Commentary

A $732 Million Fine Is Fine By Microsoft

The Europeans are really, really, really serious about creating a level competitive playing field, as Microsoft learned once again yesterday to the tune of a $732 million fine for a mistake it chalked up to a “technical error.” Or are they?

“The hefty sanction issued by Joaquín Almunia, the EU’s antitrust enforcer, is a serious financial and reputational setback for Microsoft, which carries a special sting given the whistle-blowing role of its archrival Google,” write the Financial Times’ Alex Barker and Richard Waters.

How, you may be wondering, does a company with as many engineers, overseers and marketers as Microsoft make a “technical error” that costs it so much money that might be better spent in, say, developing the “futuristic inventions” it’s working on, or getting its licensing right the first time, or paying Steve Ballmer his full bonus

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Well, first bear in mind, as James Kanter does in the New York Times, that  “Microsoft has been a special case in the history of European Union antitrust enforcement, racking up a total of $3.4 billion in fines over about a decade.” And it’s only a little worse for the wear and tear on the checking account.

In this particular case, the company cut a deal in 2009 with the European Commission, which ensures that EU legislation “is correctly applied,” to include options in its Windows operating system for consumers to use browsers other than its own Internet Explorer. The announcement “means Microsoft must alter its marketing practices in Europe and risks a large fine,” the AP reported when it agreed to “[conduct] our business in full compliance with European law."

At the time, Microsoft’s product “commanded 90% of the operating system market share in Europe and 55% of the browser market,” Information Week’s Mathew J. Schwartz reports. But when an update to Windows 7 came out in May 2011, Explorer was still the only choice, until July 2012, for that OS’s 15 million users.

Microsoft “was left to police its own compliance and Mr. Almunia said the lapse was brought to his attention by a Microsoft rival. According to people involved, Google and Opera informally provided the tip-off and helped investigators,” write the FT’s Barker and Waters.

Since then, IE’s share in the EU “has dropped to just under 30% … which the commission said is partly because of the introduction of the choice screen,” Vanessa Mock reports in the Wall Street Journal.

Microsoft apologized in October 2012. And it apologized again yesterday, saying it “[takes] full responsibility for the technical error” in a statement. “We provided the Commission with a complete and candid assessment of the situation, and we have taken steps to strengthen our software development and other processes to help avoid this mistake -- or anything similar -- in the future.”

The fine, which amounted to about 1% of Microsoft’s global sales during the period in question, could have been as high as 10%, Whitaker points out, indicating that its very public contrition –- which included the personal assurances of Ballmer that it saw the errors of it ways -– was a sound business decision. 

“The world's largest software company can easily pay the fine out of its $68 billion in cash reserves,” reports Reuters’ Foo Yun Chee. “It holds $61 billion of that outside the United States, much of it in Europe, to take advantage of low tax rates.”

But like a stern, finger-wagging parent bellowing “let this be a lesson to you,” Almunia, the EU's competition commissioner, told the gathered global media in Brussels: “I hope this decision will make companies think twice before they even think of intentionally breaching their obligations or even of neglecting their duty to ensure strict compliance.”

But more than one observer thinks the warning is about as effective as a proverbial slap on the wrist. WritesForbes’ Parmy Olsen: “In the cost-benefit analysis of global domination, you can probably label a fine from European regulators as a distraction.”

InfoWorld’s Robert X. Cringely compares the action to the FTC fining Google “almost five hours worth of revenue” for ignoring Safari privacy settings. 

“Fines don't work,” writes Cringely. “They might be a way for bureaucrats to demonstrate they're earning their cushy taxpayer-funded salaries, but as a deterrent, they're less than useless. If you want someone to stop breaking the rules, you need to put a few of them in orange jumpsuits and leg manacles and make them do the perp walk for the cameras.”

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