Microsoft’s EU Fine

Today comes the news that Microsoft has been fined 1.3 billion dollars by the European Union. This hot on the heels of last week’s announcement by Microsoft that they were making 30,000 pages of interface and protocol information available to developers who wish to create products to interoperate with Microsoft’s.

Much of the discussion by open source pundits about last week’s announcement is, essentially, criticism that Microsoft is only doing it because they’ve been under the gun from the EU, and that they still expect commercial, although not community, open source developers to pay royalties. In other words, they’re criticising Microsoft because it hasn’t really embraced open source and is only going as far as they have because of political pressure.

Memo to pundits: Duh. Microsoft is the incumbent, and incumbents, whether in politics, business (or even love, I suppose) always give ground grudgingly, haltingly, and, to the greatest extent possible, minimally. Essentially, Microsoft is executing a retreat, and all retreats attempt to give up as little ground as possible.

I don’t expect that any proprietary software vendor, Microsoft included, is going to embrace a business innovation that threatens their core business.

Nevertheless, assuming that the documentation Microsoft has offered up is comprehensive enough to enable developers to truly develop interoperable products, this is a development of enormous significance to open source developers, and, more important, to IT organizations. And even if Microsoft fails to implement this satisfactorily, I’m sure Neelie Kroes will keep after them to ensure it gets it right.

Some commentators, such as CNBC’s Jim Goldman, pooh-pooh the EU’s fine, noting that it represents a miniscule fraction of Microsoft’s income (two week’s cash flow, according to Goldman).

This misses the point. The fine and public opprobrium accompanying it are the stick to gain Microsoft’s compliance with an order to open up its products — and that is where the true impact will be felt.

With the ability of products to legally integrate with Microsoft’s comes the opportunity for IT organizations to retain their existing Microsoft products while surrounding and integrating them with open source products (to embrace and extend, so to speak, to use Microsoft’s terminology). This puts users in a far more powerful position regarding future infrastructure decisions, whereas before they were presented with a choice between continuing to build out using Microsoft’s products or to take a legally risky approach using reverse engineered open source products. This is enormously important, as it provides much more flexibility and control for end users, and for that, all open source advocates and IT users should offer thanks to the EU Competition Commission and Neely Kroes in particular.

The irony in all this is that the grudgingly responsive approach adopted by incumbents almost always plays out less satisfactorily for the incumbent. Microsoft repeatedly stonewalled the EU’s request for interoperabilty information and then finally offered up a royalty rate that the EU rejected; however, if they had been more responsive earlier on and offered up the same royalty rate, it might very well have been accepted. Waiting until now has cost them $1.3 billion.

At the original royalty rate, vendors would have had to sell $43 billion worth of royalty-producing products to provide Microsoft $1.3 billion of royalties; now it will require $216 billion of royalty-producing products to make up for the fine, and this assumes that there are vendors out there that will actually pay royalties, which is uncertain. And Microsoft still have to make the information available. Wouldn’t it have been simpler to make the information available in the first place? Perhaps, as Goldman implies, this is a deliberate strategy on Microsoft’s part, but it seems to me the conflict and customer dissatisfaction engendered by this process will be a far larger sacrifice in the long-term than the revenues achieved in the short-term.