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Why the EU's Microsoft Fine Is Self-Defeating

March 11, 2013 in Economics

By Dalibor Rohac

Dalibor Rohac

After a long hiatus, the European Commission is once again fining Microsoft. This time, a €561 million penalty was imposed on the software giant for an alleged violation of a prior agreement with the regulators, which required that Windows users be offered an explicit choice between Microsoft Internet Explorer and alternative Web browsers.

Since 2009 when the agreement was made, Explorer’s market share has fallen below 30 percent. “Had no idea they were still making a browser,” an anonymous Twitter denizen joked after this week’s decision had been taken. Some observers thus see the Commission’s decision as a strategic move in its ongoing negotiations with Google, demonstrating that EU competition regulators still have teeth.

Whatever the regulators’ motives, the decision to penalize Microsoft with a hefty fine for what the company claims is a technical glitch is disturbing on several levels. Most fundamentally, the fact that market share of Explorer has been on decline for years is illustrative of the fact that traditional approaches to competition policy do not work well in the 21st century—particularly not in the area of software and information and communication technologies. Explorer is no longer seen as a leading product by consumers, who are switching away from it—regardless of whether they are offered an explicit “choice screen” as required by the European Commission.

Penalizing Microsoft with a hefty fine is disturbing on several levels.”

Markets for information and communication technologies, including software and online platforms, have become incredibly dynamic—more so than any other industry in human history. The innovation cycle in this area is so rapid that companies are able to sustain their technological lead for ever-shorter periods of time—making lock-in with a particular technology standard an increasingly irrelevant problem.

Furthermore, the entry into the software and online business is practically costless—certainly in comparison with industries like energy or transport, which require enormous fixed costs and which have therefore been the traditional focus of competition policy.

Software and Internet giants have come and gone. These days, very few young people have vivid recollections of Word Perfect or Netscape Navigator—once the dominant word processor and web browser, respectively—or sites like Geocities or Altavista. It follows that static measures of market power, used by European regulators, are misleading and will underrate the actual degree of competition existing in the market. Worse yet, policy interventions in this dynamic economic environment are likely to backfire.

In a paper published in 2008, during the heyday …read more
Source: OP-EDS

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