Microsoft Faces Guilty Verdict in Europe

Antitrust regulators from the 15 European Union countries have unanimously backed the European Commission's negative ruling against Microsoft, a Commission spokesperson says.

The advisory committee meeting of the 15 national regulators broke up early Monday, spokesperson Amelia Torres says.

"The meeting is over. The member states have unanimously backed the Commission's draft decision," she says.

In less than two weeks, barring a last-minute settlement, the Commission will declare Microsoft an abusive monopolist, impose a fine anywhere between $100 million and $1 billion and order the company to make fundamental changes to the way it sells software in Europe.

Microsoft gave no reaction to the advisory committee result. Spokesperson Tom Brookes says the company is still pursuing a settlement.

Media Player Problems

Computer industry analysts say that the most important aspect of a negative ruling against Microsoft will concern how the company sells its music and video playing software program Media Player.

Instead of bundling the program into its Windows operating system as Microsoft does at present, the Commission is expected to demand that the company sells two versions of Windows to PC manufacturers: one with Media Player and one with the program stripped out.

The Commission believes that by bundling Media Player into Windows, Microsoft is abusing the dominance of the operating system, which sits on more that 95 percent of personal computers in the world, to the detriment of competitors such as RealNetworks and Apple Computer's QuickTime.

"Media Player is an integral part in Microsoft's longer-term strategy for Windows," the broker Goldman Sachs says in a recent research note to investors, adding that the company is likely to resist removing Media Player from Windows. Microsoft "may refuse to settle [this issue], electing to challenge this in court," it says.

An appeal of a negative ruling to the European Court of First Instance in Luxembourg would take at least three years to conclude. In the meantime, the Court may turn down Microsoft's certain request to suspend the remedies until after the appeal, forcing the company to change the way it does business in Europe almost immediately.

Windows Around the World

Microsoft doesn't break out its sales figures for each region it operates in, but analysts believe the EU accounts for just under 30 percent of the roughly $10 billion in revenues it generates from Windows worldwide.

Microsoft lawyers in the past have said that any remedy imposed on its operations in Europe might be extended to all Windows programs in all regions of the world, including the U.S.

However, recent developments in other parts of the world lead some analysts to believe that a ruling against Microsoft in Europe could be limited to this region only.

Dan Kusnetzky, an analyst with the research firm IDC says that in recent weeks Microsoft announced a version of Windows tailored to the Thai market, and that this may be a precursor to a separate version of the operating system for Europe, designed to meet the Commission's demands.

"Microsoft may be trying to gain expertise in building a granular version of Windows ahead of the European ruling," Kusnetzky says. "The impact of the European ruling could be limited to Europe until the rest of the world demands something similar."

Ordering Microsoft to sell two separate versions of Windows to PC manufacturers would only restore competition to the audio and video software market if the version without Microsoft's Media Player were sold at a discount, analysts and lawyers say.

"Pricing is one of the components that must be considered if the ruling is to have any effect," Kusnetzky says.

A person close to the case says on condition of anonymity that the Commission can't dictate what prices the different versions can be sold at. However, the source says that the draft ruling demands that Microsoft "must not do anything which would make a bundled version of Windows more attractive to PC makers than an unbundled one."

"If the two versions were sold at the same price then obviously it would be less hassle for PC makers simply to continue selling the bundled version they have been selling until now," the source says.

Code Concerns

In addition to the bundling question concerning media players, the Commission also wants to force Microsoft to share enough secret code in Windows with rivals in order to allow them to design server software that works as smoothly with the ubiquitous operating system as Microsoft's own server software.

Servers connect networks of PCs. One of Microsoft's competitors in this market is Sun Microsystems, which complained to the Commission in 1998 that it was unable to compete fairly with Microsoft because it didn't have the necessary information about Windows to make its products work properly with Windows on individual PCs.

"We spend millions of dollars trying to reverse-engineer Windows so as to allow our server software to work with it, says Lee Patch, Sun's vice president for legal affairs.

"That's innovation wasted. We have no choice but to spend time in this way to offer an acceptable product to the consumer," he adds.

The Commission is expected to order Microsoft to propose what Windows information should be revealed to create a level playing field in the server software market.

According to a person who has seen the draft ruling, Microsoft will have to report back to the Commission within two or three months of a ruling with concrete proposals. The regulator would then consult rivals, including Sun, to see if the information Microsoft offers is enough to make competitor's server software fully interoperable with Windows.

Microsoft is more likely to agree to the Commission's demands concerning this second issue. There is already a precedent. In 1984, IBM ended a four-year investigation by the Commission after agreeing to license certain interface information to competitors in Europe. The information allowed IBM competitors to make products that were "interoperable" with IBM mainframes.

"The IBM solution was a good solution for its time. It's not far removed from what we're after, but time is running out for Microsoft to reach a similar settlement now," Sun's Patch says.

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