EU closes in on Microsoft penalty

European regulators said Wednesday that they have reached a preliminary decision to force Microsoft to give greater technical information to server rivals and to loosen the ties between its media player and the Windows operating system.

Saying that Microsoft's abuse of its monopoly power is "ongoing," the European Commission--the executive branch of the European Union--said that it will seek to have Microsoft reveal the technical details necessary for Microsoft's competitors in low-end servers to achieve full interoperability with Windows PCs and servers. As for Windows Media Player, the commission said that either that software should be unbundled from Windows or Microsoft should be forced to bundle competitors' media players as well.

The commission, which also has the power to levy a fine against Microsoft, said it will give the software maker one final chance to comment before imposing its decision.

"This Statement of Objections, which includes the identification of appropriate remedies, gives Microsoft a last opportunity to comment before the Commission concludes the case," European Competition Commissioner Mario Monti said in a statement. "We are determined to ensure that the final outcome of this case is to the benefit of innovation and consumers alike."

Microsoft spokeswoman Stacy Drake said the company had just received the EU document and will scrutinize the commission's concerns.

"We take this investigation very seriously and continue to work hard to maintain a dialogue that will allow positive resolution to the commission's concerns and the new statement of objections," Drake said.

Asked about the possibility Microsoft might be forced to share the source code of its server software, Drake said, "We can't speculate on possible outcomes or the suggested remedies of the commission."

Charles Di Bona, an analyst at Wall Street brokerage Sanford C. Bernstein, said that the decision may require Microsoft to go beyond the steps it agreed to in its settlement with U.S. regulators, but is short of the disclosure of Windows source code or break-up of the company that some rivals were seeking.

"They do not on the surface appear to be overly onerous extensions beyond the U.S. remedies," Di Bona said in a research note on Wednesday. Di Bona said that the commission could also levy a fine of up to $3.2 billion, but said the commission has never before imposed the maximum fine.

The EU inquiry is one of the key antitrust clouds remaining for Microsoft, following its settlement with the Department of Justice and several states. Massachusetts is still seeking stiffer penalties for

		Special Report A mortal Microsoft Competitors and customers find cracks in the software empire.

Microsoft, while the company also faces private antitrust suits in several states as well as a suit from Sun Microsystems. The software maker recently cited these legal uncertainties as the primary reason for not sharing more of its $50 billion in cash with shareholders.

However, if the EU probe is settled, Microsoft might be more likely to boost its dividend, according to Ken Kiarash, an analyst at Buckingham Research Group.

"If we are right, and the case is settled in the next few months, this could eliminate a significant legal case off of Microsoft's docket, after which the company could raise its dividend," Kiarash said in a research note.

In its statement, the European Commission said it has talked to more of Microsoft's customers, partners and competitors and has found that by not disclosing the necessary information to allow rival servers to exchange data with Windows PCs, Microsoft is limiting competition.

"In light of this evidence, the Commission's preliminary conclusion is that Microsoft's abuses are still ongoing," the commission said. A decision by the government body on the matter has been expected for some time.

In talking with content owners and content providers, the commission said it found that "the ubiquity of Windows Media Player on PCs artificially skews their development incentives in favor of Microsoft," confirming its initial conclusion that the tying of Windows Media Player to the Windows operating system weakens competition.

A lawyer for RealNetworks--along with Apple Computer, a competitor of Microsoft in the digital media realm--praised the EU's decision.

"The EU gets this," said RealNetworks deputy general counsel Dave Stewart, in a telephone interview. "They understand how important digital media is, and they re committed to maintaining competition in digital media."

RealNetworks has been among the companies providing information to European regulators, he said.

Stewart said that the idea of unbundling the operating system and media player was good, but that it was too soon to know whether the remedy, as proposed by the EU, would be effective. "The devil is in the details," he said.

The European Union began investigating Microsoft in 1998 after rival Sun complained that the software giant would not disclose technical interfaces to Windows NT. In 2001, the EU expanded its Microsoft investigation to include a look at how streaming media technology has been integrated into Windows. The European Commission has issued two prior statements of concern, although Monti described this one as its final statement.