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Week in review: Windows woes

The EU slaps Microsoft with a record penalty, but will a Vista price cut help pay the fine? Also: Pakistan hijacks YouTube, and game publishers square off for market domination.

Last week's bit of glasnost on the part of Microsoft apparently didn't make people in Europe very happy.

As we noted in this column last week, company executives had revealed steps they said would help the software giant comply with antitrust legal requirements and announced changes in its business practices to work better with software from other providers, including open-source communities.

However, European Union regulators, apparently unhappy with the software giant's progress, fined Microsoft a record 899 million euros, or $1.35 billion, for failing to comply with sanctions. The fine specifically addresses sanctions over the pricing structure Microsoft had set for licensing of its interoperability protocols and patents.

The pricing issue is the last of three parts of the European Commission's historic March 2004 antitrust order, which called for the software giant to provide complete and accurate interoperability information to rivals so their software could work with the Windows operating system, as well as to license the information "under reasonable and nondiscriminatory" terms.

Although Microsoft's announcement and the Commission's fine come within days of each other, one source said the two were not related. Microsoft's announcement last week addressed how the software maker would comply with the European Court of First Instance's September ruling upholding the EU's antitrust requirements and how it would apply those obligations to the rest of its business, according to the source.

In its new order, the Commission specifically said that Microsoft had charged "unreasonable prices for access to interface documentation for work group servers."

In total, the European regulators have fined Microsoft roughly $2.5 billion in the long-running antitrust dispute.

News of the penalty generated plenty of heated exchanges among News.com readers, with most debating the purpose and size of the fine.

"Consumers deserve a fair go and Microsoft hasn't given consumers a fair go because an eco-system with competition gives us the best at the best price," wrote one reader on the News.com TalkBack forum.

Despite having just been hit with a record fine, Microsoft CEO Steve Ballmer said his company is actually in full compliance with European regulatory demands.

"This is not news today," Ballmer said in an interview with CNET News.com. "We are in compliance, they agreed we are in compliance. This is a fine for activities that predate the compliance activities that (EU Competition Commissioner Neelie Kroes) talked about last fall. It says there was a past transgression and they assessed a fine for that past transgression."

In another headache for the software giant, some juicy Microsoft e-mails have surfaced as part of litigation that the software maker is party to. Microsoft is being sued over a program in 2006 that labeled some PCs as Windows Vista Capable ahead of the operating system's mainstream release in January 2007.

As part of the discovery process related to the litigation, e-mails have emerged with Microsoft executives discussing various problems with Vista as it came to market. In one e-mail, Microsoft executive Steven Sinofsky writes to Ballmer about factors that were to blame for early Vista challenges.

"No one really believed we would ever ship so they didn't start the work until very late in 2006," he said. Sinofsky added that his Brother home printer didn't have drivers until after Vista's commercial launch.

In what may be an unprecedented decision, Microsoft said it plans to lower the retail prices for several flavors of Windows Vista.

For those in the U.S., Microsoft is cutting prices only on the higher-end versions of Vista, and only for the upgrade version used to move from an earlier copy of Vista. The suggested price for Vista Ultimate drops to $219 from $299, while Home Premium falls to $129, from $159.

YouTube hijacked
If you couldn't get on to YouTube.com on Sunday, you weren't alone; the entire world was shut out. The video-sharing site suffered a two-hour systemwide outage that the company said was triggered by a network based in Pakistan.

Pakistan's attempts to block access to YouTube may have inadvertently caused the outage. Earlier in the day, Pakistan shut off access to YouTube inside the country in response to the posting of cartoons of the Prophet Mohammad, which have outraged many Muslims.

After receiving a censorship order from the telecommunications ministry directing that YouTube.com be blocked, Pakistan Telecom went even further. By accident or design, the company broadcast instructions worldwide claiming to be the legitimate destination for anyone trying to reach YouTube's range of Internet addresses.

News.com's Declan McCullagh delved into the technical details behind the outage to explain why it is both a serious Internet vulnerability and also difficult to fix. The security weakness lies in why the false instructions that took YouTube offline were believed by routers around the globe. That's because Hong Kong-based PCCW Global, which provides the Internet link to Pakistan Telecom, did not stop the misleading broadcast--which is what most large providers in the United States and Europe do.

Danny McPherson, the chief research officer at Arbor Networks, guesses that there were two ways that the ISP in question goofed and mistakenly started "announcing to the world that you provide destination reachability for the YouTube" IP address.

As McPherson noted in his blog post, because PCC Global almost certainly wasn't validating the Pakistan Telecom's prefix-code announcements, the world was getting a message that the ISP was providing access to YouTube.

After all this brouhaha, YouTube removed a video clip that offended some of Pakistan's Muslims, and the government there has lifted a nationwide ban against the video-sharing site.

War games or game wars?
In a startling bit of news, Electronic Arts announced that it has launched an uninvited bid to buy Grand Theft Auto video game franchise publisher Take-Two Interactive Software for $26 a share, or what could be a $2 billion deal. The announcement comes on the heels of what appears to be a spurned attempt at a friendly takeover of Take-Two at $25 a share.

And while EA, in its press release, did not make any reference to Vivendi's December agreement to purchase Activision, there can be no doubt that this is the response EA had to make to keep its spot as the undisputed heavyweight champion of the video games business.

What seems certain is that EA's board felt that it had to do something to counter Vivendi's Activision purchase. That move would have potentially made the combined company--known as Activision Blizzard, because Vivendi's biggest video game holding was World of Warcraft publisher Blizzard Entertainment--the world's largest video game publisher.

EA said in a conference call that it had been talking to Take-Two's management for nearly a year, though it hadn't made any formal moves until at least December. In any case, if the deal goes through, the industry will be a bit top-heavy.

But even though an EA/Take-Two merger would indicate massive consolidation, News.com's Daniel Terdiman contends that gamers probably shouldn't worry that an industry pyramid dominated by EA and Activision will mean less innovation.

After all, even with a wide gap between the top two companies and everyone else, it's important to remember that there would still be plenty of important and respected publishers: Disney, Ubisoft, THQ, Midway, and Infogrames, to name a few, not to mention Microsoft, Sony, and Nintendo.

Meanwhile, Take-Two's board of directors approved new compensation packages for its management firm that would take effect with a merger or acquisition. However, a company spokesman said the move was not in reaction to the takeover offer.

Also of note
Apple has confirmed a security glitch that, in many situations, will let someone with physical access to a Macintosh computer gain access to the password of the active user account...Apple updated its MacBook and MacBook Pro lineups with Intel's Penryn processors, while bringing multitouch trackpads to MacBook Pros...The day after the Federal Reserve cut interest rates, LendingTree.com saw record traffic to its site for connecting borrowers and lenders, leading the site to pull back on search engine advertising campaigns that are used to draw visitors...Google launched a revamped JotSpot--its recently acquired wiki platform for building collaborative Web sites--as Google Sites.