Under the agreement, Microsoft will make three "substantial" changes in the way it supplies interoperability information to competitors seeking to have their work-group server software work with Microsoft's operating system. The company will provide open-source software developers access to and use of its interoperability information, according to the Commission.
Addressing another element of, the company has agreed to reduce royalties for its "no patent agreement" to a one-time fee of $14,189 (10,000 euros). Licensees who pay that fee will be able to access Microsoft's interoperability information without securing a license for patents.
Previously, Microsoft required third parties to pay a royalty of 2.98 percent of revenue based on software developed using Microsoft's licensed technology.
"I told Microsoft that the royalties for access to its secret interoperability information were unreasonable and had to be reduced," European Competition Commissioner Neelie Kroes said in a statement (PDF) at a press conference. "Microsoft has now abandoned its demand for a royalty of 2.98 percent."
Under Microsoft's worldwide "patent agreement" license, third parties will pay a royalty of 0.4 percent of revenue from their products that use Microsoft's licensed technology. Previously, the royalty rate was 5.95 percent.
The Commission, having persevered throughout its four-year struggle with Microsoft, praised the company for taking steps to come into full compliance with the 2004 decision but also chided it for prolonging the conflict.
"I welcome that Microsoft has finally undertaken concrete steps to ensure full compliance," Kroes said. "It is regrettable that Microsoft has only complied after a considerable delay, two court decisions, and the imposition of daily penalty payments."
The Commission had at one point(280.5 million euros), over allegations it was failing to comply with the March 2004 order. Kroes, however, noted that it will adopt a decision post haste on the pending noncompliance case regarding Microsoft's past alleged unreasonable pricing for its interoperability information.
Last month, the European Court of First Instance heard Microsoft's appeal of the ruling and handed the Commission, siding with the antitrust bureau's most significant findings and remedies.
Microsoft said it would let the Court of First Instance decision stand and not appeal the case to the European Court of Justice.
"At the time the Court of First Instance issued its judgment in September, Microsoft committed to taking any further steps necessary to achieve full compliance with the Commission's decision. We have undertaken a constructive discussion with the Commission and have now agreed on those additional steps," Microsoft said in a statement. "We will...continue to work closely with the Commission and the industry to ensure a flourishing and competitive environment for information technology in Europe and around the world."
Kroes noted in her speech that she and Microsoft Chief Executive Steve Ballmer had been in almost daily contact over the past two or three weeks, hammering out an agreement the Commission would accept.
Microsoft's decision to reach an agreement with the Commission was likely driven by its slim chance to have the Court of First Instance (CFI) decision overturned by the higher court, said Michael Knight, an antitrust partner at Cooley Godward Kronish.
"After the CFI decision, the writing was on the wall," Knight said. "Microsoft must have realized to get the decision overturned on appeal would have been extremely difficult."
He added that small, innovative companies stand a lot to gain from the agreement, compared with larger players, such as.
"It will level the playing field for these smaller, next-generation innovators who didn't have these (interoperability) agreements," Knight said. "Now that the playing field is level, the question is will their products catch on and can they deliver?"
Microsoft will offer the interoperability information under license terms that will permit programmers to use it in open-source software, Kroes said. Such software grants anyone unfettered rights to copy, modify and redistribute the software, freedoms that Microsoft's earlier terms wouldn't permit.
A trade organization that represents a number of Microsoft's competitors, from IBM to Oracle to Sun Microsystems, applauded the statements by the Commission.
"Today's statement...marks an important milestone in the Commission's efforts to address Microsoft's continuing abuse of its dominant position and ensure competition on the merits in key software markets," said Thomas Vinje, an attorney for the European Committee for Interoperable Systems (ECIS).
The open-source community received a large win with the agreement. And, in particular, the Commission did not take a position that Microsoft had any valid patents that could be infringed upon by sharing its protocol software, Vinje noted.
"So that means the Commission believes it is possible to deal with the situation, without a need for a patent license," Vinje said.
But that's not to say Microsoft may not try to file a lawsuit against those who sign aboard with one of its two licenses.
Microsoft has agreed not to enforce its patents over interoperability information for only noncommercial open-source software projects. If the software is used for commercial purposes, Microsoft may try to assert its patents.
A Commission representative noted the competition bureau is not in the business of determining what is, or isn't, a valid patent.
CNET News.com's Stephen Shankland contributed to this report.