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The EC Can't Get Enough of Microsoft

By Jay Greene While Microsoft (MSFT) has extinguished most of its legal flare-ups in the U.S., its fires in Europe continue to rage. The European Commission's antitrust unit is still tussling with the software giant over concerns about its leveraging Windows in the computer server and digital media markets. And on Aug. 25, it announced that it has opened a new Microsoft probe.

Regulators put Microsoft and partner Time Warner (TWX) on notice that it intends to investigate their plans to jointly acquire Bethesda (Md.)-based ContentGuard, which makes digital-rights-management (DRM) software to prevent music and movie piracy. "After a preliminary review, it appears to the commission that the transaction might possibly create or strengthen a dominant position by Microsoft in the market," the European regulator said in a statement.

TIPPING THE BALANCE? The commission seems clearly worried about preventing Microsoft from illegally dominating a market before regulators are powerless to reverse things. "They seem to be concerned that if Microsoft gains a certain [market] position on DRM, the whole market will start flowing in that direction," says Charles S. Stark, Brussels-based partner in Wilmer Cutler Pickering Hale & Dorr. In its statement, the EC said Microsoft's strong position in the antipiracy software field could be so augmented by the deal as to "tip" the market's balance toward the software giant.

That's an unease regulators echoed last March when the EC ruled that Microsoft illegally used its dominant Windows operating system to gain an unfair advantage in the market for digital-media-playing software. That concern, in part, led the commission to fine Microsoft $612 million and order Ballmer & Co. to offer a version of Windows without its media player and disclose proprietary programming information to rivals. Microsoft is appealing that ruling and declined to comment for this story.

With the ContentGuard case, the commission sees a market that's on the cusp of huge growth. Record labels and movie studios are clamoring for DRM software to stem piracy of their music and movies as their businesses move into the Digital Age. As digital media becomes mainstream, it seems likely that a standard will emerge among the variety of antipiracy-software approaches available now.

"COMPLEX ISSUE." The potential for the market drew Microsoft and Time Warner toward ContentGuard, which emerged with a portfolio of patents generated by the work at Xerox' (XRX) famed Palo Alto Research Center. In April, Microsoft, which had already invested in ContentGuard, and Time Warner purchased most of Xerox' stake for an undisclosed amount.

On July 12, the outfits sought clearance for the deal under European Union law, which sparked the investigation. "We're continuing to cooperate with the European Commission. This is a very complex issue," says Time Warner spokesman Ed Adler.

The commission expects to conclude its probe by Jan. 6. By then, Microsoft should have a pretty clear picture if this latest regulatory row is just a brushfire or a full-blown conflagration. With Carol Matlack in Paris and Tom Lowry in New York

Greene is BusinessWeek's Seattle bureau chief

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