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Microsoft's Day in European Court

Tech executives from around the globe will be focused on a Luxembourg courtroom over the next week, as one of the world's most closely watched legal battles reaches its next step. Starting Apr. 24, Microsoft (MSFT) will square off against the European Commission (EC) in an appeal of the commission's tough 2004 antitrust ruling against the software giant, which included a record $612 million fine.

There's much more at stake than the future of Windows. The European antitrust case is also a crucial test for intellectual property rights -- and indeed, a potential turning point in the relationship between regulators and the tech business. With Microsoft's U.S. antitrust trial a distant memory, Europe has now become the key battleground.

If Microsoft succeeds at overturning the ruling, critics fear that its influence over the technology sector will be unchecked for the foreseeable future. But if the commission's decision stands, governments around the world may be emboldened to pursue similar legal actions that could affect not just Microsoft and the direction of Windows, but scores of other tech players.

PLAYING MONOPOLY? The EC found in March, 2004, that Microsoft abused its monopoly market position by bundling its Media Player software into the dominant Windows operating system. The inclusion, the commission said, effectively wiped out the market for rival options such as RealNetworks' (RNWK) RealPlayer and Apple Computer's (AAPL) QuickTime, forcing providers of digital music and video content to adopt Microsoft's digital media formats en masse.

To remedy the situation, the commission demanded that Microsoft offer a "naked" version of Windows with Media Player stripped out, to which computer makers and consumers could add their own alternative players. (Of course, they could already do that, and still can.)

The commission also found Microsoft guilty of withholding technical information that would allow third-party programs to work more closely with its network servers. The impact was measured, again, on the ability of customers and third-party developers to take full advantage of non-Windows options, such as Linux, Unix, Apple, or Novell (NOVL) software. The commission ordered Microsoft to produce and publish software specifications that tell rival software makers how to connect their programs to Windows servers and desktop PCs.

SERVER SKIRMISH. In the intervening two years, the sides have squabbled over the implementation of the ruling. As ordered, Microsoft eventually released in Europe a version of Windows without Media Player -- but it's priced the same, and virtually nobody wants it. Sources estimate that sales may have numbered only in the thousands of units. The two sides have yet to agree over the server specifications. The commission says it's still not satisfied with Microsoft's compliance on the server front and has threatened to fine it up to $2.4 million per day, retroactive to last December until the software maker meets its demands.

Now, even as those issues remain unresolved, Microsoft's long-awaited appeal is getting under way. In an unusually long five-day hearing before a 13-judge "Grand Chamber" of the European Court of First Instance, Microsoft will ask the court to overturn the antitrust decision on the basis that the EC erred -- both in its factual analysis and its interpretation of European law. Lawyers for the commission and a handful of industry groups supporting its case will, naturally, defend both the facts and legal principles (see BW Online, 4/24/06, "A Window into Microsoft's Battle").

The potential impact goes much further than the outcome of this particular trial. To Microsoft, the European case is an attack on two bedrock principles it says it will never give up defending. "At issue is whether companies can improve their products by developing new features, and whether a successful company must hand over its valuable intellectual property to competitors," Microsoft noted in a prepared statement. The company has declined to discuss the case publicly.

FEATURE CONTROL. Privately, Microsoft officials say that the battle over Media Player is really about whether it is free to evolve Windows to meet changing market demands and customer expectations. If the EC can order Media Player stripped out, the company reasons, governments anywhere could start picking and choosing which features should be allowed in current and future versions of Windows.

That would not only be an engineering nightmare but also would undermine the consistency and predictability of Windows in the marketplace, Microsoft claims. The most immediate impact could be on the next version of the operating systems, called Vista, which is supposed to ship in early 2007. Microsoft plans to weave a host of new features into Vista, including Internet search, security, and closer ties to its Office suite of desktop software applications.

Indeed, in a separate move from the current antitrust case, an industry group called the European Committee for Interoperable Systems (ECIS), backed by such companies as IBM (IBM), Oracle (ORCL), Sun Microsystems (SUNW), and Red Hat (RHAT), has asked the EC to launch an investigation into whether Vista violates antitrust laws.

INNOVATION DILEMMA. Microsoft is even more passionate about the question of intellectual property protection. After all, even in a worst-case ruling over software bundling, it could still create basic and premium versions of Windows and use its distribution muscle to drive adoption of the premium version. But if being a monopoly results in its inventions being declared "essential facilities" for technology, and thus thrown open to the public, Microsoft says it would have less incentive to innovate.

That scenario doesn't trouble the company's opponents, who see in Microsoft's arguments a thinly veiled justification for continued market dominance. "We've seen this movie before," says Thomas Vinje, a partner in the Brussels office of law firm Clifford Chance, who will represent the anti-Microsoft industry groups ECIS and the Software & Information Industry Assn. before the court. "Look what happened to Netscape and RealNetworks," he says, referring to two companies that tried to carve out new software markets (for browsers and media players, respectively) only to see their businesses hammered when Microsoft bundled the features directly into Windows.

Vinje and others concede that the commission's 2004 decision against Microsoft was probably too little, too late. Consumers turned up their noses at the version of Windows XP without a media player, and Microsoft's share in the media player market is now greater than ever. Likewise, the drawn-out fight over the server protocols has stalled any big incursions Linux and other operating systems might make into Microsoft's territory.

COMPLEX ISSUES. Microsoft's opponents say that what really matters in Luxembourg is establishing legal principles that can guide future decisions. Former European Commissioner Mario Monti, who pushed the Microsoft suit when he was in office, could have settled it during days of frantic last-minute negotiations preceding the decision. But Monti was looking at a larger prize, which was to get a precedent on the books that would begin to address the complex intersection of technology and law. As economies become more knowledge-based, it will be increasingly important to have adequate legal structures in place to resolve intellectual property disputes and other such questions.

The Luxembourg judges won't rule for many months -- perhaps as long as a year and a half. And whatever they decide is subject to yet another appeal at the European Court of Justice, the highest judicial body in the 25-member-state European Union. This battle could drag on for years more. But whatever the outcome, lawyers, technology executives, investors, and consumers around the world will be watching what happens in Luxembourg.

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