Blog Post

Microsoft fined for non-compliance: a game-changer in antitrust settlements

The European Commission has crossed into new territory. For the first time, it has sanctioned a company for not abiding by an antitrust settlement: a €561million fine imposed on Microsoft for not keeping to promises made by the company back in 2009.

By: Date: March 6, 2013 Topic: European Macroeconomics & Governance

The European Commission has crossed into new territory. For the first time, it has sanctioned a company for not abiding by an antitrust settlement: a €561million fine imposed on Microsoft for not keeping to promises made by the company back in 2009 (see the Commission press release).

Background. The case is one of the last outstanding issues stemming from the clash between the Commission and Microsoft that started in the early 2000s, when the company still faced little or no competition in computer-related markets. Microsoft was accused of tying its internet browser Explorer to Windows, de-facto leveraging its dominance in the operating systems market in order to protect or extend its power in the browser market. This practice is sanctionable by a fine of up to 10% of Microsoft’s global turnover under Article 102 of the Treaty on the Functioning of the European Union.

Microsoft originally escaped the fine by entering into a settlement with the Commission. Under the terms of that settlement, Microsoft had to provide computer users with a ‘ballot screen’ so that they could compare all major potential available alternatives and choose whether to stick to Explorer or swiftly switch to another browser (see Ms Kroes announcement at the time). That gave enough confidence to Microsoft’s competitors that a level playing field in the browser market was restored. However, between May 2011 and July 2012, the ballot screen did not pop up in Windows 7 – service pack 1. Today’s Commission decision punishes this as an infringement of the settlement agreement.

The significance of this fine goes far beyond the Microsoft case. As I mentioned already in a previous Bruegel blog post (European antitrust fines: a new wave of deterrence?), levying fines in antitrust is mostly about sending signals to discourage companies from breaching antitrust laws in the future. Companies refrain from entering into cartels or abusing their dominant position if what they expect to gain (ie the additional profit with respect to a counterfactual scenario in which they compete fairly) is less than what they expect to lose (ie the fine imposed by the antitrust authority if the illegal activity is discovered). The question is then: does it make sense to offer a company that allegedly caused harm to consumers an easy way-out, such as a settlement with no accessory fine entailed, as was the case with Microsoft in 2009?

Costs and benefits of settlements. From an economic perspective the answer is not straightforward. First, there is a risk that a settlement as opposed to an immediate fine will reduce deterrence by reducing the expected costs associated with the abuse. If I know that Almunia will offer me a chance to settle, why not breach competition law, reap the benefits today and then go back to competition after the settlement is done? Second, by definition, the settlement is a compromise. So there is a chance that not all outstanding issues will be sorted out, particularly because a settlement comes after a preliminary assessment by the Commission (in the form of a statement of objections), and issues that would have been tackled in a final infringement decision might not yet have been identified at that stage of the process. Third, and perhaps most importantly: with a settlement the strength of a case cannot be fully assessed, since it is extremely unlikely that a settlement would end up in court, and it leaves no legal precedent, reducing the chance to provide guidance to industry on the antitrust treatment of novel issues, leaving unaltered the likelihood that the same problem will occur again in the future. A settlement cures the symptom, not the illness.

However, settlements have juicy counterbalancing features that perhaps can explain their increasing popularity in EU antitrust proceedings. In dynamic industries (such as ICT), timing is critical. A settlement allows quick identification of the issue and the introduction of a correction in the market in order to restore normal competitive conditions almost immediately. The life-cycle of an antitrust proceeding may often outlive that of a computer or a tablet. It would be of little consolation to consumers to overpay for a product for years and then witness the levying of a huge fine in relation to a product they do not use anymore. A settlement also acts at once against the source of extra profit arising from the abusive conduct. In the case of antitrust proceedings with no settlement, that may not happen: the abusive conduct may be perpetrated until the final decision is taken. Therefore, even if it may reduce the expected costs associated with abusive conduct, a settlement can nevertheless reduce its expected benefits.

In addition, a settlement may not run the risk of overlooking outstanding issues if the proposed commitments are properly market-tested before the settlement decision is taken. In that sense, given the level of uncertainty at the time of the statement of objections about the nature and the relevance of the factors that led to the abuse, a settlement may offer an opportunity to the Commission to minimise the risk of future anti-competitive behaviour by imposing the acceptance of conditions that are designed to open the market. For example, in the case of an antitrust abuse in the airlines industry, a settlement package may entail the release of slots at important airports in order to favour entry and reduce the likelihood of a future abuse of dominance. In a way, this means that post-settlement, a company’s profit may be lower than what it would have been if the abuse had not been perpetrated in the first place. This may provide enough discouragement so that the possibility of a settlement in case things go bad and an antitrust investigation is launched would not alter a company’s incentive to breach antitrust laws.

A game changer. Crucially, the balance between the costs and benefits of a settlement depends on the credibility of the commitments. If the commitment is really implemented and is capable of bringing the market back to competition from day 1, going for settlements can certainly have a positive effect on general welfare. Guidance on the treatment of novel cases can still be given through dedicated guidelines; meanwhile the abuse is stopped and customers are better-off.

But checking compliance with commitments is a difficult task, especially when commitments do not entail structural divestments but rather specific conduct on the part of the dominant company: this may be very difficult to monitor, particularly at a time in which the Commission is struggling with declining available resources. But if non-compliance entails little risk of incurring significant costs, the whole credibility of the settlement as a welfare-improving tool is questionable. In that light, Almunia’s decision to sanction for the first time a company for non-compliance with a settlement has a clear motive. Almunia cannot increasingly rely on settlements for his antitrust investigations without being certain that those settlements will effectively right the wrong that prompted the investigation (see the most recent examples: E-books, Thomas Reuters, Rio Tinto Alcan). One of the most important high-profile cases currently on Almunia’s agenda, the Google search-bias case, is expected to end up in a settlement after the Summer. In the context of a similar case, Google recently settled with the Federal Trade Commission in the US. However, in the US, Google made non-binding commitments that generated harsh criticism about the effectiveness of the remedy, should it be needed (see, for example, the concurring and dissenting opinion of Commissioner Rosch). In addition to remarkable differences in the substance of the settlement, the Commission take on the Google case will therefore be likely to have a significantly different impact than in the US.

Today’s Commission decision on Microsoft implies that should Google decide to enter into a settlement with DG Competition, it will have to exert extra care to not give the impression that it is deviating from the commitments that such a settlement will entail. The potential price to pay for sending the wrong signal is a fine up to 10% of the company’s global turnover.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.


Warning: Invalid argument supplied for foreach() in /home/bruegelo/public_html/wp-content/themes/bruegel/content.php on line 449
View comments
Read article More on this topic More by this author

Blog Post

The international use of the euro: What can we learn from past examples of currency internationalisation?

The recent State of the Union speech by Jean-Claude Juncker sparked a discussion about the potential wider use of the euro on the international stage. Historically, it is not the first debate of this kind. Emmanuel Mourlon-Druol analyses four previous cases of debates on international currencies to reveal the different scenarios associated with their greater use, as well as the need to have a clear objective for a currency’s internationalisation.

By: Emmanuel Mourlon-Druol Topic: European Macroeconomics & Governance Date: October 15, 2018
Read about event More on this topic

Upcoming Event

Oct
23
12:30

Europe: Back to the future of a political project

This event will feature a discussion on different ideas for reforming European Governance.

Speakers: Ulrike Guerot, Adriaan Schout and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic More by this author

Podcast

Podcast

Director’s Cut: How does Italy’s budget fit with EU fiscal rules?

In this Director’s Cut of ‘The Sound of Economics’, Guntram Wolff welcomes Bruegel research fellow Grégory Claeys to assess how the new Italian budget proposals measure up against the existing EU fiscal rules.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: October 9, 2018
Read article More on this topic More by this author

Opinion

Greece: What to expect after the bail-out

After being under the close scrutiny of three financial assistance programmes since May 2010, Greece has finally left the bail-out in August 2018. How different is the post-bail-out era from the preceding eight years? Will Greece be able to stand on its own? And how might the country improve its economic outlook? In this post, which summarises a presentation recently given at an Athens conference, the author answers these three questions.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: October 9, 2018
Read article More on this topic

Blog Post

Improving the efficiency and legitimacy of the EU: A bottom-up approach

The 2019 European elections promise to be a watershed moment for the EU. A recent Bruegel paper made the case for restructuring the Union’s model of governance and integration. The authors of this post critically assess this proposed institutional engineering, and argue for the principle of “an ever closer union” to be safeguarded by a bottom-up approach to respond to the common needs of the citizens.

By: Silvia Merler, Simone Tagliapietra and Alessio Terzi Topic: European Macroeconomics & Governance Date: October 9, 2018
Read article More on this topic

Blog Post

Italy’s new fiscal plans: the options of the European Commission

The Italian government has announced an increase of its deficit for 2019, breaking the commitment from the previous government to decrease it to 0.8% next year. This blog post explores the options for the European Commission and the procedures prescribed by the European fiscal framework in this case.

By: Grégory Claeys and Antoine Mathieu Collin Topic: European Macroeconomics & Governance Date: October 8, 2018
Read article More on this topic More by this author

Blog Post

One club does not fit all in Europe

In this column, Jean Pisani-Ferry argues how the EU can become a more effective global player, following the Policy Brief "One size does not fit all: European integration by differentiation.

By: Jean Pisani-Ferry Topic: European Macroeconomics & Governance Date: October 2, 2018
Read article More on this topic More by this author

Podcast

Podcast

Director’s Cut: Is economics asking the right questions?

Bruegel deputy director Maria Demertzis welcomes Financial Times commentator Martin Sandbu to explore the journey taken by the field of economics since the financial crisis struck 10 years ago, and discuss what new tools economics has now that it didn’t have then.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: October 2, 2018
Read article More on this topic More by this author

Blog Post

Digesting the Salzburg Summit

As the moment of truth for Brexit negotiations is approaching, with the October European Council around the corner, we review opinions on the outcome and meaning of the Salzburg summit.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: October 1, 2018
Read article More on this topic More by this author

Podcast

Podcast

Director’s Cut: The Italian government budget proposal for 2019

Guntram Wolff welcomes Bruegel affiliate fellow Silvia Merler to evaluate the Italian government’s planned budget for 2019, in this Director’s Cut of ‘The Sound of Economics’

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: September 28, 2018
Read article Download PDF

Policy Contribution

European Parliament

Excess liquidity and bank lending risks in the euro area

In this Policy Contribution prepared for the European Parliament’s Committee on Economic and Monetary Affairs (ECON) as an input to the Monetary Dialogue, the authors clarify what excess liquidity is and argue that it is not a good indicator of whether banks’ have more incentives in risk-taking and look at indicators that might signal that bank lending in the euro area creates undue risks.

By: Zsolt Darvas and David Pichler Topic: European Macroeconomics & Governance, European Parliament, Testimonies Date: September 26, 2018
Read article More on this topic More by this author

Blog Post

Something Putin and Juncker appear to agree on – the euro

“It is absurd that Europe pays for 80% of its energy import bill – worth €300 billion a year – in US dollars when only roughly 2% of our energy imports come from the United States,” said President Juncker in his state of the union speech.* Europe’s largest supplier of energy – Russia, who accounts for a third of that bill – couldn’t agree more. Russia’s offer to switch to euros in trade with the EU will likely be costly to implement, but the US switch towards unilateralism is forcing its long-standing partners to question the dollar’s global dominance.

By: Elina Ribakova Topic: European Macroeconomics & Governance Date: September 25, 2018
Load more posts