Microsoft lost its appeal in the EU this morning. Often when we have a ruling, one side focuses on why the ruling makes sense while the other focuses on what a lame-brained decision it was. There is plenty of ammunition for both sides and none of that really matters because it now exists and the market will have to deal with it. This is potentially a game changer. What it means is a lot of regulatory power just popped up into the software business.
The next company likely to be hit by the weapon that was just forged is Apple, though Oracle, IBM, Google and any company that has a strong dominant position assured by proprietary interoperability in a given market could find itself on the wrong side of this thing. This also creates an opportunity for an open source version of Windows and Microsoft could actually benefit from the result, depending on how it plays this out. (Often companies become so focused on the loss that they forget the result is another global rule -- and big companies can often use these rules to advantage because governments suck at this stuff.)
The Trivial Parts There are two small parts of this and one big part. The small parts have to do with the media player and the trustee. In the first case, what it shows is that governments, when coming up with remedies, don't have to come up with remedies that actually do anything. The version of Windows without the media player that has been supplied in Europe isn't selling and the dominant company in the media player space is generally believed to be Apple with iTunes, not the Windows Media Player. For streaming, Adobe Flash is dominant, not Microsoft, and the ruling, and precedent, may actually have an adverse impact on Apple and possibly Adobe in the future. With regard to the trustee, Microsoft won that aspect of the appeal (and given this almost never happens, that is something), but the trustee was largely localized to Microsoft and is somewhat redundant to the mechanism that is already in place from the earlier U.S. DOJ action. So, while it may result in some additional bureaucracy for Microsoft to deal with, it doesn't appear to have any impact on the industry. This isn't cooked yet, however, so once it is we'll likely have a better idea what this part means. Had the trustee part gone the other way and the EU could implement the kind of controlling power paid for by the vendor that they had intended, the precedent could have been much more damaging. The effort showcases an intent to move in that direction (and governments can change laws so the next company that goes down this path may not be as lucky). Still, the lasting impact from these two aspects of the decision seems relatively minor. The first will cause Microsoft extra expense but given that most of us download players (Rhapsody, QuickTime, iTunes) anyway, no lasting competitive disadvantage, and the trustee is both localized and redundant.
The Weapon: Interoperability It's not just that Microsoft has to disclose and license the core technology that allows Microsoft products to work better with other Microsoft products. It is that the EU wants it to do this for free that makes this a potential game changer. Let's say you apply the same rule, which is likely, to Apple (which appears to be next in line for this treatment unless it can find a diplomatic way out). The end result is that all of the infrastructure Apple has so painstakingly built (accessories, iTunes, automotive adapters, etc.) now has to be opened up for free to other companies, including Microsoft.
From the consumer standpoint this could actually be a good thing, except when you think through the fact that it blows up much of the incentive to create such an ecosystem in the first place. The right way to use this weapon is to let some other company go through the painful process of getting a lot of stuff to work well together and then use this new EU weapon to step in and cheaply benefit from the result. For instance, if SanDisk wants to move from 9 percent of the market to 30 percent of the market, it now has a new effective way to do that. China has already started to illegally clone the iPhone; this could open the door for a way to do much of the same legally. ITunes, which is a reverse razor blade model, now has to support phones from third parties passing all of the benefit (iTunes is basically run at slightly above cost) to the third parties and remove a lot of Apple's competitive advantage. Think of Google, which has painstakingly created a massive proprietary network of utilities and platforms to manage advertising revenue, having this precedent used against it by a competitor. Certainly it is as dominant in its space as Apple and Microsoft are with MP3 players and operating systems. Now it is too are vulnerable to this new weapon and may find it has to, for free, allow others access to proprietary technology. However, this too can be gamed. We'll get to that in a moment.
World Impact The other interesting part of all of this is that the complaint was largely driven by and between U.S. companies. I'm not aware of a case (but clearly I am not aware of all cases) where European companies have come to the U.S. to resolve their differences. For multi-nationals, this suggests a power shift from the U.S. to the EU for commerce issues like anti-trust and this too has broad implications. If, as a smaller company, or even a large company moving against a small dominant vendor, you can more easily get the EU to step in on your behalf, that will likely become the new venue of choice. This basically bypassed the U.S. Congress with regard to world commerce and puts the EU where the U.S. used to be. I wonder if this isn't yet another side effect of Iraq and the overall reduction in U.S. influence globally. Without Iraq, I doubt the U.S. would have allowed this to happen unchallenged and might have at least tried to argue that a dispute between U.S. companies should be resolved in the U.S. That certainly wasn't the case here, though, and that too has broad implications for which regulatory bodies companies need to monitor and lobby. The EU does seem to have a more aggressive consumer focus than the U.S. does at the moment but it will also be a much more costly venue for U.S. companies to deal with.
Can Microsoft Benefit? The short answer is yes, but it will depend on how it plays this. While the intent may be to limit Microsoft's competitiveness, this effectively makes Microsoft's methods of interoperability into standards and may force Microsoft to supply them at a price that, had it done this without being forced, would have been seen as predatory. The browser is supplied for free and it is basically a super interoperability platform. If we extend that metaphor between platforms, everyone else, to make use of the free code Microsoft will be supplying, has to conform to it. Yes there can be inexpensive clones, but the companies creating them will still have to patch, update and support those clones and will have to either buy from Microsoft or reverse engineer the parts of the cloned product that complete the offering but aren't provided under this judgment. That won't be trivial at all, and at the end of the day, a buyer is going to assume, given it's Microsoft's technology, that Microsoft will be best able to deal with it; the buyer will have to go to Microsoft for a roadmap and many compatibility issues -- for the most part, anyway. For instance, if you need something fixed so your application will run on a Microsoft platform, it will do you no good to go to a clone company because they don't own the roadmap for the offering and, if you aren't buying from Microsoft, Microsoft will probably not alter its product so your application can work better on the clone. Now the EU can't later go back and try to force Microsoft to charge a fair price for the interoperability components because they ordered Microsoft to give them away for free in the first place.
Open Source Windows: Winux? One of the things this could enable, however, is an open source version of Windows based largely on the free code Microsoft does provide. Just because parts of an offering are proprietary doesn't mean the entire offering has to be and open source lives in a world of multiple licenses. I've often thought that one of the things Microsoft itself should create is a product that embraces both the Windows code base and the open source method of creation, support, distribution and intellectual property ownership. I don't see the current Windows offering competing effectively against the market needs defined by Linux but a derivative is now much more likely. Microsoft would be at the root of any such product and own at least part of the roadmap. This would further fragment open source, create what is potentially a more powerful competitor to both Linux and UNIX, and give Microsoft more power in this open source environment (though not as much certainly as it has in the Windows environment) than it currently has, if successful. This is not to suggest it will be successful but it actually forces Microsoft to think about a path it likely would not have voluntarily chosen and one that might turn out better than the one it is on. (For instance, Dell might prefer it over Linux if it matures properly.)
Wrapping Up This is potentially a world changer and actually could turn out to work positively long term for Microsoft. It reflects a weakening of the U.S. in world commerce issues and suggests multi-nationals will increasingly need to look to the EU for governance regardless of where any of the parties are based. Finally, it has implications for any company that has a dominant position protected by a proprietary interoperability model between platforms where competitors exist. In short, a massive weapon was just forged; learning how to use, benefit from it, or avoid it will now be a full-time job for a lot of people. But, I expect, the lesson that may be learned is that whenever you get a government involved in an industry, the long-term outcome is seldom what you intend.