EU ruling deals setback to Microsoft

In its ruling, the Luxembourg-based Court of First Instance upheld European Commission claims that Microsoft abused its dominant position in the operating system market. Microsoft's allies and competitors have been closely following the case since the Commission imposed antitrust sanctions against the company in early 2004.

The court's decision is expected to have far-reaching implications for consumers, computer makers, Microsoft competitors and, perhaps most pointedly, the Commission's ability to regulate technology companies on antitrust matters, legal experts and industry observers say.

"The court ruling is...welcome for its confirmation of the Commission's decision and its underlying policy, but nevertheless, it is bittersweet," Neelie Kroes, the Commission's Competition Commissioner, said during a press conference Monday. "Bittersweet because the court has confirmed the Commission's view that consumers are suffering at the hands of Microsoft."

Kroes added that should Microsoft comply with the Commission's order, she expects to see a "significant drop" in Microsoft's overwhelming market share.

And while she gave no estimate of how steep she expects that drop to be, Kroes noted that it would likely be more than a few percentage points as more competitors enter the market. Microsoft's Windows operating system runs on about 95 percent of the world's personal computers.

"A market share less than 95 percent is a way to measure the success (of the order)," she added. A spokesman for Kroes later clarified that a fall in market share would be a logical consequence of fairer competition.

The top antitrust regulator for the Commission also noted that it is "too early" to discuss whether there are any antitrust issues in Vista. But she added that some information may be available "not too far from now."

The 13-member court ruled that the Commission was justified in requiring Microsoft to share certain technical specifications, or protocols, with rivals so their products would work with Microsoft's Windows operating system. The Commission is also requiring Microsoft to offer an unbundled option to consumers when tying together two separate products, such as Windows and the company's Media Player software.

The court also upheld the $613 million fine imposed by the Commission, according to documents detailing the ruling.

Monday's verdict could ultimately force Microsoft to change its business practices, at least in Europe, observers say. It could also embolden antitrust regulators to pursue Microsoft in other countries.

However, the ruling likely will have no bearing on Microsoft's business in the United States. The company settled a long-running antitrust case here in 2002.

The U.S. Department of Justice on Monday issued a statement critical of the Commission's decision. "We are...concerned that the standard applied to unilateral conduct by the (Court of First Instance), rather than helping consumers, may have the unfortunate consequence of harming consumers by chilling innovation and discouraging competition. In the United States, the antitrust laws are enforced to protect consumers by protecting competition, not competitors," Thomas O. Barnett, assistant attorney general for the department's antitrust division, said in the statement.

Microsoft has not indicated whether it will pursue an appeal of Monday's verdict to the European Court of Justice, the highest court in Europe.

"The decision is not what we had hoped for and to say anything less would be less than candid," Brad Smith, Microsoft general counsel, said during a press conference on Monday.

While acknowledging that the court sided with the Commission on key points, the company took some solace in the fact that the court annulled the Commission's imposition of an independent trustee to monitor compliance, Smith said.

He added that Microsoft has made progress on the interoperability issues, but that more work needs to be done and will be addressed as quickly as possible.

Previously, the Commission believed the pricing Microsoft was going to charge for licensing its protocols was too steep, but the software giant responded by dropping the fee to 1 percent of revenues generated from its products, Smith noted.

"If the European Commission still believes that is still too high, we want to understand (their concerns) and quickly address it," he said.

Microsoft, however, believes it has a "complete and accurate" set of technical specifications that companies have begun to license, and Smith noted that he hopes even more licensees will sign on.

As for Media Player, Smith said Microsoft has offered an unbundled version of its Windows operating system and Media Player for more than two years, and, as a result, believes it is in full compliance with the Commission's 2004 order.

Minor victory
Microsoft took some solace in the minor win the Court awarded it over the Commission's use of a monitoring trustee, Smith said.

As a result of the ruling, Microsoft is not responsible for paying all the costs associated with the monitoring trustee. The court also reined in the power of the trustee, finding that the Commission has no authority to compel Microsoft to grant the trustee powers that the Commission is not authorized to confer on a third party.

Smith emphasized the progress Microsoft has made over the years to comply with the Commission's order and said he remains hopeful the court's order will bring further clarity to the issue.

"We have been working hard over the last few years to address these issues," Smith said. "Everyone agrees, for example, that the version of Windows that we offer in Europe today is in compliance with the Commission's 2004 decision."

Nonetheless, the court chided Microsoft on its behavior regarding interoperability issues.

"The court considers that the Commission was correct to conclude that the work group server operating systems of Microsoft's competitors must be able to interoperate with Windows domain architecture on an equal footing with Windows operating systems if they are to be capable of being marketed viably...the absence of such interoperability has the effect of reinforcing Microsoft's competitive position on the market and creates a risk that competition will be eliminated," the court said in its ruling.

Microsoft and the Commission had particularly contentious disagreements over the issue of interoperability, with Microsoft and the Commission clashing on the extent to which the company's technical information should be shared with rivals.

"The court rejects Microsoft's claims that the degree of interoperability required by the Commission is intended in reality to enable competing work group server operating systems to function in every respect like a Windows system and, accordingly, to enable Microsoft's competitors to clone or reproduce its products," the court said.

A number of Microsoft competitors have previously weighed in on the interoperability issue in complaints to the Commission. These include the European Committee for Interoperable Systems (ECIS), a nonprofit trade association that includes as members Adobe, IBM, Oracle, RealNetworks, Red Hat and Sun Microsystems.

"This landmark judgment sets a clear standard for Microsoft's future conduct and empowers the European Commission to impose it in the European market when necessary," said Thomas Vinje, a spokesman and legal counsel for ECIS.

Linux distributor Red Hat also voiced its support for the court's decision.

"In our business, interoperability information is critically important and cannot simply be withheld to exclude all competition?we were pleased with the overall decision and look forward to examining the decision in greater detail," Matthew Szulik, Red Hat chief executive, said in a statement.

Similar views were expressed by the Software and Information Industry Association (SIIA).

"After one of the most thorough investigations in the history of competition law, spanning over seven years, the Commission has taken a steady and decisive course," Ken Wasch, SIIA president, said in a statement. "We applaud the leadership and persistence of the European Commission."

But another trade group, the Computing Technology Industry Association (CompTIA), which includes Microsoft as a member, expressed disappointment in the ruling, labeling it a blow to "free enterprise in Europe."

In addition to the interoperability issue, the court sided with the Commission on the bundling of separate software products, citing three areas that affected its decision. One was the company in question must have a dominant position in the market for the tying product, such as the Windows operating system; two, the tying product and tied product--in this case Windows and Windows Media Player--must be two separate products; and three, consumers don't have a choice to obtain the tying product without the tied product.

"The court considers that the factors on which the Commission based its conclusion that there was abusive tying are correct and consistent with community law."

RealNetworks, which makes the RealPlayer media player, had raised such an issue in the past, eventually reaching a $460 million settlement to address antitrust claims with Microsoft in 2005. Microsoft also agreed to pay RealNetworks $310 million to support RealNetworks' movie and game business.

In recent years, the software giant has been paying multimillion-dollar settlements to its rivals to address previous antitrust litigation. Microsoft also paid longtime archrival Sun Microsystems $700 million to settle antitrust disputes with the company over interoperability issues and another $900 million over patent issues.

Legal experts previously weighed in on what a favorable court ruling would do for the Commission. Some legal experts said that with a favorable court ruling in the Microsoft case, the Commission would likely remain on its current aggressive track in pursuing antitrust cases, whereas an unfavorable one would have likely "taken the wind out of its sails."

Reuters contributed to this report.