European Commission Threatens Microsoft

The European Commission is declaring that it could fine Microsoft as much as 10 percent of its global annual sales for monopoly offenses, finding that the software giant is still using the same tactics that prompted five years of scrutiny.

The statement was a preliminary ruling in the European Commission's long-running antitrust suit against Microsoft. In fact, the company is still committing the monopoly abuses it was accused of when the investigation began in 1998, the EC declares.

Charges Listed

The Commission has sent an updated statement of objections to Microsoft, reiterating previous accusations that the software giant has leveraged its dominance in the market for computer operating systems into the markets for server systems and media-player software.

Its statement also outlines the remedies the Commission wants to impose on Microsoft to free up competition in these markets. The report comes after extensive research by the European competition regulator earlier this year, intended to strengthen its legal arguments, says Tilman Luder, an EC spokesperson.

"We now have a very strong case. The issue as it stands now is too strong to ignore for the company at issue," Luder says.

The Commission is giving Microsoft "a last opportunity to comment before the Commission concludes the case," says Mario Monti, commissioner for competition issues, in a statement.

Besides forcing changes in the way Microsoft does business, the EC could levy a fine of up to 10 percent of Microsoft's annual global sales. The size of the fine won't be decided until the weeks before a final ruling, which Luder says could occur within months.

"The final decision is months rather than years away now," he says.

Microsoft on July 17 reported $32.19 billion in revenue for its 2003 financial year, which ended June 30.

Microsoft Considers

The Commission's belief that Microsoft continues to abuse its monopoly status makes a large fine likely. Under European Union law, the gravity of an antitrust offense is determined partly by how long it lasts. However, the EC has never fined a company the maximum 10 percent of sales.

Microsoft is studying the new statement of objections, says Jim Desler, company spokesperson. The EC did not alert the vendor in advance that it was issuing a new statement of objections, according to Desler.

"We're currently examining the contents of the Commission's statement of objections to thoroughly assess their concerns," Desler says. "We take this investigation very seriously and will continue to work toward a positive resolution of these issues."

The EC's statement will prolong the case, according to Horatio Guttierez, Microsoft's chief lawyer, who says he is "disappointed" about the delay. Issuing a statement of objections now means "there is no short-term culmination of the official process," Guttierez says, declining to comment on details of the statement.

The latest statement of objections is the Commission's third; the first two appeared in August 2000 and August 2001, according to Desler. Microsoft has two months to respond to this private document, Desler says.

Wish List

The Commission wants Microsoft to reveal all the software code that competitors would need in order to make a server system as compatible with Windows as Microsoft's own server software.

In order to restore competition in the market for audio- and video-playing software, the EC proposes two solutions: Either Microsoft must stop selling its Media Player as a package with Windows, or Windows must bundle a competing product as well.

"It's an extremely positive outcome," says Thomas Vinje, a lawyer in the Brussels office of Morrison & Foerster, which represents several Microsoft competitors.

"It indicates that the Commission is serious about pursuing the company," Vinje adds. Only a few months ago, many people feared that the Commission "might let the case fade away," he says.

The Commission's proposed remedies go a long way toward restoring competition in the two specific markets, Vinje says. However, he expresses doubt about the must-carry solution for media software.

"If Microsoft is allowed to keep bundling Media Player into Windows with another rival product, it will find ways of giving an advantage to Media Player," he says.

Also, choosing the rival that will receive the benefit of being bundled with Windows will be difficult, and enforcing the rule will be complicated, Vinje notes.

Too Late?

The Commission's action to restore competition in media playing software may come too late.

"The game is up," says one content provider who asked not to be named. "It's expensive to tailor content for different media players. If we know that Microsoft's Media Player is in Windows, then there isn't much incentive to adapt our products for other players."

Leading rivals to Media Player are RealNetworks' Real Player and QuickTime, from Apple systems.

The media player battle is far from over, and the Commission's efforts demonstrate that, says Dave Stewart, RealNetworks deputy general counsel. Most media companies use both Microsoft's and RealNetworks' technologies today, he says.

"This game ain't up, and if the game is kept legal, we know we'll win," he says. "I think the Commission's statement reflects that this is a very important market. They would not be putting all those resources into this if they thought competition was over in digital media. We view this as the Commission ensuring there will be a level playing field in the future."

As a Microsoft rival, RealNetworks has provided information to the Commission when asked to do so, Stewart says.

Next Steps

More than 75 percent of the world's PCs today have RealNetworks', Apple's, or some other maker's media player installed either instead of or in addition to Microsoft's player, according to Richard Doherty, research director at The Envisioneering Group.

"RealNetworks and Apple have done fairly well despite the home-team advantage Microsoft has with bundling Media Player," Doherty says. "Consumers have voted to download the RealPlayer and QuickTime software to get the kind of content they want and the quality they want."

If the Commission follows its statement with an adverse final ruling, Microsoft can file an appeal against that ruling at the European Court of First Instance in Luxembourg. That court hears disputes of Commission rulings, chiefly those involving competition. Microsoft can also request that the Commission's remedy be put on hold pending an appeal.

Microsoft continues to modify its practices under pressure from antitrust cases. The company is changing the terms under which companies can license protocols that help non-Microsoft applications interoperate with Windows.

A recent change in Microsoft's product licensing terms aims to satisfy government concerns about Microsoft's compliance with the November 2002 antitrust settlement, according to Justice Department officials at a recent hearing with U.S. District Judge Colleen Kollar-Kotelly, who oversees the U.S. antitrust case.