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High Noon for Microsoft in Europe

By Andy Reinhardt Tick, tock, tick, tock. That's the sound of the clock counting down for Microsoft in Europe, where on Mar. 15, regulators moved a step closer to finding it guilty of antitrust violations. Behind closed doors in Brussels, the European Union's Competition Directorate, under the leadership of steely Italian lawyer Mario Monti, presented to the heads of the competition agencies from each of the EU's 15 member states the results of its five-year investigation.

According to a statement from Monti's office, the national competition authorities unanimously approved the finding. On Mar. 22, the 15 competition heads will meet again to review Monti's proposed remedies and sanction a fine that could run to the billions of dollars. The final decision will likely be announced a few days later.

TWO VERSIONS. The EU alleges that Microsoft (MSFT) has unlawfully benefited from leveraging its monopoly in personal computer software. By bundling Media Player audio- and video-playback software into the Windows operating system, the pan-European competition authority charges that Microsoft has reduced choice in the nascent digital-media industry for content producers, consumers, and rivals such as RealNetworks (RNWK) and Apple (AAPL).

And by refusing to disclose critical technical details about the interaction between Windows desktops and servers, Microsoft allegedly made it impossible for competitors such as Sun Microsystems (SUNW) and Novell (NOVL) to play on equal terms in networks of Windows PCs.

The specifics of the proposed ruling have yet to be made public. But informed sources in Brussels say Microsoft will be ordered to produce two versions of Windows, one with Media Player and one without, each of which would be offered at different prices to PC makers. This would allow manufacturers to sell PCs equipped with Windows and, say, RealOne or QuickTime, but not Microsoft Media Player.

HIGH STAKES. It's unclear whether PC makers -- or their customers -- would favor such a version of Windows without Media Player. On the server issue, Microsoft would be required to provide more information about the technical details of how desktop PCs and servers communicate, which rivals would be able to obtain for a fee.

Microsoft says it's still trying to negotiate a settlement. But with only nine days to go before the full European Commission -- the executive body of the European Union -- is expected to approve the ruling, time is running out.

"We continue to be actively engaged with the commission in the hope of settling this amicably," says Microsoft spokesman Lou Gellos. Spokespeople for the European Commission couldn't be reached.

CD SOLUTION? It's easy to see why a negotiated settlement could be attractive to both sides. The commission, though perhaps concerned that an agreement might signal it was backing down, would get a final result that avoided endless appeals. A settlement also could include requirements that Microsoft change its practices globally, not just in Europe. For Microsoft, a deal would put legal uncertainty behind it, and it could obtain a remedy more palatable than the full unbundling of Media Player and disclosure of server-interface specifications.

Where do things stand in the negotiations? At the beginning of 2004, Microsoft told the commission it was prepared to bundle copies of competing media players on the CD-ROM discs shipped by PC makers. The idea was to provide consumers with ready alternatives to Media Player. Recent news reports claim the commission rejected the offer as insufficient.

A Microsoft spokesman in Brussels says the idea has not been dismissed outright, however. Rather, "it remains one of many options being considered as part of the negotiations," he says. Microsoft's hope is that bundling rival media players on a CD-ROM could be part of a "broader approach" to addressing the EU's view that Microsoft must support rival media players.

UNTESTED THEORY. The two sides could well agree to other measures. For instance, Microsoft might be allowed to leave Media Player as the primary option built into Windows but add a "wizard," a software-installation tool that guides users and would run when a customer fired up a PC for the first time. This would allow the user to select which media players to install, and whether to set one as the default. The noninstalled options could be shipped on a CD-ROM with the PC or made available via download. Microsoft might have to agree to leave the Media Player desktop icon hidden unless customers activated the software.

What's odd about all this is that media players are generally available for free over the Internet. Besides, they usually install themselves automatically if a PC user clicks on a piece of online media he or she can't currently play. So, even if Microsoft stripped out the Media Player entirely, the software would likely end up being installed from the Net the first time a customer tried to play a streaming audio or video file.

Microsoft has tried to assert its right to bundle whatever applications it deems appropriate -- what it calls its "right to innovate." If it is ordered to ship rival media players with Windows, its ability to add features such as Internet searching and online music downloads to subsequent editions of Windows could be threatened. Also, if it reaches a settlement, Microsoft might be saddling itself with a difficult precedent. Every time Redmond rolls out new features in its operating system, third-party providers of comparable software could lobby to have their versions included.

PROTECTION AT HOME. So why is the European Commission even bothering with this? It argues that the very dominance of Media Player, which is on every PC desktop, biases content producers to create material that complies with Microsoft's standard. Then, and only then, do producers consider rolling out additional versions of audio and video offerings that can be used with rival software. If Media Player is no longer a given, the EC argues, content producers will be free to consider all options. What's more, consumers will have a greater selection of digital media from which to choose, and Microsoft's power to set standards and exert control in digital media will be reduced.

It all sounds fine in theory, but the market hasn't yet had a chance to validate whether unbundling Media Player would produce more options -- or might actually reduce choice by burdening content producers and users with the task of juggling multiple formats.

The issue of the server interfaces seems less ambiguous -- and Microsoft is apparently more willing to give ground on the matter. Clearer specifications, analogous to the rules that govern interconnection between Internet routers from Cisco Systems (CSCO), Juniper Networks (JNPR), and Nortel Networks (NT), would level the playing field and allow companies such as Sun to compete on price and technical merits against rival offerings from Microsoft. Even this aspect of the case raises questions, however.

GOING FOR IT. For instance, if the EU forces Microsoft to disclose intellectual property in Europe, will it be possible for U.S.-based companies to use that information without treading on copyright or patent laws? Clearly, a settlement would have to address this problem, but an outright ruling by the EU might leave it open to endless legal battles.

It's battles such as these that Microsoft still hopes to avoid through a settlement. Yet with the finish line in sight, and after the European competition agencies' Mar. 15 vote of confidence, the EU may be emboldened to go for total victory. Then again, might pragmatism produce a last-minute compromise? The clock is ticking. With Jay Greene in Seattle


Reinhardt is covering the dispute for BusinessWeek in Paris

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