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Thursday, March 25, 2004 - Page updated at 12:45 A.M.
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EU imposes record fine on Microsoft, orders changes

By Kim Peterson
Seattle Times technology reporter

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European antitrust regulators imposed a record $613 million fine on Microsoft today and ordered the company to change the way it does business in Europe.

The penalties came as the European Commission, the executive arm of the European Union, found that the Redmond-based software giant broke competition laws on the continent, gaining an unfair advantage by failing to give rivals necessary information and by packaging its media player with its Windows operating system.

"Dominant companies have a special responsibility to ensure that the way they do business doesn't prevent competition on the merits and does not harm consumers and innovation," said Mario Monti, the EU's competition commissioner, in a statement announcing the widely expected decision.

The fine is the largest the EU has ever imposed in an antitrust case, although it is far less than the maximum possible penalty of about $3.5 billion.

Microsoft said it will appeal the decision in European courts, a process that could take up to five years.

"We think that today's decision is unfortunate but we respect the commission's decision and will now move forward with the next steps in this process," said Brad Smith, Microsoft's chief lawyer, in a conference call with reporters this morning. "Perhaps in the future we'll be able to achieve a mutual resolution of these issues."

The penalties go beyond the settlement the company reached in 2001 between the federal government and the states in the U.S. antitrust investigation. That settlement focused primarily on Microsoft's bundling of its Web browser in Windows, while the European case looked at additional technologies, including the Windows Media Player.

The penalties could have implications for the way Microsoft bundles features into future products, most significantly the next version of Windows, code-named Longhorn. That version, expected to be released in 2006 or 2007, specifically mentioned by the commission today, but it's clear that Europe will be keeping a close eye on Microsoft's plans for the new operating system.

The commission set a 90-day deadline for Microsoft to offer computer makers a second version of Windows for sale in Europe that is stripped of its software to play music and video clips. The company is still allowed to offer a version of Windows that includes the media player.

The commission also gave Microsoft 120 days to provide more information about Windows to rival companies developing servers, which connect personal computers to a network such as the Internet. These companies have complained that by withholding crucial information about Windows, Microsoft gives its own servers a compatibility advantage.

Monti said in a news conference today that the European Commission was ensuring that companies developing new software have a fair opportunity to compete in the marketplace. Additionally, he said, consumers and computer makers ought to be able to decide which media player they want.
 
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"They ought to choose, not Microsoft," he said.

The commission did not order Microsoft to offer the stripped-down version of Windows at a price that's lower than one with the media player. That could lead some to question why computer makers would choose the altered version, if they could pay the same amount for one with the extra feature.

But in an unusually worded twist, the commission said Microsoft couldn't do anything that would make the version without the media player less attractive to computer makers. In particular, Microsoft must not give computer makers a discount for buying Windows together with the media player.

Smith said yesterday that stripping out Microsoft's media player would break other features in Windows, including access to Web sites with video designed to work with the player. Those Web sites include that of the Italian parliament and a Swedish broadcasting service.

Similarly, a computer without the media player would not be able to show the introductory and tutorial videos about Windows that start up when a person turns on a new computer for the first time, Smith said.

The commission's decision will effectively freeze technology, hobble the Windows operating system and give customers less value for their money, Smith said.

A frequent critic of Microsoft said those problems could easily be fixed by software engineers and aren't as dire as Smith describes.

"We think that's a very unwelcome part of their response — to put so much emphasis on that aspect," said Ed Black, chief executive of the Computer & Communications Industry Association. The trade group has lodged its own antitrust complaint against Microsoft, alleging to the European Commission that the Windows XP operating system violates competition laws.

Black said the commission's decision could facilitate future cases in Europe against Microsoft, possibly private lawsuits brought by other companies in specific countries. The two areas the commission analyzed - the Windows Media Player bundling the information given to rival server makers - have been so thoroughly dealt with that they could be used to establish fact in future lawsuits, Black said.

One analyst said ordering Microsoft to strip its media player from a version of Windows will have little effect. The company has bundled its media player in Windows for two years, and in that time has taken a huge lead in the European market over such companies as Seattle-based RealNetworks, said Jaap Favier, an Amsterdam-based analyst at Forrester Research.

The commission's decision "is basically coming two years too late," Favier said. "Windows Media Player has already such a huge competitive stronghold compared to RealNetworks that it will not have a significant effect on Microsoft's commercial success in Europe."

In unsuccessful negotiations with the commission to settle the case, Microsoft had agreed to include three competing media players with Windows, Smith said. That step would have been a far better resolution to this case than the decision announced today, he added.

When asked about implications for Longhorn, Smith said innovations Microsoft has planned for the next operating system will benefit consumers and ensure that there will continue to be competition in the industry, adding that the software will "pass muster" in Europe.

Regulators will appoint a "monitoring trustee" who will oversee that Microsoft gives complete and accurate information about Windows to server makers, the commission said. The trustee will also ensure that the two versions of Windows perform equally as well.

The European Commission has been investigating Microsoft's behavior for five years, since Santa Clara, Calif., rival Sun Microsystems complained that Microsoft refused to give enough information for Sun to develop products that work with Windows-based computers.

The commission said it found that Sun wasn't the only company that wasn't able to get this information. Microsoft's strategy was designed to shut competitors out of the market.

As a result, the commission said, an overwhelming majority of customers said they preferred to buy Microsoft's server products instead of those of its competitors.

In 2000, the commission expanded its investigation to include Microsoft's bundling of its media player software with the Windows operating system.

The immediate ubiquity of the media player reduced incentives for content providers and software developers to work with competing media players, the commission said.

There is already a clear trend in favor of Microsoft's media player in the market, the commission said today. If regulators had not intervened, Microsoft's bundling of its player would have tipped the market in its favor and allowed it to control parts of the digital media industry.

Other companies reacted quickly to the commission's decision. In a statement, Sun Microsystems said the decision was important for consumers in Europe, and also for increased innovation and competition across the world.

"For the first time in many years, information technology managers will be able to choose from a variety of work group servers, confident that they will interoperate with Microsoft desktops," Sun said.

RealNetworks said the decision confirms the merit of its $1 billion private antitrust suit filed in December against Microsoft.

"Building on the commission's factual findings establishing Microsoft's illegal conduct, we intend to vigorously pursue our case in the U.S.," Bob Kimball, the company's general counsel, said in a statement.

Smith said Microsoft needs to file its legal appeal in 70 days, and the company will ask European courts to delay enforcement of the commission's decision.

"At the end of the day, the European Commission has the first word, but the European courts have the final word, and the final word will carry the day," he said.

Kim Peterson: 206-464-2360 or kpeterson@seattletimes.com

Copyright © 2004 The Seattle Times Company

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