The EU's 'Nationalization by Regulation'

Europe's approach to regulation is really stealthy nationalization.

RONALD A. CASS | FROM TODAY'S WALL STREET JOURNAL EUROPE.

Say what you will about President Obama's effective nationalization of General Motors, Chrysler, and AIG, at least his industrial policy is more open than the European Union's. While Washington is taking over failing companies by pouring billions of taxpayer dollars into them, Brussels -- pushed by competing businesses -- is slowly but surely nationalizing successful companies merely by regulating them.

The latest example of this "stealth nationalization" comes courtesy of the European Commission's long-running feud with Microsoft over Internet browser software. Competitors like Mozilla Firefox and Opera have long complained that Microsoft's ability to pre-load its own Internet Explorer as part of the Windows operating system gave Explorer an unfair advantage.

With regulatory proceedings on these charges still pending before the European Commission, Microsoft announced earlier this month it would release its new version of Windows in Europe without a browser.

A browserless Windows once was the Nirvana of Microsoft foes. But instead of throwing a party, competing browser makers now demand that Microsoft redesign its operating system in yet another way. They want a "ballot screen" that requires consumers to select from a set of browsers -- their browsers -- when a new computer first boots up. In other words, they are urging the EU to impose its judgment on the fundamental design of Windows itself.

If the EU accedes to this demand and forces Microsoft to redesign Windows yet again, it will be entering into truly novel -- and dangerous -- territory.

Brussels bases its thinking in this case on the competition-law concept of "contractual tying," such as a dominant manufacturer telling consumers "if you buy my printer, you also must buy my printer paper." Regulators on both sides of the Atlantic consider this sort of business practice under certain conditions an abuse of dominant market power.

But this model doesn't translate well to something as complex as operating-system design, or more broadly the practice of bundling multiple functions and software programs in a single package. Product design isn't an either-or proposition. It's a multi-faceted task, with every choice presenting different possible paths, and every decision altering the way consumers perceive the product.

The bundling of functions in software and other products is ubiquitous because consumers want bundled products. They prefer a mobile phone, say, that does many things, as opposed to lugging around separate phones, email devices, clocks, calculators, cameras and music players. Many consumers undoubtedly appreciate the convenience that comes from being able to surf the Web on a new computer without having first to sort through competing browsers.

The fact that a leading firm like Microsoft also wants to offer consumers this level of convenience is not a problem needing attention -- especially given recent market developments.

Competing browsers are readily available, easily downloadable, and successful. Mozilla's Firefox accounts for roughly one third of Europe's browser market and together with Opera's browser, Apple's Safari and Google's Chrome takes between 40% and half the European market, according to Applied Technologies Internet of France. That's a big change from the 85%-90% share Microsoft's Internet Explorer commanded five to six years ago.

Once an agency like the EU's competition directorate asserts authority over the features included in a dominant firm's products, there is no easy stopping point short of complete control of all significant business decisions. Once government opens this door, rival businesses (which don't want the leading firm's bundle competing with their products) learn that complaining to government can be a less costly way to gain market share than investing in better products, packaging or marketing.

Microsoft's competitors already have made a cottage industry of complaining to regulators about the design of Windows. In the 1990s, with their market shares declining, competing browser makers asked U.S. competition authorities to make Microsoft remove browsing features from Windows. After failing in the U.S., they renewed their complaint in Europe. In 2004, the Commission sided with software makers for media players to force Microsoft to redesign Windows in ways rivals thought would boost sales of their products. That encouraged more demands from Microsoft foes.

Each time the Commission wades in, it sets a precedent that makes it harder to avoid intervening the next time, and each time it becomes more involved in product design. It's like General Motors and AIG, where the Obama administration is dictating business decisions such as who runs the company and how much they make -- but without any EU investment in the regulated company.

This will be bad for consumers, as the browser case suggests. Governments historically have proven singularly inept at making design decisions, as any number of jokes and real-life stories about Soviet-style economies make clear.

With U.S. competition authorities now leaning toward a more European approach to regulating conduct of dominant firms and competition authorities elsewhere showing greater willingness to protect competitors and impose constraints on leading businesses, Europe's decisions on bundling take on global importance. The EU can lead the way back from the quagmire of government control or lead governments further in.

Anyone who favors increased investment in innovation over investment in lobbying and litigation should hope that the Commission hands product design back to businesses -- to the people whose skills and stakes make it far more likely that consumers, not competitors, will get what they want.

Mr. Cass, chairman of the Center for the Rule of Law and former commissioner and vice chairman of the U.S. International Trade Commission, teaches competition law and intellectual property law in Europe.