Microsoft discount funds raise eyebrows

News about special funds used by Microsoft to offer discounts on software and services has caused some concern among government officials and regulators but is unlikely to affect current antitrust cases and inquiries, according to legal analysts and people involved in the proceedings.

However, the discounts do raise the question of whether antitrust cases thus far have changed Microsoft’s anticompetitive behavior and bear further scrutiny, they said.

An article Thursday in the International Herald Tribune (IHT) and its sister publication, The New York Times, reported that last July Orlando Ayala, then Microsoft’s worldwide sales manager, sent e-mail authorizing company officials to draw from special funds in order to win over customers who looked likely to choose open source Linux software over Windows.

“Under NO circumstance lose against Linux,” the IHT quoted Ayala’s e-mail as saying.

In response to the article, the European Commission is considering whether to order Microsoft to hand over the e-mail, sources close to the Commission said Thursday. The Commission, the European Union’s executive body, is currently pursuing an antitrust case against Microsoft.

Microsoft officials acknowledge the existence of “business investment” programs that are used to give discounts, particularly to institutions in developing countries, and to make competitive offers on consulting services. But the programs did not originate specifically to undercut deals offered by Linux vendors, according to Microsoft spokesman Jim Desler, in Redmond, Wash.

For example, the company’s Education and Government Incentive Program is focused on low-income countries, Desler said.

“It provides access to technology and software for governments and institutions that don’t have IT funding,” Desler said.

Microsoft also has “discretionary funds available to use for certain purposes,” Desler said. “These business investment funds have been used in response to major companies dropping prices for services and consulting.”

“These programs were developed with customers in mind and we have a legal team to make sure they comply with laws and regulations,” Desler said. Microsoft has an ongoing dialogue with officials in the U.S. to ensure compliance with the settlement reached last year in the U.S. government’s antitrust case against the company, he pointed out. In addition, the company has regular communication with officials engaged in the current EU antitrust case against the company, he said.

If discounts were below the cost of products and were used specifically to undercut competition, however, it could give new ammunition to competition regulators and competitors, according to some lawyers.

“This could get into the realm of predatory pricing, internationally, if what they’re saying is, ‘We don’t care what it costs, get the order and we’ll take care of the bottom line’,” said Bob Schneider, head of the Intellectual Property Department at the Chicago law firm of Chapman and Cutler. “Especially if they were targeting Linux, it’s an indication of the same type of behavior that the [U.S.] antitrust settlement was precluding.”

Officials at the U.S. Department of Justice, which with 17 states agreed to a settlement on antitrust charges against Microsoft, declined to comment on the issue Thursday.

West Virginia and Massachusetts have appealed the U.S. settlement and are pushing for tougher restrictions against Microsoft. However, because pricing issues related to Linux were not part of the remedy proceedings leading up to last year’s settlement, they would not be able to bring up any allegations of attempts by Microsoft to use price discounts to undercut Linux deals, according to Doug Davis, assistant attorney general for West Virginia.

“In the appeal, we’re bound to the record in the trial court and the remedy proceedings,” he said. “The issues that were raised [by the article] will likely be looked at, however.”

Allegations involving predatory pricing against Linux would have to be dealt with in a new case, Davis indicated. Legal scholars who have followed the case agreed.

“This sounds like a separate claim,” said Einer Elhauge, a professor at Harvard Law School and antitrust expert. “That’s a separate issue that might prompt a new investigation, but it’s not the same as the prior behavior.”

Predatory pricing might be difficult to prove, he added.

“You must prove pricing is below cost. In software, that gives rise to complicated questions … Often the marginal cost of software is near zero.”

“Some courts have also said that even a monopolist has a right to meet competition — that if a competitor is offering their product for free, a monopolist is allowed to offer it for free, also,” he added.

In Europe, price discounts have not been singled out as an issue in the current Microsoft case.

However, allegations that Microsoft was discounting software to win contracts in the workgroup server software market — a segment under special scrutiny in the European lawsuit — could overlap with part of the Commission’s existing lawsuit, said Thomas Vinje, a lawyer for some of Microsoft’s rivals.

If the Commission decides that an inquiry is called for, it would probably open a separate investigation rather than delay a decision on current charges, he said.

— Additional reporting by Paul Roberts in Boston, Scarlet Pruitt in London and Paul Meller in Brussels.