Just about every major news organization reported Wednesday that Microsoft (NASDAQ: MSFT ) is being fined over $730 million by the European Union Commission for failing to follow a court order that directed the company to offer users a choice of browser when installing the Windows operating system. The fine comes just weeks after the Commission warned that under newly formulated rules, it will soon be able to fine companies like Google (NASDAQ: GOOG ) up to 2% of revenue, or $1 billion, for violations. While shareholders of these two technology behemoths will likely be forced to chalk this up to the cost of doing business, they should not do so in silence. Microsoft has apologized for the glitch and Google is looking to settle, but the actions of the Commission are nothing short of offensive. Neither stock is likely to be significantly affected by the fines, but the precedent should be considered.
The anatomy of the fine
At the end of 10 years of antitrust litigation, Microsoft agreed to settlement terms in 2009 that included a provision requiring the company to offer a choice of the top 12 most popular browsers to users who bought a computer that used Windows. The company took responsibility for what it called a glitch that caused roughly 28 million computers to be sold without the choice being included according to a Bloomberg report; Reuters had the number closer to 15 million. The violation took place between May 2011 and July 2012.
EU Competition Commissioner Joaquin Almunia explained the fine: "If companies agree to offer commitments which then become legally binding, they must do what they have committed to do or face the consequences." He went on to warn: "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."
While I absolutely agree with the explicit sense of Almunia's words, the very concept of the fine and the size of it are absurd. Leaving aside the reality that a Competition Commissioner is an affront to the idea of free enterprise, the fine is simultaneously too small, too large, and without merit based on the original settlement. This is regulation run amuck and overreaching in dangerous ways.
What actually happened
It is important to understand that the glitch in Microsoft's software meant that a browser option screen was not included as part of the Windows installation process. Instead of seeing that screen and opting for the browser of choice, these users were defaulted to use the Microsoft browser because they had opted to use the Microsoft OS. These poor downtrodden users were, therefore, subjected to the incredible inconvenience of having to install a second browser -- a procedure that takes roughly 30 seconds to initiate.
Arguably any user that does not understand this, and therefore might need protecting, would be equally ignorant of any differences that might exist between the options. Furthermore, for many users that have their machine set up by a vendor where the machine is purchased, they would never have seen the screen anyway. Thank goodness the EU Commission is here to keep us all safe.
As punishment for this atrocity, Microsoft has been fined $26 per user for each offending machine. The total $731 million fine represents roughly 1% of the company's 2012 revenue, which seems steep for costing users a few seconds of their time. On the other hand, given the amount of potential advertising revenue that might be generated from each user, $26 per case might seem low. This divergence takes me back to the original premise that the settlement itself was absurd.
Is Google next?
Google is reportedly involved in negotiations with the EU to end a probe into some of its search practices. Other search engines, including Microsoft's Bing, have lodged complaints about some of Google's practices. This settlement will not address the complaint that the company's practice of collecting aggregated user data violates EU privacy standards, but will go a long way to alleviating some of the tension existing between the company and the regulator.
What happens now?
In all probability, Microsoft will pay the fine, Google will settle and the status quo will shift to a heightened level of regulation that essentially serves as a tax and nothing more. In the land of fantasy, one must wonder how the companies of Europe would react if Microsoft declined to pay the fine and pulled out of Europe. Would enterprise side with a critical productivity provider or one more in a long line of regulators?
The reality of business is that the fine and compliance with the new rules is unavoidable. Neither stock is likely to feel any long-term ill effects of the ruling, but it should not go unnoticed. When developments like this go by without comment, the cost is immeasurable. We should all be paying attention.
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