Microsoft is getting ready to take on the iPhone and Android with its new smartphone platform. The company sent off the new system-software to phone makers on Friday, and Windows 7-equipped phones will be on store shelves by the holiday shopping season.
Microsoft is reportedly spending a billion dollars or more on development and marketing of Windows Phone 7--pretty much guaranteeing the company will take a loss on the product for years--in an effort to chip away at two California-based companies: Apple and Google.
All of which sounds like business-as-usual in the competitive tech industry. But, in fact, Microsoft's gambit is clearly illegal. How do I know? I read a recent appeals court decision involving Seattle Weekly's parent company, Village Voice Media.
VVM owns papers in a dozen cities, including San Francisco. That's where the VVM paper, SF Weekly, has been sued--so far, quite successfully--by a competitor, the San Francisco Bay Guardian. The Bay Guardian accuses its rival of unfair business practices, saying the paper engaged in "predatory pricing." At a jury trial two years ago, the Bay Guardian won a $16 million judgment against SF Weekly (which, like all VVM papers, is separately incorporated; VVM is not named in the suit). That decision was upheld last month by the First District Court of Appeal in California.
In their lengthy written decision, the appellate court judges make it clear that everything Microsoft is doing--investing in the creation of an improved product and selling it at less than its true cost, with the express intent of taking market share from a California competitor--is completely prohibited in the Golden State.
Under California code, it is against the law for a business there "to sell any article or product at less than the cost...or to give away any article or product, for the purpose of injuring competitors or destroying competition."
Sounds slightly archaic in the Internet age, right? By this logic, SF-based Facebook engaged in illegal conduct when it started up its free social-networking service, thereby causing irreparable harm to fee-charging Classmates.com, which had been in business for years.
Nonetheless, the Bay Guardian ruling stands, at least while it's appealed further.
So where does that leave Microsoft and its smart phone? Clearly in the hot seat. Or so it would be, if it were being subjected to the same absurd, Depression-era standard of conduct being applied to alt-weeklies. Consider the parallels:
When the company now known as Village Voice Media took over SF Weekly in 1995, "additional salaried journalists were hired to bring high-quality 'long-form journalism' to the paper," as the appellate judges noted. At the same time, however, SF Weekly sold advertising at rates that were "well below" what might be warranted by those high costs, according to trial testimony.
Likewise, Microsoft has spent heavily to create a new and improved smart phone, developing a new user interface, integrating the phone with Xbox, and adding other features. As TechCrunch reports, Microsoft's licensing fee to phone makers is 15 bucks per phone sold with Windows 7. Which means 67 million Windows 7 phones will have to ship before the company covers its costs. (FYI, Apple hasn't even sold that many iPhones yet.)
Microsoft's approach here is similar to what the company did with the Xbox and with the Zune--sell at a near-term loss in order to seek long-term market share. It's also what every Internet company has done since the dawn of free search, free e-mail, etc. And it is, apparently, against the law in California.
Careful readers of the law will note that there's a second prong here: The miscreant party must not only be selling below cost, but for the purpose of harming a competitor.
In the VVM case, for example, it has been widely reported (even by the New York Times)--and was testified to at trial--that VVM Executive Editor Mike Lacey once allegedly stomped on a copy of the Bay Guardian to convey just how intent he was on destroying the competing weekly.
Likewise, last year, Steve Ballmer reportedly wrested an iPhone from a Microsoftie's hands and pretended to stomp on it in front of thousands of employees at an all-company meeting.
The Robber Barons are surely rolling over in their graves at the notion that "stomping" is now sufficient to get you hauled into court.
So far, Apple has shown no signs of going the route of Bay Guardian owner Bruce Brugmann and suing Microsoft. Maybe because Steve Jobs, unlike Brugmann, has little fear of being outgunned and outmaneuvered by his competitor.
But keep in mind that failure is no defense in this case. As the California judges observe, the offending party doesn't even have to succeed in harming its competitor to violate the law. "[A]n injurious effect is not an essential element of the violation," they write, quoting a previous court decision from the 1940s.
So even if Microsoft doesn't manage to make any inroads against the iPhone or Android, it will still be guilty, guilty, guilty....as is every other smart, enterprising company these days.
In a recent note on the case, two attorneys with the Boston-based firm Bingham McCutcheon, well known for its expertise in antitrust law, wrote as follows:
The nature of competition is to want to win--to beat the competitor. But [in the wake of the Bay Guardian ruling,] loose talk and hyperbole in staff meetings, PowerPoints, e-mails or elsewhere, when coupled with evidence of pricing below "fully allocated" cost, may now lead to treble damages...regardless of any actual impact on competition or consumers.
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