Microsoft fails to satisfy EU; strong sanctions due next week

By Kim Peterson
Seattle Times technology reporter

	Steve Ballmer
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After three days of intense negotiations, Ballmer and Microsoft's top lawyer, Brad Smith, could not reach a settlement agreement with European regulators yesterday that would have ended the long-running antitrust investigation against the company.

It is the second time in three years that a corporate titan, a man who can move mountains in America, has sat down to negotiate with European antitrust chief Mario Monti only to come back with nothing.

In 2001, Welch, then head of General Electric, could not persuade Monti to sign off on the $41 billion merger of his company with Honeywell, leading to the deal's demise.

Ballmer, Microsoft's chief executive, didn't fare any better. The two sides could not reach an agreement after regulators pressed for commitments from Microsoft on its future conduct, reportedly including its ability to bundle new applications into future versions of Windows.

	Mario Monti

And so the European Commission — the executive arm of the European Union (EU) — is expected to hit Microsoft next week with perhaps the most damaging fines and demands the company has ever faced.

The case will not end there, however. Microsoft is sure to appeal, and Smith held out the possibility yesterday that a settlement could be reached in the courts.

Investors did not react strongly to the news yesterday. Microsoft's share price fell 24 cents, or less than 1 percent, to close at $24.89.

This case has been five years in the making in Europe, ever since Sun Microsystems complained Microsoft had broken European antitrust rules by playing favorites with its licensing. Sun, based in Santa Clara, Calif., also alleged Microsoft wasn't giving essential information about its products to makers of computer servers.

Over time, the case expanded to scrutinize Microsoft's bundling of its media-player software with Windows. Competitors, notably Seattle-based RealNetworks, argued that by offering free software to play audio and video files, Microsoft was using its dominance in computer operating systems to take over other markets.

The European Commission has been reviewing a draft decision that reportedly requires Microsoft to offer computer makers two versions of Windows: one with its Windows Media player and one without it. The draft decision, according to reports, would also force Microsoft to give more information about Windows to rival computer-server makers.

Microsoft has pushed hard for a settlement. Smith spent 20 days of the past two months in Brussels, Belgium, headquarters of the EU. Earlier this week, he said a happy ending appeared to be in sight.

"The interesting thing is that we were able to reach an agreement on every one of the issues in this case," he said in an interview yesterday. "We were able to get to a common point."

Ballmer flew in Tuesday morning to discuss the final details. But the negotiations were tripped up by other issues, Smith said, including Microsoft's future business and other complaints pending in Brussels.

In February 2003, the Computer & Communications Industry Association — a trade group backed by some of Microsoft's staunchest rivals — filed a complaint against Microsoft with the European Commission alleging the company was using the Windows XP operating system to maintain its monopoly.

Smith said talks broke down once the discussion moved beyond the case to those other issues.

"We don't think it's ever possible to solve every future problem in one single stroke," he said. "And yet if we had come to an agreement, we would not only have solved today's problems, the settlement would have had an immediate effect."

In a statement released yesterday, Monti said he intends to ask the European Commission to finalize the draft decision Wednesday. He praised the "constructive and cooperative spirit" shown by Microsoft executives.

"We made substantial progress towards resolving the problems which have arisen in the past, but we were unable to agree on commitments of future conduct."

And so five years of investigation has led to this: European officials are expected Wednesday to fine Microsoft hundreds of millions of dollars and demand the company change its way it does business on the Continent.

With nearly $53 billion stashed in the bank, Microsoft could likely handle a fine reaching into the billions of dollars. It has probably already budgeted for such a case.

More worrisome to Microsoft are possible requirements that it strip its media player from Windows and release more technical details to rival server makers.

Microsoft has made the media player a centerpiece in its strategy, particularly as audio and video content becomes more widely available on the Internet.

Ed Black, chief executive of the Computer & Communications Industry Association, said he never expected the two sides to agree on the technical requirements. Microsoft makes more than a billion dollars a month in profit and doesn't want to change that business model, he said.

A ruling in Europe "is not going to change Microsoft's behavior except where they absolutely must comply, because there's no way to get around it."

A pro-Microsoft trade group, Americans for Technology Leadership, said the company had little choice but to refuse any attempt to limit its ability to innovate and improve products in the future.

Some analysts have said that even if Microsoft were to remove the media player, the move wouldn't have much of an effect on the company.

Few people would choose a computer without a media player over one that has the software, Gartner analyst David Smith wrote in a research note. And computer makers already have the choice to install media players from competitors like RealNetworks.

Sanjiv Hingorani, an analyst with Oppenheimer, wrote in a research note yesterday that he is optimistic about Microsoft's revenue prospects and that the case in Europe will likely take a couple of years to resolve.

Smith estimated litigation could last as long as four or five years. Part of the reason no agreement could be reached, he said, was there have been no European court rulings about technological innovation and integration.

When Microsoft negotiated an antitrust settlement with the U.S. Department of Justice in 2001, it had a prior decision from a federal appeals court to go on, Smith said. He added that he wouldn't be surprised if a similar scenario played out in Europe.

"This will go to the courts, and the courts will have the opportunity to speak," he said.

Kim Peterson: 206-464-2360 or kpeterson@seattletimes.com

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