Old Europe's attack on New World technology

Early last month, competition authorities of the European Commission announced a new "Statement of Objections" highlighting their concerns with American software company Microsoft.

Once again, Old Europe battles innovation, wary of change that promises better products for consumers. As Armey's Axiom would have it, "Old fogies don't tolerate young fogies."

The EU has threatened Microsoft with a new round of fines, with upwards of hundreds of millions of euros at stake. To avoid the heavy hand of regulators, Microsoft is being asked to license key innovations to competitors for a pittance.

A formal reaction from Microsoft is expected, but it is hard to imagine any response that would appease the regulatory zealots. This dispute, part of a larger antitrust case that began in 1998, is likely to end up in the European judicial system, where judges and regulators will shape the market of the future. Unfortunately, governments run on a slower clock than markets, which means consumers may have to wait to get their hands on the latest innovations.

The threat of penalties is not because consumers have been harmed, but because competitors have failed to succeed.

In the meantime, the broader implications of the EC's Statement deserve serious attention from the administration as well as the broader business community, investors and consumers. The EC's regulatory threats are the worst type of invasive economic management practiced by old Europe, with regulators concerned about propping up rival firms rather than assuring consumers have access to the latest technologies at competitive prices. Old fogies with power are essentially punishing innovation and entrepreneurial spirit.

Microsoft is alleged to have misused its market strength in operating systems to gain an advantage in the market for server operating systems. The allegation is still being reviewed by the European courts, but Microsoft settled similar issues in America six years ago.

Regardless of the outcome of this allegation, however, two points about this area of technology are clear. First, Microsoft's entry into this market increased competition and drove down costs for server operating systems. Second, Microsoft brought innovation to this area of technology--something easily observed by the number of patents that the firm has been issued for its server technology.

The EC's action against Microsoft runs counter to these facts. Even though Microsoft's presence in the server market added competition, introduced innovation, brought down prices, and attracted eager customers, the EC has determined that Microsoft must be sanctioned. The threat of penalties is not because consumers have been harmed, but because competitors have failed to succeed.

Consumers in the marketplace have rewarded Microsoft and now the EC will punish the marketplace by forcing Microsoft to disclose valuable proprietary technology. In its latest Statement of Objections, the EC stakes its claim on a specific technology called communications protocols and, of course, the EC wants this technology shared free of royalties. The EU's competition commissioner, Neelie Kroes, says that "there is no significant innovation" in the protocols.

Then one must wonder: Why has Microsoft earned patents--with more than three dozen pending--across Europe and in America for the communication protocols? It sounds a whole lot like the EC is bent on redistributing technological wealth instead of fostering the creation of new innovative products and services. What message does this send to innovators and venture capitalists that put their resources at risk in the marketplace?

It is hard to imagine where Microsoft will go from here. For at least two generations, European firms have failed to keep pace with upstart Americans in innovation, entrepreneurship, and economic growth. Unfortunately, it appears the lesson learned by the EC is that regulatory force and wealth redistribution is a good substitute for wealth creation. We are all poorer for it. Fortunately, a stern diplomatic shot across the bow may be all that is necessary to let the old fogies of Europe know that we take innovation seriously.