March 24, 2004

European Union Issues Strict New Ruling on Microsoft


BRUSSELS, March 24 Microsoft was handed its greatest legal challenge to date today when the European Union not only declared the software company an abusive monopolist, but levied penalties designed to prevent similar abuses in the future.

The ruling orders Microsoft to sell two versions of its Windows operating system to manufacturers of personal computers such as Hewlett-Packard, Dell and Fujitsu Siemens. One version must remove Microsoft's audio-video playing software, called Media Player. The ruling ordered the company to produce the alternate version within 90 days.

More than 95 percent of personal computers in the world are powered by Windows software. The European Commission, which enforces European Union competition law, ruled that such a dominant product cannot be used to help Microsoft leverage its might in other markets.

The commission's ruling also forces the company, within 120 days, to divulge previously proprietary information about the way Windows works in order to allow rivals the chance of making software suitable for Windows users. Sun Microsystems, whose complaint in 1998 first began the commission's investigation, persuaded the European regulator that by holding back vital Windows code from competitors, Microsoft was bringing its operating system dominance into the market for server software that runs networks of personal computers.

The commission levied a $613 million fine ($497.2 euros) and said it would set up a new advisory group to examine Microsoft's compliance.

Microsoft said today that it would appeal the ruling.

"Microsoft believes a settlement would have been better for European consumers," said Tom Brookes, Microsoft spokesman in Brussels, according to The Associated Press.

At a news conference, the European competition commissioner, Mario Monti, said, "I am confident that we have produced here a decision that will stand before any appeal."

Media software like Microsoft's allows PC users to download, listen to, organize and copy to hand-held players music that has been converted to digital form. Companies like RealNetworks and Apple Computer have tried to make money in this field, but have complained that they are held back by the proliferation of Media Player.

"Consumers ought to be able to choose their media player, not Microsoft," Mr. Monti said at the news conference. "Media Player is a separate product. There is a separate demand for media players."

The commission is not requiring a price difference between the two Windows versions. "Microsoft must refrain from using any commercial technological or contractual terms that would have the effect of rendering the unbundled version of Windows less attractive or performing," the commission's statement said, adding that Microsoft must not give PC makers a discount if they buy Windows with its own Media Player.

"We are simply ensuring that anyone who develops new software has a fair opportunity to compete in the marketplace," Mr. Monti said, according to The A.P.

Mr. Monti said he decided to limit the order to Europe "in deference to the competition authorities of the United States and other countries."

"We could legally have imposed explicitly a worldwide geographic scope, given the global nature of these markets," he said, according to The A.P. "We have not done so."

By going further than the United States Department of Justice in punishing Microsoft in 2000, the European Commission is trying to build an image of being the toughest antitrust regulator in the world. The sanctions eventually agreed to in Microsoft's settlement of the United States case are widely seen as being ineffectual.

According to some commentators, this is partly why Mr. Monti decided to come down hard on Microsoft that the remedies in the United States case were insubstantial enough that it added urgency to the European case.

The antitrust problems in the European case emerged later than the issues dealt with in the United States. The Justice Department was investigating accusations that Microsoft had effectively crushed the Internet browser Netscape by bundling in its own browser, Internet Explorer, into Windows.

In the end, it settled with Microsoft, allowing the company to escape with what many saw as only modest changes to the way it does business.

The part of the European case concerning Media Player is similar to that of Netscape, although the technology emerged later. By being found guilty of unfairly bundling again, Microsoft has showed itself to be a repeat offender.

Rich Sherlund, a managing director and technology analyst at Goldman Sachs, said the commission's decision was not "terribly draconian."

"I am not really concerned about the fine," Mr. Sherlund said in an interview on CNBC television this morning. "It represents about two weeks of cash flow for Microsoft. And unbundling the music player is something they can live with."

Mr. Sherlund said he believes the real issue for Microsoft is the European Commission's decision to appoint a trustee to effectively look over the company's shoulder "and potentially put restrictions on them going forward."

"You don't want a panel approving or disapproving things you want to do," Mr. Sherlund said.

That issue is likely to remain in limbo for some time, he added, since Microsoft will appeal the ruling.

That said, Mr. Sherlund said that today's decision removes a cloud that has been hanging over Microsoft shares for some time.

Within the "next couple of months," Microsoft will make a decision about what they intend to do with their enormous pile of cash, Mr. Sherlund predicted.


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