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EU report takes Microsoft to task

A 300-page report sheds new light on a corporate culture and business practices that led regulators to sanction the company last month for anticompetitive practices.

A record fine imposed on Microsoft in Europe last month arose from the longstanding nature of the software company's anticompetitive practices, according to a massive report from European regulators.

The European Commission's 300-page document says the more than five-year duration of those practices pushed the fine to 497 million euros--now about $590 million--well above what Microsoft would have been charged simply on the basis of its business practices.

Special coverage

European regulators tell the
software maker to unbundle
Media Player from Windows
and pay a record fine.

"The amount of the fine to be imposed on the basis of the gravity of the infringement should therefore be increased by 50% to take account of its duration. On that basis, the base amount of the fine is EUR 497,196,304," the document says.

The report is a full account of the investigation by the European Commission, the executive arm of the 15-nation European Union, into the way Microsoft sells software, and had been expected, since regulators announced their decision in March. That ruling found that the Redmond, Wash., company had failed to give rivals information that they needed to compete fairly in the market for server software and that it had been offering the Windows operating system on the condition that it come bundled with Windows Media Player, stifling competition.

The commission made the document available publicly Thursday at the end of its workday. Some of the findings from the report were first published by the online edition of The Wall Street Journal.

Responding to the report, which it had seen before the public release, Microsoft posted a seven-page paper to its Web site that aimed to portray the company as the victim of overreaching regulators. The paper called the March ruling a "new law" and cited both the ruling's potential to cause damage and its alleged legal shortcomings.

The commission's reponse to the Microsoft paper was terse.

"This is a decision the commission has taken. We will be explaining our decision in court and not in the press," Amelia Torres, a spokeswoman for the agency, said Thursday.

Microsoft intends to appeal the remedies outlined by the regulators, taking the legal battle to Europe's Court of First Instance.

"As our document points out, the commission's decision will have an adverse effect on consumers, the technology industry and many other sectors by stifling innovation," said Jim Desler, a Microsoft spokesman. The company also maintains that the size of the fine is excessive.

Much ado about Media Player
The March ruling gave Microsoft 90 days to provide a version of Windows without Media Player, although it can also continue to provide a version that includes the media software. Thursday's document offered additional details on that mandate.

"The remedy applies to Windows licensed directly to end users and licensed to (computer makers) for sale" in the European Union, the report stated.

Microsoft would be required to offer an operating system without Media Player that would perform as well as the bundled version of the Windows. It would be prohibited from offering a Media Player download link without also providing a similar link to its competitors' players.

"Microsoft must not give OEMs (original equipment manufacturers) or users a discount conditional on their obtaining Windows together with WMP (Windows Media Player)...or otherwise, remove or restrict OEMs' or users' freedom to choose the version of Windows without (Media Player)," the report said.

The commission also prohibited Microsoft from shipping Media Player with another Microsoft product--such as its Office software suite--that is dominant in its own market much as Windows is among operating systems.

"Without this exclusive franchise, called the Windows API (application programming interface), we would have been dead a long time ago."
--Aaron Contorer, C++ general manager, Microsoft, in a 1997
e-mail drafted for Bill Gates
The EU document also offers historical insight into Microsoft's business and how company executives viewed the software maker's market position. For instance, it notes that Microsoft withheld information from rival Sun Microsystems on the issue of interoperability.

In September 1998, Richard Green, a Sun vice president, wrote a letter to Paul Maritz, a Microsoft executive vice president, in which Green requested from Microsoft "the complete information required to allow provide native support for the complete set of Active Directory technologies on Solaris."

Sun's request encompassed the specifications for certain protocols used by Windows work group servers. Although Maritz responded that the information was already available to Sun and other software developers via the Microsoft Developer Network and that relevant source code could be licensed from other sources, the commission found that Microsoft withheld information.

"Microsoft has acknowledged a number of specific instances of interoperability information that fall within what was requested in Mr. Green's letter and that Microsoft refuses to provide to any work group server operating system vendor," the report states.

As a result, the commission's remedies call for Microsoft to provide complete and accurate disclosure of protocols used by the Windows work group servers to provide file, print, group and user administration services to Windows work group networks, according to the report. The protocols should be shared with competitors at about the same time Microsoft releases its products to beta testers, the order said.

In addressing the future development of Microsoft products, the commission also said it preferred to define the scope of the relevant protocols, based on generic services such as file and print rather than on specific versions of products.

The commission notes that its remedies do not require Microsoft to share its own source code.

An "exclusive franchise"
The report also includes a memo written for Microsoft Chairman Bill Gates by C++ General Manager Aaron Contorer in 1997 that describes one of the reasons why he felt Microsoft's Windows operating system was becoming a must-have product for client PC vendors.

Contorer wrote that end users stuck with Windows, despite the operating system's shortcomings, based on the high costs of abandoning heavy investments already made in APIs.

"The Windows API is so broad, so deep and so functional that most ISVs (independent software vendors) would be crazy not to use it. And it is so deeply embedded in the source code of many Windows apps that there is a huge switching cost to using a different operating system, instead," the e-mail reads.

"It is this switching cost that has given the customers the patience to stick with Windows through all our mistakes, our buggy drivers, our high TCO (total cost of ownership), our lack of a sexy vision, at times, and many other difficulties," the e-mail said. "Customers constantly evaluate other desktop platforms, (but) it would be so much work to move over that they hope we just improve Windows rather than force them to move."

The Contorer e-mail continues: "In short, without this exclusive franchise, called the Windows API, we would have been dead a long time ago."

In making its conclusions on the bundling of Microsoft's media player with its operating system, Mario Monti, the head of the European Commission's competition bureau, said: "The commission does not purport to pass judgment as to the desirability of one unique media player, or set of media technologies coming to dominate the market. However, the manner in which competition unfolds in the media player market, which may or may not bring about such a result, is of competitive concern."

The commission alleged Microsoft has a "clear incentive" to achieve a strong role in the media player market, which would serve as leverage in propagating its stake in proprietary media formats and technologies for its server software efforts, as well as bolster its relationship with content developers.

"It has been shown that what Microsoft presents as the benefits of tying (its media player to its OS) could be achieved in the absence of Microsoft tying WMP with Windows. As regards (the) other benefits identified by Microsoft, they primarily relate to Microsoft's own profitability and, being furthermore disproportionate to the anticompetitive effects in the market caused by the tying, cannot therefore serve as a valid justification," the commission said.

Michael Parsons of ZDNet UK contributed to this report.