Tying as Abuse of Article 82 (d) of the EC Treaty - A Study of the Microsoft case

Abstract: On 24 March 2004, the European Commission found Microsoft Corporation guilty of violating Article 82 of the EC Treaty. Consolidated version of the Treaty establishing the European Community, OJ C 325, 24.12.2002. The Commission established two separate violations of the provision. However, the relevant abuse in relation to this thesis was the finding of illegal tying by technical integration of Windows Media Player in Windows Client PC Operating System in a manner inconsistent with Article 82 (d) EC: 'Any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it shall be prohibited as incompatible with the common market insofar as it may affect trade between Member States. Such abuse may, in particular, consist in: [...] (d) making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.' In its Decision, the Commission applied four elements to determine whether tying was abusive. The first condition was that the company concerned had to be in a dominant position in the tying market. The Commission concluded that since Microsoft's market share in the market for client PC operating systems was over 90%, the company was overwhelmingly dominant in this market. A second element of abusive tying was that the tying product (Windows) and the tied product (WMP) had to be separate products. The Commission employed the consumer demand test and considered the existence of vendors who developed and supplied media players separately as evidence of a separate market. In addition, separate distribution of the two products, different functionalities and the character of the industry structures enhanced this view. The third criterion presented by the Commission was unavailability of untied supply. In its Decision, the Commission established that Microsoft did not supply any untied version of Windows nor did it provide any ready technical means of removing the media player from the operating system. Finally, what differentiated Microsoft from earlier case law was the fourth element of abusive tying - a foreclosure effect on the tied market. In view of the fact that Microsoft was overwhelmingly dominant in the market for client PC operating systems, a guaranteed and exclusive distribution method was afforded WMP. In its Decision, the Commission examined the distribution channels available in the media player market and established that there was no equally effective method of distributing media players as the one controlled by Microsoft. In addition, as a result of the indirect network effects produced by Microsoft's behaviour, high barriers to entry were produced. The majority of content providers, developers and end-users had begun to rely on WMP format since Microsoft's tying arrangement guaranteed that WMP was as ubiquitous on the market as Windows. As a consequence, Microsoft attained an exceptionally advantageous position in the market for media players. This position was not a result of the merits of Microsoft's media player but instead an effect of the tying arrangement employed by the company. Considering these factors, the Commission concluded that Microsoft had indeed infringed Article 82 (d) by technically integrating WMP with Windows. Thus, along with a &euro&semic497 million fine, the Commission ordered Microsoft to supply a full-functioning untied version of Windows. In essence, the Decision presents a shift in the structure of analysis in tying cases. Prior to Microsoft, a form-based approach was applied as tying was prohibited per se. In contrast, the Commission's reasoning in Microsoft represents a more effects-based analysis since the foreclosure effect of the tie was a key element in the assessment. However, not everyone agree on the altered legal status of tying in EC competition law. While the Commission argues that it balanced the anti-competitive effects and the pro-competitive benefits of the tie in a manner similar to the US 'rule of reason' approach, others dismiss the Commission's approach as a modified per se illegality test. Other aspects of the case have also produced deviating opinions, for example, the effects on innovation and whether the Decision protects single competitors rather than competition as a means of enhancing consumer welfare. Criticism against the Decision has focused on the use of the consumer demand test, the standard and burden of proof applied by the Commission, in addition to the lack of guidance in relation to the concept of 'competition on the merits'. While Microsoft demonstrates a new position concerning the assessment of abusive tying, the case does not display an altered position concerning the illegality of abusive tying. The Commission's approach as portrayed by the high evidentiary requirements on the dominant undertaking reflects a continued suspicious attitude towards tying. In addition, the economic aspects of tying remain underdeveloped in EC competition law. Thus, in my view, it was the method of assessing the tie that was flawed in Microsoft, not necessarily the conclusion.