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EU Members OK Draft Ruling Against Microsoft

Representatives of 15 European Commission member governments have given unanimous approval to a draft decision that supports antitrust penalties against Microsoft .

EU spokeswoman Amelia Torres told internetnews.com that all the member states backed the commission's draft decision.

Torres declined to comment further on the details in the draft. The decision is widely believed to include a fine as well as order the company to open up its Windows operating system so that other companies' server software can interoperate with it.

Another week of reviews awaits before the ruling. The five-year-old case could be finalized, and the extent of the penalties known, by March 24.

At issue are two questions: Did Microsoft limit the ability of other companies to create software that interoperates with its Windows operating system? And, did the company freeze out RealNetworks' RealPlayer by tying its own Windows Media Player into the operating system?

The penalties that Microsoft could face include a fine by the EU of up to 10 percent of its annual revenue. The EU could also require Microsoft to create a version of the Windows OS that doesn't include Media Player, to include competitive players with the standard Windows package; and make its APIs more accessible to third-party software developers.

A fine of 10 percent of Microsoft's 2003 revenues could amount to about U.S. $3.2 billion. That's on top of the multi-million dollar judgments the company has been hit with in a series of patent infringement suits.

Microsoft negotiated to the last minute, in an attempt to settle before the EU ruled. "We're actively engaged with the Commission trying to resolve these issues in a positive way," Microsoft spokesman Jim Desler told internetnews.com before the ruling.

The EU reportedly turned down an offer of providing competitors' software on a CD to be shipped with new computers. "It's clear why the commission is rejecting that," said Herbert Hovenkamp, a professor of law at the University of Iowa and the author of numerous books on antitrust law. "There has never been a history of success for secondary applications where the primary one was installed on the computer. It's simply not going to work."

Market Impact

Requiring an EU-specific version of Windows could hurt not only Microsoft but computer makers, Hovenkamp said. "Traditionally, OEMs have been reluctant to support two or more competing versions of the same software," he said. "They have the expense and headache of supporting two applications instead of one."

"Clearly it's the unbundling issue that breaks new ground in antitrust [cases against Microsoft]," said Directions on Microsoft analyst Rob Helm. The U.S. Department of Justice originally wanted Microsoft to sever the player from the OS, but the final settlement stopped short of that requirement.

Windows minus Media Player could put a big crimp in Microsoft's home entertainment strategy. "On the strategic side, Microsoft is really hoping that digital media will kick off a new wave of consumer PC purchases," Helm said. "Making that happen seems to require that the Microsoft media format win the current format wars. The EU is in some sense tying its hands -- and maybe its legs as well -- by forcing the removal from Windows."

A ruling that Microsoft must produce a version of player-free version of Windows would make it a lot easier for other media player providers to get their software on the desktop. RealNetworks is suing Microsoft in the U.S., making essentially the same charges as the EU, that Microsoft abused its monopoly power to hurt the Seattle-based media technology company's business.

It's hard to see what the big deal is for RealNetworks, said James Governor, an analyst with RedMonk. "The RealPlayer, even in the best of times, wasn't software that people paid for," he said, although at some point people might buy a premium service. "It's kind of weird, when your model is giving something away, to complain when someone else is giving something away." Meanwhile, he said, RealNetworks seems to be doing quite well in Europe with its Helix DNA media technology for mobile devices.

Beyond implications for Microsoft, the ruling could have repercussions for copyright and patent law, as well as for international cooperation. First, it reflects changes in legal thinking about copyright. The Commission last summer said it had provisionally identified the core code that Microsoft would have to disclose to competitors to create a level playing field. However, that would breach Microsoft's copyright protection, and, according to news reports of leaks from the commission, it backed off and will let Microsoft decide what and how it will share interface protocols. "New far-reaching copyright laws have removed one of the most potent weapons in an anti-trust regulator's arsenal; that is, interface disclosure," Governor said.

Second, the ruling may provide an impetus for the U.S. and EU to get together on some of these legal issues. While U.S. anti-trust law is based on the 100-year old Sherman and Clayton acts, European courts rely on principles negotiated during the formation of the European Community in 1965, according to Robert Badal, an antitrust and trade litigation specialist with the law firm of Heller Ehrman White & McAuliffe. So a company could be in violation of antitrust law in one country but not the other -- or, as in the Microsoft case, find itself with a hefty penalty abroad for business practices that are tolerated at home. "The U.S. antitrust law is aimed at consumer welfare and price efficiency," Badal said. "The EU body of law is aimed at competitor welfare and price maximization. They will lead to different results."

In the future, said Hovenkamp, U.S. companies hope to encourage convergence, the process under which US and foreign anti-trust law enforcement agencies cooperate to come up with a common set of standards.

Still, while U.S. policy makers are working with their counterparts abroad to converge anti-trust law, he hasn't heard a lot of people saying that the EU should have moved closer to the U.S. on this decision. "Microsoft originally got a really harsh verdict [in the U.S.], then this totally wussy settlement that hasn't done anything." He said that, while the Department of Justice stands behind its consent decree with Microsoft, in Congress, it's different. "A lot of people think we have failed to open the computer platform to competition," he said, "and maybe we should be cheering the Europeans on, rather than criticizing them."

The EU's antitrust investigation of Microsoft officially began in 2000, after a complaint from Sun Microsystems pushed the European Commission to survey a wide variety of businesses. The overwhelming majority complained that Microsoft would not disclose interface information that was necessary for competing servers to communicate with Windows PCs and servers.

The same industry survey led the Commission to conclude that the inclusion of Media Player with the Windows OS stifled competition and product innovation. In February 2000, the Competition Directorate General of the European Commission asked Microsoft to provide technical information that would allow it to determine the truth of allegations that Microsoft bundled its PC operating system, server software and middleware so that, "in order to ensure full exploitation of functionalities embedded in Windows 2000 for PCs, customers would de facto be obliged to purchase Windows 2000 for servers."

The Microsoft antitrust case is part of a broader initiative within the EU to ensure a technology industry unfettered by dominant players. The Commission's stated position on competition is that, effective "competition is crucial to an open market economy. It cuts prices, raises quality and expands customer choice. Competition allows technological innovation to flourish. For this to happen, businesses and governments must respect rules of fair play." The EU was particularly concerned that Microsoft could leverage its dominance in the PC OS market to other markets such as server software.

By August 2001, Microsoft's increasing dominance in the low-end server market worried the EU enough that it included what it called "an abusive licensing strategy" for its technical interface information. At that time, it also added the bundling of Windows Media Player into the mix. Mario Monti, Competition Commissioner, said in a statement, "Server networks lie at the heart of the future of the Web and every effort must be made to prevent their monopolisation through illegal practices. The Commission also wants to see undistorted competition in the market for media players. These products will not only revolutionise the way people listen to music or watch videos but will also play an important role with a view to making Internet content and electronic commerce more attractive."