America’s European Regulator

U.S. technology companies are increasingly subject to European standards.

The European Union is now routinely exerting its authority as a regulator on technology companies, which Intel, amd, Apple, Microsoft, Sony and Toshiba can verify from first-hand experience. Consequently, European standards of doing business—if the European Commission’s behavior continues to go unchecked—will become de facto law in the United States.

The EU Commission sparked tremendous controversy when it blocked a $42 billion acquisition of Honeywell International by General Electric in 2001, even after Washington had already approved the merger between the two U.S.-based companies. Until then, no one had fully realized that Europe intended to exert its influence even outside its borders in such a proactive way. But now, to a prominent technology company, this sort of behavior is commonplace.

On July 27, EU regulators accused the world’s largest processor company, Intel Corp., of anti-competitive activity. The crime? Intel gave rebates to companies that used its processors. Where the companies involved consider this an incentive to buy, Brussels considers it “abuse of a dominant position”—with a potential fine of up to €3.5 billion. Advanced Micro Designs (amd), Intel’s main rival, lodged the complaint. The Wall Street Journal observed that Intel is being punished because it has an 80 percent share, as opposed to amd’s 20 percent, of the $33 billion microprocessor market:

In Europe, a firm’s size and success are the determining factors of its alleged violations. The same commercial practices would be entirely legal if the company in question were not considered “dominant.” This leaves companies in the absurd position of being free to compete as hard as possible until they reach a certain market share—at which point their hitherto legal behavior becomes unlawful. This is the kind of reasoning that has damaged the Commission’s credibility, as Europe’s highest courts overturn one major antitrust decision after another.

The European Commission is taking action even though amd actually gained a larger share of the market throughout 2005 and most of 2006. The writing has been on the wall ever since EU officials carried out a raid of Intel offices throughout Europe at dawn on July 12, 2005. But such actions are becoming routine where technology companies—especially American technology companies—are involved.

Perhaps most shocking, the EU has launched an investigation into the war between Sony’s Blu-ray and Toshiba’s hd-dvd formats—without having received a complaint from anyone. The European Commission notified all the major studios in Hollywood to turn over agreements, e-mails, records of telephone conversations, etc. regarding their decisions on their choice of dvd format. Again, the Commission seems to be focusing on the dominant player—in this case, Sony. Every major studio has backed the Blu-ray format, excluding nbc Universal. Five studios exclusively produce Blu-ray discs, a decision the EU is specifically challenging. One can only presume that if these were still the days of vhs versus Betamax, the EU would be trying to prevent Betamax from failing in the marketplace. The result: Two incompatible formats getting equal support from movie studios and retail outlets because of government interference—and a foreign government at that! No matter what Sony and Toshiba do, and no matter what any consumer thinks of the technology, in the Blu-ray/hd-dvd format wars, Europe may fire the deciding shot.

Apple Computer has discovered the troublesome European standard as well—and on multiple fronts. EU regulators are targeting Apple because its iTunes music store pricing is higher in some European jurisdictions than others—likely a result of record companies’ pricing rather than any proactive decision on Apple’s part. Yankee Group analyst Mike Goodman said Apple is “somewhat caught in the middle on pricing” with a profit margin of only a few cents a song as it is.

EU regulators have also targeted the exclusive operation between the iPod and iTunes, which a consumer group in Norway called an “illegal lock-in” that forces consumers’ hands by “technically blocking interoperability,” MacNewsWorld reported. But like the pricing war, it is the record labels that have insisted on this restriction. Nevertheless, Apple has started responding to European regulators’ concerns: It has made some of its catalog available without the restrictions—called Digital Rights Management (drm)—that prevent other players from using the iTunes store. The real story is that Apple has to take European law into consideration, even though it is in the clear with its own government.

Microsoft has also famously come under the European hammer of justice, paying record-breaking fines and still currently under European review and threat of further fines (for more information, read “Microsoft Gets European Justice”).

The concept goes back to German Chancellor Angela Merkel’s May 2006 comments: “Europe has to show that it can mold world policy according to its own values.” No doubt, that is exactly what Europe is doing: enforcing European ways of doing business on foreign companies, and, in the process, establishing laws outside its own borders.