Guild Companies

The European Commission's antitrust organization, under Competition Commissioner Mario Monti, said late last week that it had reached a preliminary decision in its four-year antitrust investigation into the products and practices of Microsoft. Monti and his fellow commissioners are giving Microsoft a final chance to address their concerns before imposing fines that could amount to 10 percent of Microsoft's worldwide sales.

Server and operating system maker Sun Microsystems and media-player software developer RealNetworks have been egging on the EC's antitrust body for years, claiming that Microsoft is leveraging its monopoly power for operating systems on the PC desktop to illegally stifle competition in the entry server and media player markets. There undoubtedly have been other parties supplying input for the case, which has been moving through the EC's analysis process at a snail's pace.

The crux of the EC's position as it relates to the entry server market is that Microsoft, being the owner of the Windows operating system, has control of the APIs and other features of the operating system that allow its server operating systems to more seamlessly integrate with its PC operating systems. The EC believes that by withholding information that might allow vendors of other servers to seamlessly integrate with Windows PCs, Microsoft is pushing customers toward adopting Windows on the server, when they might otherwise have chosen a different server platform. The EC has contacted a significant number of companies across the EC, in all industries and of all sizes, and the overwhelming majority of them say that the nondisclosure of such interface information did indeed artificially alter their decision to acquire Microsoft's server products.

The EC also reckons that tying Windows Media Player to the Windows operating system also has given Microsoft an unfair advantage over its rivals in media markets. The EC randomly surveyed a large number of software developers in the European Union and in the United States, who said that the ubiquity of Windows Media Player on Windows desktops--which is made possible because Microsoft includes Media Player with Windows--skews the developers to write their applications for Microsoft's products above and beyond any potential competition. "This confirms the commission's preliminary conclusion that Microsoft's tying of Windows Media Player to the Windows operating system weakens competition on the merits, stifles product innovation, and ultimately reduces consumer choice," said the statement that the EC released.

The EC has been patient with Microsoft, and Microsoft has, in the past year, shown a willingness to not be so belligerent in dealing with governments, courts, and competitors. But it is hard to say what Microsoft will do to remedy the situation. The EC has investigated the situation in the entry server market, and has identified the key APIs that Microsoft must disclose to level the paying field with competing platforms. If Microsoft does this, the EC will back off, it will be able to claim victory for Sun, and Microsoft will be able to quietly push ever deeper into corporate computing, perhaps even without a significant fine. On the media-player front, the EC is giving Microsoft two options: provide an unbundled version of Windows without Windows Media Player or bundle all other media players with Windows.

In the EC's statement, Monti was firm with Microsoft: "This Statement of Objections, which includes the identification of appropriate remedies, gives Microsoft a last opportunity to comment before the commission concludes the case. We are determined to ensure that the final outcome of this case is to the benefit of innovation and consumers alike." While Microsoft is undoubtedly unhappy with the EC, what the EC is asking for is not anything as harsh as the breakup of Microsoft, which the U.S. Department of Justice sought, and Federal Judge Thomas Penfield Jackson ordered, before Microsoft won a lighter reprimand on appeal.

According to EC law, Monti can impose a fine of 10 percent of annual revenue on Microsoft, which would come to $3.2 billion in its last fiscal year. It is unclear if these fines can be cast backward to when the offenses began, which would be more than a decade for the Windows APIs and arguably seven or eight years for the media players. If this is the case, Microsoft could stand to lose a substantial portion of the $49 billion cash hoard it has in the bank. If the fines are not cumulative, they ought to be, since the offenses certainly are.

Microsoft is undoubtedly keen on keeping its money, whether it is $3.2 billion or more, and seems inclined to argue that the latest proposed settlement with the U.S. government in that antitrust case, plus a few provisions that Microsoft has made in recent months to specifically allay the concerns of the EC, are sufficient to settle the matter. The fact that Monti issued the "one last chance" document illustrates that the EC does not agree with this assessment.

Microsoft, which has exhibited patience with harsh pronouncements from governments in the past, and did better than if it had it settled early, may be counting on the EC's Court of First Instance, in Luxembourg, to overrule Monti, much as the federal appeals court in Washington did to Judge Jackson. This has happened in several big cases already, and the odds are good that Microsoft could prevail on appeal. Then again, Sun and RealNetworks might appeal a Microsoft settlement.

This is probably going to become a mess, drag on for years, and once again demonstrate the inability of antitrust law to move fast enough to keep damage from being done in any market--especially in the fast-moving IT sector.