Microsoft Gets the Full Monti. C. Boyden Gray. Policy Matters 04-10. March 2004.

Last week, negotiations broke down between Microsoft and European Commission antitrust regulators -- led by competition czar Mario Monti -- to settle the European antitrust case. This week, it is all but certain that the commission will declare Microsoft in violation of competition laws, fine the company and impose enormous restrictions on how Microsoft does business. At the heart of the ruling, the commission is essentially telling Microsoft that any further improvement of its flagship Windows operating system is illegal.

Simply put, this ruling is bad for technology, bad for the competitive marketplace, bad for European-U.S. relations and bad for consumers. While there have been signs pointing to this impasse, the EU has now made it very clear that it will put the interests of Microsoft's competitors above the interests of consumers, competition and economic growth. Does this also mean that a major producer like Nokia cannot add new features to its cell phones if a competitor complains? Can we see our way out of this quagmire?

The European antitrust case against Microsoft runs parallel to the U.S. case in many regards, though there are crucial differences. Both cases primarily involve U.S.-based companies -- Microsoft and Netscape (now part of Time Warner's AOL division) in the U.S. case; Microsoft, Sun Microsystems and RealNetworks in the European case. Both examined how Microsoft shared its software code with rivals and how Microsoft integrated new functions into Windows.

In spite of these similarities, there is one striking difference between the two cases: The U.S. case is over. Since November 2001, Microsoft has been operating under a series of sanctions outlined in a settlement reached with the U.S. Department of Justice and several states. In November 2002, that settlement earned the approval of the U.S. District Court, which continues to oversee compliance. Earlier this year, the supervising federal judge said the settlement was working "as envisioned."

In most respects, the U.S.-approved sanctions address the European Commission's concerns. Microsoft has been placed under stringent requirements to share and license software code and other technical information so that other companies' products can better "interoperate" with Windows. (Never mind that thousands of programs worked just fine with Windows before the case.) The agreement also forced Microsoft to modify Windows so that access to certain functions can be hidden and replaced with rival products. For instance, manufacturers and computer end-users can hide Microsoft's Web browsing tool (Internet Explorer) or music/video tool (Windows Media Player) and instead use competing products like Netscape Communicator or RealNetworks' RealPlayer.

As these settlement terms suggest, Microsoft made large concessions to bring the U.S. case to a close. The company has altered how it develops, markets and licenses its products. At the same time, Microsoft has not been prevented from competing or improving the Windows operating system. Consumers can continue to benefit from Microsoft's innovations, and rival software companies must continue to compete to win customers. Ideally, the U.S. settlement should be a model for a global resolution to antitrust challenges to Microsoft.

But now the company essentially faces double jeopardy in Europe. In fact, one trade group made up of Microsoft's fiercest rivals -- the Computer and Communications Industry Association (CCIA) -- has advocated harsher penalties on both sides of the Atlantic. In other words, rather than compete in the marketplace, other companies have shopped their complaints to different jurisdictions to see where they could take the biggest bite out of Microsoft. The European Commission has become a de facto court of appeals for parties dissatisfied with the decision reached in the U.S. The commission listened to Microsoft's rivals, but it is clear that they did not fully consider how their effort to manage competitive markets will affect consumers.

The ruling by the commission's competition regulators would have greater credibility if Europe-based companies had a central stake in the dispute. But the case is largely an American affair, which is all the more reason for the ruling of the U.S. courts to take precedence. In addition, the U.S. and the EU have in place an agreement that codifies the age-old diplomatic principle of "comity" between nations when it comes to enforcing antitrust. Under this principle, the commission should defer to the U.S. decision to avoid conflict.

While Microsoft agreed to a tough settlement at home, in Europe the company has wisely decided that enough is enough. Instead of agreeing to a settlement that would undermine the U.S. settlement and impinge on the company's fundamental ability to operate, Microsoft will likely appeal the commission's ruling to Europe's Court of First Instance in Luxembourg.

Microsoft has a good chance to succeed with the Court of First Instance, which has struck down several other recent rulings from Commissioner Monti's office. An appeal also serves notice that companies cannot easily disrupt the competitive marketplace just by invoking the wrath of EU regulators. Unfortunately -- for consumers, the global economy, and the tech sector -- the next ruling in the case could be another three years off.

In spite of the global move toward more-open trade policies, contradictory antitrust regulations are creating roadblocks -- and adding expenses -- for international companies. In May, the make-up of the European Commission will change when 10 new nations are admitted to the EU. Primarily former Soviet bloc countries, these new members strongly support free markets, a lesson learned from decades of suffering under command economies.

With a new commission in place -- and a new competition commissioner taking office in the fall -- the U.S. should seek ways to find common ground with Europe on antitrust. Without systemic change, history will repeat itself: Another U.S.-based company will be stymied in Europe; another U.S. court decision will be effectively trumped by EU regulators; and mercenary companies will continue to seek competitive advantages in the political arena -- all at the expense of consumers.

Mr. Gray, White House counsel to the first President Bush, is co-chairman of Citizens for a Sound Economy.

This article appeared in The Wall Street Journal on March 22, 2004.