Playing by the rules

What does the EU ruling mean for Digital and its competitors?

The world of computer services isn't the natural environment for dawn raids, so when the European Commission sent its heavies into Digital's offices in Germany, the Netherlands and the UK in November 1995, it appeared something was definitely afoot. And when Digital settled with the European Commission's Competition Commissioner Karel Van Miert last October, the effect of those dawn raids became apparent. The 10 October 1997 agreement is a huge step towards the unbundling of service and support from the supply of hardware and software.

The Commission dropped a complaint against Digital after Digital made a series of undertakings that it would eschew predatory pricing of its support services in Europe, and would publish a price list of those service charges. The effect being third-party service companies are on a playing field that even if it isn't quite level, still slopes.

Despite massive implications for the services business in Europe, and for companies like Digital that have been banking on significant services revenue to sustain growth, October's landmark decision sent a collective shrug around the European Community. Perhaps this is because third-party maintenance contracts are relatively unglamorous, compared with the fun of baiting Microsoft over competition law.

Many hardware companies contacted hadn't heard of it. Others did not think it important. Few agreed with Robert Bell of law firm Nabarro Nathanson's who said: 'This is the tip of the iceberg. It sends a clear message to all other manufacturers.'

Because of the length of service contracts and a natural disinclination to swap support service providers on price alone, that message will take time to come through. But if it does, its effects may be far greater than any quibbling over whether Microsoft's browser is a component of its operating system.

Digital, for example, has a clear incentive to fight the case. Out of its first quarter revenue of $3 billion worldwide, $1.6 billion comes from product. The other $1.4 billion is services.

Bell, however, could hardly be considered an objective observer. As Nabarro Nathanson's partner in EC competition law, he took the case to the Commission on behalf of Granada Computer Services. Their assertion was that Granada was being unfairly muscled out of support and service contracts on Digital's hardware because Digital was dominant in its own sector. By bundling its service and support contracts into the hardware sale, Digital was abusing its dominant market position.

Because Digital settled with the Commission voluntarily and without prejudice, this remains no more than an assertion as Digital's European vice president of multivendor customer services Alan Blank was quick to point out. 'This decision endorses our position from the outset of the Commission's investigation two years ago.'

'The Commission initiated the review because it wanted to clarify the rules in this area. Its decision to stop indicates that we have not breached European Competition Law. No fines or sanctions have been imposed and we are getting on with our business,' he said.

Bell metaphorically raises an eyebrow at this. 'When our client made its complaint in 1995 the rules were not going to change. Now they have, for Digital as well. The impact doesn't have to occur next week. We'll see the fallout in the next couple of years. This will be a worry to a lot of people.'

But it seems we will see some of the effect sooner rather than later because of a clause in the undertaking. After 1 October this year, Digital customers can terminate any of their support deals with Digital and look elsewhere for a better deal.

This autumn may be a competitive one for Digital's services business.

At Granada Computer Services International, the main complainant against Digital, group managing director Richard Ferre, is claiming more than a simple victory. 'The behaviour we were complaining about got modified.

We can see the benefits already,' he says. 'The undertaking was very clear and precise because the Commission was determined this issue would not be fudged. What that meant in practice was the Commission insisted on looking at more issues than we complained about.'

Ferre is naturally delighted that the Eurocrats set the 1 October deadline.

He hadn't asked for it. Granada, bought out by a management team including Ferre last September before the agreement was reached, has between 10 and 20 per cent of its business in supporting Digital's hardware and software.

But with turnover at £133 million in the year to September 1996, embarking on a two-year legal case that might not show a result was a substantial risk. You can't help thinking it would be easier to drop the case.

The problem is that taking someone through the Commission is a long, expensive business, so while some have been complaining about Digital for a couple of years, most let the complaints drop, leaving the entire industry short of a standard. Ferre's bet is that the two or three other suppliers he casts in a similar role will amend their practices accordingly.

If they don't, he promises to go legal to beat them into changing the way they do business. 'If I come across a serious enough case, I will always pursue the legal route. In fact, we're making noises towards one company in particular about that at the moment.'

While Ferre is relishing the fight, he is less gung-ho than his legal counsel on the effect this will have on his business. Aside from the usual noises about level playing fields, he concedes the extra business this will generate will not make a massive difference in the short-term. In the long-term, the drift towards cross-platform support services may have more effect on Granada's competitiveness. Unless Digital can offer support for rival platforms, then it is increasingly uncompetitive.

And if it does offer support for rival platforms, it can't bundle that support when it sells its hardware. 'A lot of this goes away in the future with multivendor contracts and open systems,' admits Ferre. 'But there's still a lot of proprietary systems out there too.'

At Unisys, the director of desktop services Keith Tomson thinks there's little the European Commission can do at the desktop level that isn't already taken care of by market forces. 'I don't think regulation has a role to play here,' he says. 'In all my experience in the industry, the market drives change. The classic case is trying to regulate Microsoft.

How many years has that gone on? For PCs, support is a totally open market.'

Tomson has several problems with the application of any level playing field standard, notably with the introduction of a price list. 'The problem there is you don't compare apples to apples. So much of a service agreement depends on the volume, geography and service level required and that changes the price completely.' When Unisys launches its new set of service options, he says, it will be making a price list public. But he doesn't expect the prices charged to have anything to do with the list price. 'The reality is that the standard service is not what people want,' he says.

Not only is pricing more complex than it seems, Tomson adds, but companies like Digital have a hidden advantage for customers - their logistics.

'Older companies like Digital, IBM and ourselves have the geographical infrastructure and experience to offer high service levels. Some of the latest entrants are more price competitive because they do not have that infrastructure.' The result is that third-party maintenance will continue to be dominated by the companies that supply and install the systems rather than being bought as a separate commodity.

There's a lesson to be learned from this ruling. If you want manufacturers to like you, don't get into third-party maintenance. At Granada, Ferre says the case has improved relationships with Digital. 'Two years ago we wouldn't have sat down to lunch. Now we can,' he says. He's not worried that if he continues to use lawyers to protect his business he will damage any fragile relationships with manufacturers. 'In reality, the only relationship we have had with these people is that they will work with us if they absolutely have to.

So we don't have that much to lose.'

What it all means

What did Digital agree to do? For the European Commission to drop its accusation that Digital was abusing a dominant position, the commissioners drove a hard bargain:

Digital will offer hardware maintenance services for its equipment on a standalone basis and software maintenance based on a flat fee per CPU.

It can still offer a combination software-and-hardware package (DSS), but priced not less than 90 per cent of the sum of both.

Digital will offer software support without hardware support for those who want it.

Digital will publish a price list of its support charges and will break down the cost of support services in customer quotations.

Digital promises to try not to discriminate when it offers discounts, and if it offers a discount on DSS, then it has to offer that discount on DSS components.

Discount prices have to be above average total cost (the sum of fixed and variable costs), not above the average variable cost. This stops loss-leader pricing or predatory pricing to squeeze out competitors.

Digital has agreed to allow its distributors to distribute software updates to anyone licensed to use the relevant software. So, if you are a third-party maintenance supplier, you can be a Digital distributor. Or if you are a Digital distributor, you can use a third party to supply the support services you sell, and Digital can't stop you.

After 1 October 1998, Digital customers can terminate their current service agreements. This means they can take advantage of either new Digital prices, or those offered by third parties.

The undertaking lasts until 1 January 2003. Digital can appeal after 1 January 2000 if it thinks the undertaking is too restrictive.

Things ain't what they used to be

What's new here? It's tempting to treat all European Commission policy as meddling myths about guidelines over the curliness of bananas (false) and reclassifying the carrot as a fruit (true) abound, but in competition terms, this represents a serious attempt to analyse competition in the computer business. 'There's no doubt the Commission took a set of facts and put more meat on the bones than they had to,' says Bell. 'This was a clear decision with key rules.' The Commission has been looking for opportunities to define fair competition in the technology sector for some time. Bell explains: 'When I took cases to them, they would say, "We're looking for a computer case. Is this it?", and this was the first substantial opportunity they had. When the dawn raids happened, we knew something big was going down.' What's new is the interpretation of market dominance. Previously, this was loosely defined, restricted to "one or two mega companies," in Bell's words. 'But companies in downstream markets for their own software are likely to be dominant,' he explains. 'The Treaty of Rome says higher standards of conduct are expected from them.' Although Digital is not dominant in the primary market - selling servers, for example - it is dominant in the market for selling services around those servers. Therefore, the way it sells those services could be defined as anti-competitive - a decision unlikely to have escaped IBM's and HP's notice.