Europe not done with Microsoft

Dealt a major legal defeat Monday, Microsoft faces an empowered and emboldened regulatory agency that could bring about more changes to the company's dominant Windows operating system in Europe.

The European Union's second-highest court ruled that the Redmond software giant abused its monopoly in computer operating systems; that its anticompetitive business practices have limited consumer choice; and that remedies imposed by antitrust regulators — including the forced licensing of sensitive technical details of the Windows operating system to competitors — are appropriate.

The European Court of First Instance upheld all of the important parts of a March 2004 European Commission decision, which itself was the culmination of a five-year investigation into complaints from competitors, including Sun Microsystems and Seattle-based RealNetworks.

The court left intact a $613 million penalty, the commission's largest, equal to about 3.3 percent of Microsoft's operating income in its past fiscal year.

(Microsoft settled with RealNetworks out of court two years ago for $716 million, and struck an alliance with Sun in 2004. It also has already paid and accounted for the fines.)

Now, Microsoft faces a pivotal decision that could signal its ongoing confidence in the legality of a famously profitable business model after a decade of government scrutiny:

It can appeal Monday's ruling to the Court of Justice of the European Communities, the highest court in Europe, and continue a bruising battle that has done nothing for its image on the continent.

Or it can continue to comply with the European Commission's mandates, seeking to reconcile with regulators.

The latter choice would probably come at the cost of sharing, with rivals, more technical details about its most profitable product, Windows, than it is comfortable with.

It may also have to live with the possibility that features it wants to add to Windows could raise more competitive or regulatory ire.

The company has two months to decide.

General Counsel Brad Smith, likening his first review of the lengthy court ruling to speed-reading "War and Peace," said Microsoft will take its time.

He struck a conciliatory tone outside the courtroom in Luxembourg, and later during a news conference.

"It's clearly very important for us as a company that we comply with our obligations under European law," Smith said. "We'll study this decision carefully, and if there are additional steps that we need to take in order to comply with it, we will take them. ... That is one of our strongest convictions as we go forward."

"Talk" to desktop

Under the commission's 2004 decision, largely upheld Monday by the court, Microsoft must license technical details that allow computer servers to "talk" to its desktop Windows operating system.

It also must market a version of Windows in Europe that does not include Windows Media Player, something it has been doing since 2004.

Europe's top antitrust watchdog, Commissioner Neelie Kroes, said the court victory Monday was hollow because Microsoft's dominance remains undiminished.

The ruling, she said in a news conference, is a "welcome confirmation of the commission's decision and its underlying policy, but nevertheless, it is bitter-sweet ... because the court has confirmed the commission's view that consumers are suffering at the hands of Microsoft."

Microsoft's share of the server market has grown from some 40 percent when the commission began its investigation in 1998 to 80 percent, she said. Its media-player format has also "come to dominate the market," Kroes said.

Mark Anderson, a longtime Microsoft observer and industry analyst in Friday Harbor, suggested Microsoft's products have continued to dominate despite sanctions because of consumer preference.

"The consumer will tend to prefer a product made by the same plumber who made the rest of your plumbing," Anderson said.

The commission's decision and court's ruling, he said, are untenable and basically penalize any monopoly company for improving its products.

Kroes pledged to keep the pressure on.

"Microsoft must now comply fully with its legal obligations and desist from engaging in anti-competitive conduct," she said. "The commission will do its utmost to ensure that Microsoft complies swiftly. ... I will not tolerate continued non-compliance."

Smith, reiterating a pledge to bring Microsoft into compliance, said the technical disclosures fit with a business strategy the company is pursuing to improve how its products work with competitors'.

In fact, the company has touted several agreements reached in the past year with competitors such as Novell, as well as an expanded alliance earlier this month with Sun — the source of the original European complaint.

Agreement or order

But signing interoperability agreements is a different proposition from being forced to comply with a regulatory agency.

Microsoft has been working with the European Commission on disclosing so-called server communications protocols for three years, but disputes remain about how much it must share and under what financial terms.

The company currently charges 1 percent of sales of products that make use of its technologies.

Unsatisfied with its progress on this matter, the commission slapped Microsoft with an additional $357 million in fines in July 2006.

The bundling issue is perhaps more problematic for the company, even though, Smith noted, for three years it has been selling compliant versions of Windows XP and Vista, dubbed "N," which do not include the media player.

The court's support of the unbundling of Windows and the media player represents a direct assault on Microsoft's business model, said Andrew Gavil, a professor at Howard University School of Law.

"If the commission can make it stick — that Microsoft can no longer add what it calls features and the rest of the world calls programs — that would be a pretty profound change in the Microsoft business model," said Gavil, who has advocated for stiffer oversight of Microsoft's monopoly.

"That would limit their ability to use Windows as a base for seeking to gain advantage in other fields," he said.

This could point to a future in which Windows includes fewer additional features.

Vista compliance

Smith said Microsoft had constructive conversations with the European Commission before the Windows Vista launch to ensure compliance.

Even so, he acknowledged that specific new features similar to the media player (in that they are also present in programs offered by competitors) could become targets for regulators. Examples include document formats and encryption and security features.

There is no indication the commission intends to immediately revisit any of those and try to force Microsoft to offer versions of Windows with additional features "unbundled."

A veteran of the battle over the media player said anyone seeking to strip more features out of Windows should come with deep pockets and stamina.

"I don't think it's realistic to think you're going to see an operating system with lots and lots of features stripped out of it," said Bob Kimball, general counsel of RealNetworks.

What's more, Kimball said, Microsoft is unlikely to just roll over and let it happen.

"They continue to be very proud and very able to defend themselves in these situations, and I don't think anybody's going to be confused about that," Kimball said.

Benjamin J. Romano: 206-464-2149 or bromano@seattletimes.com