Commission Decision of 24 May 2004 relating to a proceeding pursuant to Article 82 of the EC Treaty and Article 54 of the EEA Agreement against Microsoft Corporation (Case COMP/C-3/37.792 — Microsoft) (notified under document number C(2004) 900) (Text with EEA relevance)
Date: 2004-05-24
Institutions: European Commission
Subjects: application of EU law, dominant position, information technology industry, infringement procedure (EU), systems interconnection

6.2.2007

EN

Official Journal of the European Union

L 32/23

COMMISSION DECISION

of 24 May 2004

relating to a proceeding pursuant to Article 82 of the EC Treaty and Article 54 of the EEA Agreement
against Microsoft Corporation

(Case COMP/C-3/37.792 — Microsoft)

(notified under document number C(2004) 900)

(Only the English text is authentic)

(Text with EEA relevance)

(2007/53/EC)

On 24 March 2004, the Commission adopted a decision relating to a proceeding pursuant to Article 82 of the EC Treaty
and Article 54 of the EEA Agreement. In accordance with the provisions of Article 21 of Regulation No 17 (1), the
Commission herewith publishes the names of the parties and the main content of the decision, having regard to the
legitimate interest of undertakings in the protection of their business secrets. A non-confidential version of the full text of
the decision can be found in the authentic languages of the case and in the Commission’s working languages at DG
COMP’s Web site at http://europa.eu.int/comm/competition/index_en.html.

I.

SUMMARY OF THE INFRINGEMENT

Addressee, nature and duration of the infringement

(1)

This Decision is addressed to Microsoft Corporation.

(2) Microsoft Corporation has infringed Article 82 of the EC

Treaty and Article 54 of the EEA Agreement by:

architecture. ‘Porting’ (that is to say, adapting) a non-Intel-
compatible operating system (for example Apple’s Macin-
tosh) to run on Intel-compatible hardware is a long and
costly process. However, the question of the inclusion of
Intel-compatible and non-Intel-
operating systems
compatible PCs in the definition of the relevant market
can be left open since the difference will not be such as to
alter the result of the assessment of Microsoft’s market
power.

for

— refusing to supply interoperability information and
allow its use for the purpose of developing and
distributing work group server operating system
products, from October 1998 until the date of this
Decision,

(5) Operating systems for handheld devices such as personal
digital assistants (PDA) or ‘intelligent’ mobile phones and
operating systems for servers cannot presently be regarded
as competitive substitutes for client PC operating systems.

— making the availability of the Windows Client PC
Operating System conditional on the simultaneous
acquisition of Windows Media Player (WMP) from
May 1999 until the date of this Decision.

The relevant markets

PC operating systems

(3) Operating systems are software products that control the
basic functions of a computer. ‘Client Personal Computers’
(PCs) are general-purpose computers designed for use by
one person at a time and that can be connected to a
computer network.

(6) As regards supply-side substitutability, a software product
that is not presently in the market for client PC operating
systems would have to be substantially modified in order to
adapt to the specific needs of consumers in that market.
This entails a development and testing process that involves
a substantial amount of time (often above one year) and
expenses, and entails a substantial commercial
risk.
Furthermore, as is established when discussing Microsoft’s
dominance in the relevant market, such a new entrant
would face significant barriers to entry.

Work group server operating systems

(4) A distinction could be made between (i) operating systems
for
so-called ‘Intel-compatible’ PCs and (ii) operating
systems for non-Intel-compatible PCs. ‘Intel-compatible’ in
to a specific type of hardware
that context

relates

(7)

‘Work group server services’ are the basic services that are
used by office workers in their day-to-day work, namely
sharing files stored on servers, sharing printers, and having

(1) OJ 13, 21.2.1962, p. 204/62. Regulation as last amended by Regulation (EC) No 1/2003 (OJ L 1, 4.1.2003, p. 1).

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their rights as network users ‘administered’ centrally by
their organisation’s Information Technology department.
‘Work group server operating systems’ are operating
systems designed and marketed to deliver these services
collectively to relatively small numbers of PCs linked
together in small to medium-sized networks.

tightly linked to the provision of group and user
administration services. Since work group server operating
systems are as a rule used with inexpensive hardware, these
applications will generally not
require extremely high
reliability.

(8)

Evidence gathered by the Commission in the course of its
investigation has confirmed that work group server services
are viewed by customers as constituting a distinct set of
services provided by servers. In particular, the provision of
file and print services on the one hand and of group and
user administration services on the other hand are closely
interrelated:
there were no proper group and user
administration, the user would not have efficient and secure
access to file and print sharing services.

if

Streaming media players

(12) Media players are client-side software applications, the core
functionality of which is to decode, decompress and play
(and further allow the processing of) digital audio and video
files downloaded or streamed over the Internet (and other
networks). Media players are also capable of playing back
audio and video files stored on physical carriers such as
CDs and DVDs.

(9) Work group servers (servers that run a work group server
operating system) must be distinguished from high-end
servers that are generally needed to support
‘mission-
critical’ tasks, such as inventory control, airline reservations
or banking transactions. Such tasks may involve the need to
support storage of vast amounts of data and require
maximum (often termed rock-solid) reliability and avail-
ability (2). They are carried out by expensive machines
(sometimes called enterprise servers) or by mainframes. By
contrast, work group server operating systems are generally
installed on less expensive computers.

(13) As regards demand-side substitutability, classical playback
devices such as CD and DVD players are not substitutes for
media players as they offer a very limited subset of the
media player functionalities. Media players which depend
on third parties’ proprietary technologies are, in contrast to
Microsoft’s WMP, RealNetworks’ RealOne Player and
Apple’s QuickTime Player, not likely to constrain the third
parties’ behaviour. Media players unable to receive audio
and video content streamed over the Internet are not
substitutes for streaming media players since they do not
satisfy specific consumer demand for streaming.

(10) However, not all low-end server machines are used as work
group servers. For instance, low-end servers can also be
installed at the ‘edge’ of networks and be specialised in web
serving (3), web caching (4) or firewall (5) to the exclusion of
the core work group server services.

(14) As

regards

supply-side substitutability,

the significant
the protection of existing
necessary R&D investments,
media technologies through IP rights and the indirect
network effects characterising the market translate into
entry barriers for developers of other software applications
including non-streaming media players.

(11)

It should also be pointed out that whilst only file, print and
group and user administration services constitute the core
work group server services, work group server operating
systems can be used to run applications, as is the case with
other operating systems. These applications will often be

(2) Reliability is the ability of an operating system to function for a long
period of time without malfunctioning or having to be rebooted.
Availability is the ability of an operating system to function for a
long period of time without having to be taken out of service for
routine maintenance or upgrades. Another aspect of availability is
how fast an operating system can get back up and running after a
failure has occurred.

(3) A web server hosts web pages and makes them accessible through

standard web protocols.

(4) A cache is a place where temporary copies of web objects are kept.
Web caching is therefore a way of storing web files for later re-use in
a way that speeds up the access for the end user.

(5) A firewall is a hardware/software solution that isolates organisations’
computer networks and thereby protects them against external
threats.

Dominance

PC operating systems

(15) Microsoft has acknowledged that

it holds a dominant

position in the PC operating system market.

(16) This dominant position is characterised by market shares
that have remained very high at least since 1996 (90 % + in
recent years), and by the presence of very high barriers to
entry. These barriers to entry are in particular linked to the
presence of indirect network effects. Indeed, the popularity
of a PC operating system among users derives from its
popularity among vendors of PC applications, which in
turn choose to focus their development efforts towards the
PC operating system which is most popular among users.

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This creates a self-reinforcing dynamic that protects
Windows as the de facto standard for PC operating systems
(applications barrier to entry).

Work group server operating systems

(17) The Commission concludes that Microsoft has achieved a
dominant position in the work group server operating
system market. This conclusion rests in particular on the
following findings:

— The Commission has examined a variety of data in
order to measure Microsoft’s market share in the work
group server operating system market. All
these
datasets confirm that Microsoft holds by far the
leading market share, which, under every measure, is
above 50 %, and for most measures, is in the 60 %
75 % range.

— There are barriers to entry in the work group server
operating system market. In particular, the easier it is
to find technicians skilled in administering a given
work group server operating system,
the more
customers are inclined to purchase that work group
server operating system. In turn, however, the more
popular a work group server operating system is
among customers, the easier it is for technicians (and
the more willing technicians are) to acquire skills
related to that product. This mechanism can be
formalised from an economic perspective in terms of
network effects.

— There are strong commercial and technical associative
links between the PC operating system market and the
work group server operating system market. As a
result, Microsoft’s dominance over the PC operating
system market has a significant impact on the adjacent
market for operating systems for work group servers.

Refusal to Supply

(18) The Decision makes the following findings.

— Microsoft has refused to provide Sun with information
enabling Sun to design work group server operating
systems that can seamlessly integrate in the ‘Active
Directory domain architecture’, a web of interrelated
client PC-to-server and server-to-server protocols that
organise Windows work group networks.
is
noteworthy that,
in order to allow Sun to provide
for such seamless integration, Microsoft only had to
provide specifications of the relevant protocols, that is
to say, technical documentation, and not to give access
to the software code of Windows, let alone to allow its
reproduction by Sun. There are two further factual
circumstances of the refusal at issue that must be
pointed out. First, Microsoft’s refusal to Sun is part of
a broader pattern of conduct of refusing the relevant

It

information to any work group server operating
system vendor. Second, Microsoft’s refusal constitutes
a disruption of previous levels of supply, since the
analogous
information for previous versions of
Microsoft’s products had been made available to Sun
indirectly through a
and to the industry at large,
licence to AT&T.

— Microsoft’s refusal risks eliminating competition in
the relevant market for work group server operating
systems because the refused input is indispensable for
competitors operating in that market. Customer
evidence confirms the link between on the one hand,
the privileged interoperability that Microsoft’s work
group server operating systems
enjoy with its
dominant PC operating system, and on the other
hand,
to dominance (and the
the Active
increasing uptake of
Directory domain architecture that are incompatible
with competitors’ products). The Commission’s inves-
tigation also shows that there is no actual or potential
substitute to the refused input.

the features of

rapid rise

their

— Microsoft’s refusal limits technical development to the
prejudice of consumers, in contradiction in particular
with Article 82(b). If competitors had access to the
refused information, they would be able to provide
new and enhanced products to the consumer.
In
particular, market evidence shows that consumers
value product characteristics such as security and
reliability, although those characteristics are relegated
to a secondary position due to Microsoft’s interoper-
ability advantage. Microsoft’s refusal thereby indirectly
harms consumers.

(19) These circumstances of an exceptional nature lead to the
conclusion that Microsoft’s refusal constitutes an abuse of a
dominant position incompatible with Article 82, unless it is
objectively justified.

(20) Microsoft’s claimed justification for

its refusal

is that
providing the information at stake and allowing competi-
tors to use it in order to make compatible products would
be tantamount to licensing intellectual property rights. The
Commission did not take a position on the validity of
Microsoft’s general
intellectual property claims, which
could in any event only be ascertained on a case by case
basis when Microsoft has prepared the relevant specifica-
tions. However, according to the jurisprudence, an under-
taking’s interest in exercising its intellectual property rights
cannot in itself constitute an objective justification when
exceptional circumstances such as the ones identified above
are established.

(21) The Commission investigated whether, under the specific
circumstances of this case, Microsoft’s proffered justifica-
tion outweighed these exceptional circumstances and

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concluded that Microsoft had not provided any evidence to
that effect. In particular, an order to supply the relevant
information could not lead to the cloning of Microsoft’s
product. The Commission also took account of the fact that
disclosure of information of the kind refused by Microsoft
was commonplace in the industry.

indeed recognises that

(22) Furthermore, the Commission drew inspiration from the
undertaking made by IBM to the Commission in 1984 (the
IBM Undertaking) (6), and from the 1991 Software
Directive (7). Microsoft
the IBM
Undertaking and the Software Directive provide useful
guidance for the present case. The Commission concluded
that an order to supply in the present case would be
analogous to the IBM Undertaking, in that it would only
relate to interface specifications. The Commission also
concluded that the refusal at issue was a refusal to supply
interoperability information, in the sense of the Software
Directive. In that respect, the Commission noted that the
Software Directive restricted the exercise of copyright over
software (including exercise by non-dominant undertak-
in favour of interoperability, thereby stressing the
ings)
importance of interoperability in the software industry. It
also noted that the Software Directive explicitly provided
that its provisions were without prejudice to the application
of Article 82,
in particular if a dominant undertaking
refused to make information available which is necessary
for interoperability.

(23) Microsoft

its

to supply
further argued that
refusal
interoperability information could not be
aimed at
restricting competition in the work group server operating
system market, because the company had no economic
incentive to pursue such a strategy. The Commission
rejected Microsoft’s argument, noting that it was based on
an economic model that did not fit the facts in this case and
was inconsistent with the views expressed by Microsoft’s
executives in Microsoft internal documents obtained during
the investigation.

Tying

(24) The Decision finds that Microsoft infringes Article 82 of
the Treaty by tying WMP with the Windows PC operating
system (Windows). The Commission bases its finding of a
tying abuse on four elements:
(i) Microsoft holds a
dominant position in the PC operating system market; (ii)
the Windows PC operating system and WMP are two
separate products; (iii) Microsoft does not give customers a
choice to obtain Windows without WMP; and (iv) this tying
forecloses competition. In addition, the Decision rejects
Microsoft’s arguments to justify the tying of WMP.

(6) Commission Case IV/29.479. The Commission suspended its
following that

investigation, which had started in the 1970s,
undertaking by IBM.

(7) Council Directive 91/250/EEC (OJ L 122, 17.5.1991, p. 42).

(25) Microsoft does not dispute that

it holds a dominant

position in the PC operating system market.

(26) The Commission Decision finds that streaming media
players and PC operating systems are two separate products
(rejecting Microsoft’s argument that WMP is an integral
part of Windows). The Decision first sets out that although
Microsoft has been tying its media player with Windows for
some time, there remains today separate consumer demand
for stand-alone media players, distinguishable from demand
for PC operating systems. Secondly, a number of vendors
develop and supply media players on a stand-alone basis.
Thirdly, Microsoft itself develops and distributes versions of
its WMP for other PC operating systems. Finally, Microsoft
promotes WMP in direct competition with third party
media players.

(27) As regards the third tying element, the Decision finds that
Microsoft does not give customers a choice to obtain
Windows without WMP. PC manufacturers must license
Windows with WMP. If they want to install an alternative
media player on Windows, they can only do so in addition
to WMP. If a user buys Windows in a retail store, the same
considerations apply. The Decision considers Microsoft’s
arguments that customers need not pay ‘extra’ for the WMP
and that they need not use it to be irrelevant in the context
of determining whether there is coercion under Article 82
of the Treaty.

tying of WMP to Windows

(28) The Decision then explains why tying in this particular case
is liable to foreclose competition. The Decision sets out that
the
affords Microsoft
unmatched ubiquity of its media player on PCs worldwide.
The relevant evidence reveals that other distribution means
are second best. By tying WMP to Windows, Microsoft can
offer content providers and software developers
that
support the Windows Media technologies the ability to
rely on the Windows monopoly to reach almost all PC
users worldwide. Evidence shows that supporting several
media technologies generates additional costs. As such,
WMP’s ubiquitous presence induces content providers and
software developers to rely primarily on Windows Media
technology. Consumers will in turn prefer to use WMP,
since a wider array of complementary software and content
tying
will be available for
reinforces and distorts
to its
advantage, thereby seriously undermining the competitive
process in the media player market. Evidence shows that
WMP usage increases due to tying, while other media
players are rated more highly in terms of quality by users.
Market data as regards media player usage, format usage, as
well as content offered by web sites point to a trend in
favour of usage of WMP and the Windows Media formats
to the detriment of the main competing media players (and
media player technologies). Whilst the Decision highlights

that product. Microsoft’s
these ‘network effects’

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this trend in favour of WMP and the Windows Media
format, the Decision also emphasises that, on the basis of
the case law of the Court, the Commission is, in particular,
not required to prove that competition has already been
foreclosed or that there is a risk of the elimination of all
competition to establish a tying abuse. Otherwise, antitrust
scrutiny in certain software markets would come too late as
evidence of market impact could only be demonstrated
once the market had ‘tipped’.

in particular

(29) Finally, the Decision discusses Microsoft’s arguments to
justify the tying of WMP,
the alleged
efficiencies of tying WMP to Windows. With regard to
alleged distribution efficiencies,
the Commission rejects
Microsoft’s argument that tying lowers transaction costs for
consumers by reducing time and confusion through having
a set of default options in a personal computer ‘out-of-the-
box’. The benefit of having a media player pre-installed
along with the client PC operating system does not require
that Microsoft selects the media player for consumers. PC
manufacturers can ensure that consumer demand for pre-
installed media players of their choice is met. The Decision
also finds that Microsoft has not put forward any technical
efficiency for which ‘integration’ of WMP would prove to be
a precondition. The tying of WMP rather shields Microsoft
from effective competition from potentially more efficient
media player vendors, which could challenge its position,
thus reducing the talent and capital invested in innovation
in respect of media players.

II.

REMEDIES

Refusal to Supply

(30) The Decision orders Microsoft to disclose the information
that it has refused to supply and to allow its use for the
development of compatible products. The disclosure order
is limited to protocol specifications, and to ensuring
interoperability with the essential features that define a
typical work group network. It applies not only to Sun, but
in developing
to any undertaking that has an interest
that constitute a competitive constraint
products
to
Microsoft
in the work group server operating system
market. To the extent that the Decision might require
its
Microsoft
intellectual property rights, this would be justified by the
need to put an end to the abuse.

to refrain from fully enforcing any of

(31) The conditions under which Microsoft shall disclose the
information and allow the use thereof must be reasonable
and non-discriminatory. The requirement for the terms
imposed by Microsoft to be reasonable and non-discrimi-
natory applies in particular to any remuneration that

the

reflect

Microsoft might charge for supply. For example, such
strategic value
remuneration should not
stemming from Microsoft’s market power
in the PC
operating system market or in the work group server
operating system market. Furthermore, Microsoft may not
impose restrictions as to the type of products in which the
specifications may be implemented,
if such restrictions
create disincentives
to compete with Microsoft, or
unnecessarily restrain the ability of the beneficiaries to
innovate. Finally, the terms imposed by Microsoft in the
future must be sufficiently predictable.

(32) Microsoft must disclose the relevant protocol specifications
in a timely manner, that is to say, as soon as it has produced
a working and sufficiently stable implementation of these
protocols in its products.

Tying

(33) Concerning the tying abuse, the Decision orders Microsoft
to offer to end users and OEMs for sale in the EEA a full-
functioning version of Windows which does not incorpo-
rate WMP. Microsoft retains the right to offer a bundle of
Windows and WMP.

to WMP, by providing selective access

(34) Microsoft must refrain from using any means which would
have the equivalent effect of tying WMP to Windows, for
example by reserving privileged interoperability with
Windows
to
Windows APIs, or by promoting WMP over competitors’
products through Windows. Microsoft is also prevented
from giving OEMs or users a discount conditional on their
obtaining Windows
facto,
financially or otherwise, removing or restricting OEMs’ or
users’ freedom to choose the version of Windows without
WMP. The unbundled version of Windows must not be less
performing than the version of Windows which comes
bundled with WMP, regard being had to WMP’s function-
ality which, by definition, will not be part of the unbundled
version of Windows.

together with WMP, or de

III.

FINES

Basic amount

(35) The Commission considers that the infringement constitu-
tes by its nature a very serious infringement of Article 82 of
the EC Treaty and Article 54 of the EEA Agreement.

(36) Furthermore,

the pattern of

exclusionary leveraging
behaviour engaged in by Microsoft has a significant impact
on the markets for work group server operating systems
and for streaming media players.

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(37) For the purposes of assessing the gravity of the abuses, the
markets for client PC operating systems, for work group
server operating systems and for media players are EEA-
wide in scope.

(39) Finally, the basic amount of the fine is increased by 50 % to
take account of the duration of the infringement (five and a
half years). The basic amount of the fine is therefore set at
EUR 497 196 304.

(38) The initial amount of the fine to be imposed on Microsoft
to reflect the gravity of the infringement should be, in light
the above circumstances, EUR 165 732 101. Given
of
Microsoft’s significant economic capacity (8),
in order to
ensure a sufficient deterrent effect on Microsoft, this figure
is
to
by
adjusted
EUR 331 464 203.

upwards

factor

two

of

a

Aggravating and attenuating circumstances

(40) There are no aggravating or attenuating circumstances

relevant to this Decision.

(8) Microsoft is currently the largest company in the world by market
capitalisation (see http://news.ft.com/servlet/ContentServer? pagen-
ame=FT.com/StoryFT/FullStory&c=StoryFT&-
cid=1051390342368&p=1051389855198 and http://specials.ft.
com/spdocs/global5002003.pdf — the Financial Times ‘World’s
largest Companies’, updated on 27 May 2003, printed on 13 January
2004). According to the same measure, Microsoft has held a
consistently high ranking in the list of the world’s largest companies
by market capitalisation, being the largest in 2000, the fifth largest in
2001, and the second largest in 2002 (see http://specials.ft.com/ln/
specials/global5002a.htm (for 2000, printed on 24 January 2003),
http://specials.ft.com/ft500/may2001/FT36H8Z8KMC.html
(for
2001, printed on 24 January 2003), http://specials.ft.com/ft500/
may2002/FT30M8IPX0D.html (for 2002, printed on 24 January
2003)). Microsoft’s
resources and profits are also significant.
Microsoft’s Securities and Exchange Commission filing for the US
fiscal year July 2002 to June 2003 reveals that it possessed a cash
(and short-term investment) reserve of USD 49 048 million on June
this Securities and Exchange
30, 2003. As
Commission filing indicates that in US fiscal year July 2002 to June
2003, Microsoft earned profits of USD 13 217 million on revenues
of USD 32 187 million (profit margin of 41 %). For the Windows PC
client PC operating system product during this period (‘Client’
product segment), Microsoft earned profits of USD 8 400 million on
revenues of USD 10 394 million (profit margin of 81 %).

regards profits,