EU turns its sights on Microsoft

John Temple Lang's resignation as the EU's competition policy 'fair play' officer may be the first piece of good news Microsoft Corporation has heard from Brussels for many a year.

The top Irish official, who had been appointed to oversee hearings from companies caught up in the European Commission's antitrust vetting procedures, quit yesterday complaining that his bosses were unwilling to give target firms a stronger voice during investigations.

Competition Commissioner Mario Monti's recent victims, Worldcom, MCI, Time Warner and AOL, will all be hoping that this high-profile departure will shine an unflattering light on Brussels' allegedly conveyor-belt antitrust culture but none will breathe more easily than Seattle's finest.

The commission has investigated the world's second-largest company many times but its ongoing inquiry into claims that Microsoft designed its flagship Windows 2000 software package to stitch up the nascent small-business ecommerce market is potentially the most damaging.

In February, the commission, the European Union's executive agency, opened an inquiry into Windows 2000 Professional, Server and Advanced Server - Microsoft's new family of operating systems that upgrade and replace Windows NT.

Monti wrote to the company following allegations from arch rival Sun Microsystems and some small businesses that Microsoft was using its undoubted muscle in PC operating systems to break into the growing market for the software that drives company-wide 'servers'. These are mega-computers controlling who can access files, run stacks of printers, and drive software applications for group e-mail and databases.

This investigation is deadly serious for Microsoft. The company has spent two years and 1 billion dollars (1.1 billion euro) developing what it describes as the most reliable, highest-performing operating system in our company's history. By mid-year, sales of the operating system licence had topped 3 million and PC manufacturers Compaq, Dell, Hewlett-Packard, IBM and Gateway had marketed systems preloaded with Windows 2000.

At stake is the next growth market for computer technology. IT sector analyst International Data Corporation estimates that worldwide sales of server software now touch 6 billion dollars and are set to grow by 13-15% per annum over the next five years. Measured by volume of shipments, Windows NT leads the field with 38% of the market but Unix, a 31-year-old multi-user operating system offered by many manufacturers including Sun, heads the pack in terms of sales value with a 53% share.

Last year, IDC forecast that Microsoft would have secured a dominant position - more than 50% of the market or a share more than double that of its nearest rival - by 2003. But IDC analyst Dan Kuznetsky revised this forecast because Linux shipments have increased drastically. We thought Linux would be number two by 2001-02, but it's already there, says Kuznetsky.

Linux, an interpretation of the Unix 'kernel' written from scratch with no proprietary code by Linus Torvalds, cannot compete in running big-company servers but it has one serious plus: its cost. Licences to build a Windows 2000 server environment to support 50 PCs - not uncommon with a small enterprise - could set a company back more than 150,000 dollars while a Linux package bought from a retailer is around 150 dollars.

The nub of the commission inquiry is whether Microsoft has deliberately built features into its new desktop package so that it only works effectively with the server software. This is particularly important to Sun since the company produces a version of Unix now called Solaris 8, while its network file system has become the industry standard for sharing files between Unix systems.

According to the allegations, Microsoft has not only bundled its operating system for desktop PCs with its own server software but has also done it with Microsoft 'middleware' - software that manages the interaction between disparate applications across diverse computing platforms - in a way which permits only Microsoft's products to be fully interoperable.

If true, said the commission in the formal 'statement of objections' it sent to Microsoft in August, this would amount to the extension of existing dominance into adjacent markets through the leveraging of market power by anti-competitive means and under the pretext of copyright protection.

The punishment for this is potentially 10% of the company's worldwide revenues, more than 2.5 billion dollars, or the forced withdrawal and redesign of the software. Micosoft's lawyers will be hoping that Temple Lang's departure will bring up short a commissioner who has made fighting with the new TMT firms his speciality.