products with rival software.