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What's Microsoft Up Against in Europe?

Months of negotiations crumbled on Mar. 18, when the European Union's top trustbuster, Mario Monti, and Microsoft CEO Steven A. Ballmer acknowledged that they couldn't resolve their five-year old antitrust dispute. Now, Monti will move forward with a ruling as early as next week that will find Microsoft (MSFT) guilty of monopolistic behavior and require it to dramatically change its business practices in Europe.

The ruling's implications could also reach well beyond the Continent and alter the way Microsoft designs its software and shares information about the Windows operating system with rivals. Here are some answers to key questions about the ruling:

Why did the talks break down?

Microsoft met with EU regulators for the last several months, trying to hammer out a deal. But Ballmer said in a Mar. 18 statement that it couldn't reach an agreement on all of the issues in the case. Details are scarce, but it seems likely that the Europeans were looking for a permanent framework limiting Microsoft's ability to use its Windows monopoly to gain advantages in new markets. The EU apparently wanted a way to resolve future complaints quickly. And the disagreement over that proved to be the settlement's undoing.

What will the final EU decision be?

Monti wants to restrict Microsoft's conduct in order to both remedy alleged past abuses and prevent future ones. Microsoft will be required to produce two versions of Windows for the European market, one that includes the Windows Media Player, used to watch videos and listen to music, and one without. The ruling will also require Microsoft to reveal information to competitors about how its Windows operating system interacts with Windows Media player and with Microsoft's server software.

What's next?

Monti will meet with competition regulators from the 15 EU member states on Mar. 22 to discuss how much in monetary penalties to levy against Microsoft. European law allows a fine of up to 10% of a company's revenue, which could amount to a $3.2 billion hit for Redmond (Wash.) software giant. More likely, though, the fine will be less, in the hundreds of millions of dollars. Then, on Mar. 24, the European Commission will likely approve Monti's landmark findings and recommended remedies.

Can Microsoft appeal?

It can, and almost certainly will. The first avenue of appeal is with a panel based in Luxembourg called the European Court of First Instance. Microsoft would likely ask for a stay of the EC remedies. Brussels legal experts are divided on how likely Microsoft is to get an injunction. It would have to demonstrate immediate and significant economic harm from the remedies, a high hurdle that few plaintiffs have historically cleared. But there's legal precedent for injunctions, so Microsoft might be able to have the EC's remedies put on hold pending appeal.

It could ask the Court of First Instance for an expedited review of the EC's ruling -- a process that would take about a year -- but it might not be able to persuade the court to accelerate its schedule. A normal appeal could take two to three years. If the court then rules against Microsoft, it would have one more shot at appeal, with the European Court of Justice -- the EU's equivalent to the Supreme Court. Whatever decision it makes would be final.

What are the ruling's short-term implications?

That'll depend on whether the Court of First Instance stays the ruling, pending appeal. If it does, Microsoft is free to continue developing software as it has. If not, Microsoft will need to develop a version of Windows that doesn't include Windows Media Player and offer it to PC makers. They can then add digital media software from Microsoft's rivals, such as Apple (AAPL) and RealNetworks (RNWK), and sell those machines to consumers. It's unclear, though, if PC makers will want Windows-lite, since many consumers use multiple digital-media applications.

So why is this ruling such a big deal?

The long-term implications are daunting for Microsoft. Once Monti rules that it has abused its dominant market position by bundling new applications into Windows, Microsoft has to be very careful about adding any new features to its operating system. What's more, the precedent-making ruling could make it easier for the EU to bring future actions against Microsoft. However, each case would have to be prosecuted on its individual merits, including detailed economic data and analysis. It doesn't give the EU carte blanche to ride Microsoft's back forever.

How about the EU charges involving Microsoft's server software?

Competitors say Microsoft uses "secret handshakes" between Windows and its other software so it can provide more features and better performance for computer users than its competitors can. This piece of the ruling would give rivals a fairer chance of competing with Microsoft's applications and its server software. RealNetworks, for instance, sells server software that sends streams of audio and video signals to computer users via the Web that competes with Microsoft's server software.

Will this ruling help consumers?

It may seem counterintuitive that pulling technology out of Windows could be good for consumers. But the EU is thinking long-term here. Microsoft has a tremendous advantage over rivals since it can add new features to its Windows monopoly and get the broadest possible distribution. Without that distribution, rivals stand little chance of competing or convincing third parties to support their alternative technology.

European regulators worry that competitors won't even try to square off with Microsoft if its ability to add features to Windows remains unchecked. Their hope is that the ruling will embolden future players, who in turn will bring more choice and more innovation to consumers.

But the ruling will apply only to Europe, right?

That's true. And that could limit its impact. Microsoft will continue to add new features to Windows in every market, including the world's largest, the U.S. But if the alternative version of Windows proves successful in Europe, PC makers could press Microsoft to make it available elsewhere. And disclosing information about how Microsoft's operating system interacts with other programs will help rivals throughout the world, not just Europe.

What's more, European regulators will have put Microsoft on notice that its long-standing business practices won't be brushed off in the future, and that could have broad impact in the way it develops software worldwide.

Will the EU be back with other complaints against other U.S. tech companies?

Anything is possible, but the EU doesn't seem bent on pursuing companies from the U.S. or anywhere else just for the fun of it. The legal mandate of the EU's Competition Directorate is similar to that of the U.S. Justice Dept. and Federal Trade Commission: It reviews pending mergers and acquisitions, prosecutes cartels and price-fixing, and enforces antitrust laws that are similar in scope to those in the U.S.

The EU has the right to bring cases against any company doing business in Europe, no matter where it is headquartered. So if it believes that another U.S. company is behaving as an abusive monopolist, it could launch another probe. The only other American tech giant on the EU's radar right now: Oracle (ORCL), with its proposed hostile takeover of PeopleSoft (PSFT), which the EU is moving to disallow. But so is the Justice Dept. By Jay Greene in Seattle, Steve Hamm in New York, and Andy Reinhardt in Hannover, Germany

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