Disintermediation Is Not a Case for Antitrust

Published August 1, 2006

After years of taking flak for refusing to support open standards, Microsoft recently announced it would do so … and promptly got threatened with another antitrust lawsuit.

Adobe v. Microsoft?

Most computer users are familiar with the Portable Document Format (PDF) developed by Adobe. Just about every PC or Mac has the Adobe Reader function, which allows users to read PDF files. If your computer did not come with Adobe Reader, chances are you’ve downloaded it yourself for free.

Adobe Reader is just a small element in the Abode product line. The company also manufactures a suite of document creation, management, and collaboration software, led by Acrobat, which retails for $299 in standard configuration.

You do not need Acrobat, however, to convert, create, or modify PDF files. Because PDF is an open standard, document creation and editing software such as Corel’s WordPerfect and Sun’s StarOffice incorporate “Save As” functions that allow you to save a document as a PDF file. That functionality across applications is the whole point of an open standard.

But for companies like Adobe, pursuit of open standards is also a business proposition. Make it easier for users to create and manipulate PDF files, and their use will become more widespread. That means Adobe will sell more of its proprietary software.

For years, Microsoft Office was the only office suite that did not offer PDF conversion, and the company was routinely criticized for it. So earlier this year, Microsoft announced PDF conversion would be part of Microsoft Office 2007, scheduled for release in the fall.

Adobe, which once had urged Microsoft to adopt PDF, demanded the PDF feature be decoupled from the package and made available only via download for a fee. Microsoft agreed to the former, but not the latter.

Coming to a European Court?

Which leads us to the dubious antitrust complaint Adobe is mulling against Microsoft–not in any U.S. court, but in Europe. Adobe argues Microsoft’s adoption of PDF conversion amounts to disintermediation.

Disintermediation describes the process whereby the introduction of a new product outright eliminates the need for an existing one. Microsoft’s user base is so large, the argument goes, that its incorporation of a PDF conversion feature would unfairly dent rather than spark sales of Adobe products.

It seems Microsoft’s decision to adopt PDF and Adobe’s lawsuit were spurred by the same conclusions from their respective market research: Both Microsoft and Adobe discovered many Acrobat buyers shell out $299 for the software but use only the PDF conversion function.

In a world without European antitrust jurisprudence, Adobe would simply go back to its engineering and marketing departments and figure out a way to add more features to its software and communicate them better to the market.

Fortunately for Adobe, disintermediation, a dubious claim in the U.S., gets play in Europe, where courts have been more willing to protect companies–and existing revenue streams–against legitimate market forces.

Disintermediation Happens

In the U.S., disintermediation is an accepted part of the natural business environment.

We see it all the time. Apple’s iTunes disintermediates Tower Records, not to mention other online retailers (Apple was sued in Europe over this; see the pattern here?). VoIP disintermediates the phone company. We see it outside high-tech as well: Scott’s Weed and Feed disintermediates manufacturers who supply only fertilizer or weed killers.

Even here Adobe’s case is weak, as Microsoft is not attempting to leverage Office to compete with Adobe’s full range of software. Microsoft isn’t trying to compete with Adobe at all. Adobe is trying to use the European courts to compensate for its own business miscalculation.

If Adobe wins, users lose. Adobe is attempting to prevent loss of a revenue stream by demanding Microsoft Office users, and only those users, pay for a feature they can get free elsewhere. Adobe welcomed the market boost of an open standard, yet now balks at the loss of control that comes with it. It’s attempting to make this an antitrust issue. Hence, it’s venue-shopping in Europe, where judges too often apply antitrust laws to protect companies, not consumers.

If Adobe is so worried about Microsoft’s PDF conversion feature, it betrays a poorly devised market strategy that relies on a freely available component–PDF conversion–to support sales of a sophisticated $299 product. Rather than forcing Microsoft to charge everyone a fee for a PDF conversion function–revenue that would still go to Microsoft–Adobe should try harder to call attention to the overall value of the Acrobat suite.

Until then, it’s wasting precious resources in both companies.

Steven Titch ([email protected]) is senior fellow for IT and telecom technology at The Heartland Institute and managing editor of IT&T News.