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South Korea fines Microsoft $32 million

Regulators say Redmond violated Korea's monopoly rules by bundling Windows products in ways that hurt competitors.

The Korea Fair Trade Commission has fined Microsoft $32 million (33 billion won) for abusing its market dominant position, and ordered the software giant to modify the way it packages its Windows products.

According to a statement released Wednesday by the KFTC, Microsoft was found to have violated Korea's Monopoly Regulation and Fair Trade Act by bundling its Windows Media Service with the Windows Server operating system, as well as its media player and instant messaging (IM) program with Windows.

The KTFC said it found such practices liable because they constitute abuse of Microsoft's market-dominant position and unfair trade practices under the country's antitrust laws.

In addition, the bundling practices by Microsoft proved to have eliminated competition, leading to the monopolization of the tied product markets, the KTFC said.

Such practices "raised entry barriers" to the markets these products play in, leading to the "restriction of market competition and obstruction of consumer welfare," according to the commission.

Microsoft has disagreed with the KFTC rulings and will appeal the decision, which the software maker argues is inconsistent with Korean law.

The company said in a statement that its integration of IM and media player functionality in Windows has created value for consumers, and opportunities for Korean developers who write applications that run on Windows and create devices for Windows.

"Competition in these technologies in Korea has been, and remains, vibrant with many new Korean companies successfully offering digital media and IM choices for Korean consumers," Microsoft said. "This decision could have the effect of chilling innovation in Korea."

Under the ruling, Microsoft is required within 180 days to unbundle the Windows Media Service from Windows Server operating system.

The software giant is also required to offer two versions of Windows--one that is stripped of Windows Media Player and MSN Messenger, and another with "Media Center" and "Messenger Center" features that point users to Web pages that allow consumers to download competing software.

Microsoft is also required to provide existing Windows users with access to Media Center and Messenger Center through CDs or Web updates.

In explaining its ruling, the KTFC said that by tying its media player to Windows, Microsoft was able to shift its monopoly to the streaming media and IM market.

The commission pointed out that in December 2000, right after Microsoft bundled its media player with Windows, Microsoft and rival RealNetworks had 39 percent and 37 percent of Korea's media streaming market, respectively. But recently, it said, Microsoft's market share has increased to more than 60 percent, while RealNetworks' share has shrunk to 5 percent.

Korean companies that provide IM tools also found themselves losing market share after Microsoft tied its MSN Messenger to Windows, the KTFC noted, adding that Microsoft was able to command a 65.2 percent market share in April 2004, leaving Korean Internet service provider Daum with only 5.3 percent of the IM market.

Microsoft's inclusion of Windows Media Service in its Windows Server operating system also helped to increase the use of streaming media based on Microsoft's media streaming technology. This raised the barriers to entry for the PC and server operating system market, the KFTC said.

The commission added that the new rulings will restore competition in the previously distorted markets, including respective markets for PC and server operating systems, streaming media server and instant messaging. The decision will serve as an impetus for Korea's domestic software industry to develop further, which has been behind in comparison with the hardware industry, the KFTC said.

It also urged Korean consumers and businesses to bear with any inconveniences that might result from the ruling, and consider it as "a way to participate in remedying the harm of monopoly, promoting competition and developing [the local] software industry."

Last month, Microsoft settled a lawsuit with Daum for $30 million, and RealNetworks dropped its antitrust complaints against Microsoft in the Korean market after agreeing to a $761million settlement in October.

Aaron Tan of ZDNet Asia reported from Singapore.