EU fines Microsoft $1.35 billion for non-compliance with antitrust decision

Wednesday, February 27, 2008

The European Union (EU) competitions commission has announced its decision to fine the Microsoft Corporation 899 million (US$1.35 billion), approximately 1/10th of the company's gross yearly earnings, for failing to comply with the 2004 antitrust order. It is the highest ever fine charged by the EU (also being the largest fine of its kind ever imposed upon a company), and the first time that the EU has fined a company because of non-compliance with an antitrust decision.

The first decision in this antitrust case was given in 2004 citing that Microsoft withheld needed interoperability information from rival software companies which prevented them from making software compatible with Windows. The commission ordered Microsoft to provide this information. Microsoft agreed to this, providing the information for royalty fees of 6.5% of the licensee's revenues for the product on grounds of innovation (specifically, 3.87% for the patent license and of 2.98% for the information license). The EU found these royalty fees unreasonable and Microsoft was ordered to lower them. Microsoft complied with this, adjusting the royalty rates to 1.2% (changing the rates for the licenses to 0.7% and 0.5%, respectively) in the European Union, while keeping the rate the same for the rest of the world. The EU still saw this as an unreasonable rate, and Microsoft, two month after lowering the rates, reduced the rates yet again to a flat rate of €10000 or a royalty of 0.4% applicable worldwide. Microsoft's royalty rates, which were deemed unreasonable for the period of 15 months between June 21, 2006 and October 21, 2007 are the cause for the fine. So far, the EU has fined Microsoft €1.68 billion in 3 separate fines in this case. This fine will go towards the European Union annual budget.

The European Anti-trust commissioner Neelie Kroes stated that the fine was "reasonable and proportionate", as the figure could have gone up as high as €1.5 billion, the maximum that the EU commission can impose. She also said that it should act as "a signal to the outside world, and especially Microsoft, that they should stick to the rules" and that "Talk is cheap. Flouting the rules is expensive". Although she also expressed hope that "today's decision closes a dark chapter in Microsoft's record of non-compliance with the Commission".

There is no certainty whether Microsoft will appeal this decision, a Microsoft Spokesperson has stated that Microsoft will review this latest fine, citing that "The commission announced in October 2007 that Microsoft was in full compliance with the 2004 decision, so these fines are about the past issues that have been resolved." Microsoft`s General Counsel Brad Smith commented "It's clearly very important to us as a company that we comply with our obligations under European law. We'll study this decision carefully, and if there are additional steps that we need to take in order to comply with it, we will take them." Microsoft had appealed to fines by the EU before, but all the charges were defeated. If Microsoft does not appeal the decision, the company will have 3 month (starting February 27th) to pay the fine in full. The fine must be paid in Euros.

Microsoft CEO Steve Ballmer stated that the company had news that the fine was pending. "We knew it was pending," Ballmer told interviewers. "We didn't know it was this week, but we knew it was coming at some point."

This may not be the end of Microsoft's troubles with the European Union yet, as the commission is currently investigating two other complaints about the company's anti-competition practices.

The decisions came after Microsoft announced they were disclosing 30,000 pages of previously secret software code last Thursday (February 21st). The EU competition commissioner's commented that this move "does not necessarily equal a change in business practice."

Microsoft was set to launch three new products: Windows Server 2008, SQL Server 2008 and Visual Studio 2008 at its "Heroes Happen Here" event today. Microsoft shares slipped 12 cents to $28.26 on NASDAQ after news of the fine.