EU Court Approves $8.5B Microsoft-Skype Deal

(CN) - Microsoft's acquisition of internet phone service Skype poses little threat to existing providers since a successful launch of business-friendly services is years away, Europe's general court ruled Wednesday.

The European Commission approved Microsoft's $8.5 billion purchase of Skype, a free voice-over-IP service formerly based in Estonia, in 2011. The regulatory body determined - over the objections of California-based Cisco Systems and Italy's Messagenet - that the sale would not undermine competition, primarily because of a lack of overlap between Skype users and Cisco and Messagenet's customers.

Cisco and Messagenet sued the commission, arguing that Microsoft's dominant position in the computing world and Lync - its instant messaging and video conferencing product aimed at the business market - would destroy their ability to compete for enterprise customers.

But the General Court of the European Union rejected those arguments and affirmed the commission's decision, finding that Microsoft isn't the computer world power it used to be given the rise of smartphone and tablet use worldwide.

"Although PCs remain the most used platform for consumer video communications, a substantial and growing share of new demand for those services originates from users of tablets and smartphones, sales of those appliances having overtaken those of PCs in Western Europe," the Luxembourg-based court wrote. "The commission and intervener Microsoft rightly draw attention to the extent of that growth, which the applicants do not contest, because any attempt by the new entity to exert any market power on the narrow market would risk reinforcing that trend to the detriment of the new entity. The new entity is less present on those other platforms and faces strong competition from other operators, in particular Apple and Google."

The court also rejected Cisco's argument that Skype's SkypeOut, a paid service aimed at video conferencing, will lead to price increases for VoIP services across the board. The average person won't pay for person-to-person video calls, according to the court.

"Skype's paid services, in particular its SkypeOut services, only concern video calls to a very limited extent," the court wrote. "A minimal percentage of SkypeOut's revenue comes from group video communications, which involve more than two users at the same time. Moreover, as was pointed out by the commission, no operator has thus far been able to charge for its services in respect of video calls between two participants. Consumers expect those services to be provided for free and the applicants have failed to demonstrate how the concentration might enable Skype to change those market conditions without consumers switching operators."

The current lack of interoperability between Lync and Skype also muted the companies' argument that Microsoft bought Skype to take over the video conferencing business.

"Users are generally reluctant to download several software applications for one and the same function," the court wrote.

And Cisco's concerns of a Microsoft-Skype worldwide takeover are premature, the justices added.

"According to the information supplied by Microsoft which was not called in question by the applicants, the creation of a network bridge between Lync and Skype is only likely to be completed in 2013," the court wrote. "In addition, on the assumption that the work is completed on time, the new entity would still have to devote effort to marketing the new product to potentially interested business customers. That marketing campaign would therefore take place during 2014. Lastly, in order that the anticompetitive effects feared by the applicants could occur in 2014 it would still be necessary for that marketing campaign to be commercially successful to such a large extent that it would tip, almost immediately, the enterprise communications market in favor of Lync and would enable the new entity to foreclose the market. Such commercial success would imply a major change in the position of the operators on the market and would mean in particular that Lync's market share on the enterprise communications market, which was 16 percent in 2011, would evolve significantly in comparison with Cisco's, which was 32 percent in 2011."

The commission hailed the court's decision, but added that it would "continue to ensure that competition in nascent and fast evolving markets is maintained."

Subscribe to Closing Arguments

Sign up for new weekly newsletter Closing Arguments to get the latest about ongoing trials, major litigation and hot cases and rulings in courthouses around the U.S. and the world.

Email *

Submit