Bill Gates Is A Target In Europe, Too

Microsoft's dominance is raising regulatory hackles

When John Frank became Microsoft Corp.'s European chief counsel a year and a half ago, he figured his toughest job would be clearing the way for his company's unstoppable juggernaut. Microsoft was already generating $3 billion in revenues a year in Europe. By the last quarter of 1997, sales were expanding at a 33% annual clip. Indeed, revenues would have been up by 44% last year if the fall of European currencies against the dollar hadn't cut into growth. But Frank was in for a surprise. "I thought I would be doing deals," the lawyer says. "Instead, I have ended up worrying about antitrust cases."

As Microsoft's lock on Europe's computer and software markets tightens, the company is raising many of the same regulatory hackles there as it has in the U.S.. European officials plan to follow up on the U.S. Justice Dept.'s legal challenge to Microsoft. Like the Americans, the Europeans are examining Microsoft's tie-in of its Internet browser with its operating system. Officials are also looking at whether it improperly uses the Windows standard to dominate the market. "I expect European authorities to extract serious concessions from Microsoft this time around," says Stephen Kinsella, a Brussels-based antitrust lawyer.

Given the company's aggressive posture in Europe, there's little wonder the regulators are taking a close look. A third fewer Europeans, on average, own personal computers than Americans, but the gap is closing fast. And with Asia's economies slowing, Microsoft is looking to Europe to help take up the slack. In early February, Chairman William H. Gates III completed a whirlwind tour of Europe to drum up business. He inked a major deal with Siemens and launched negotiations with other possible partners for expanding Windows's reach into consumer electronic and corporate server products. "We've seen quite impressive growth [in Europe] these last six months," Gates says.

ON A ROLL. Microsoft's strategy in Europe, as elsewhere, is to get its operating system into just about everything: corporate networks, consumer electronics, and the Internet. In the corporate market, Microsoft has struck 4,500 alliances in the past three years with European corporate software vendors, many of whom previously sold competing UNIX or Novell-based computer operating systems. Now, they're pushing Windows NT, too. The result: Microsoft's system runs on over 50% of European corporate network servers installed last year in Europe--compared with a market share of 40% worldwide. European sales of Windows NT are expected to explode 80% this year, to 450,000 copies.

Consumer electronics also may prove a bonanza for Microsoft. Its recent deal with Siemens is just the start (table). Microsoft is seeking similar tie-ups with such giants as L.M. Ericsson, Nokia, Robert Bosch Group, and Philips Electronics to ensure that Windows becomes the standard operating system for everything from palmtop computers to televisions. "Before, we just worked with computer manufacturers," says John Leftwich, Microsoft Europe's marketing vice-president. "Now, we're talking to a whole new series of partners, such as telephone-equipment and car manufacturers."

Meanwhile, on the Internet, Microsoft is winning against rival Netscape Communications Corp. just as handily in Europe as in the U.S. In the past six months, its Internet Explorer software has raised its share of the browser market by 14 points in both Britain and France, to 58% and 60%, respectively, according to INTECO, a marketing research firm in Woking, England. That compares with a 40% share worldwide. Microsoft's browser market share now tops 50% in most European markets. The fact that Internet use in Europe lags behind the U.S. has been an advantage. "By the time Europeans took up the Internet, we had a strong product ready," says Leftwich.

Given Microsoft's sales-and-deals blitz, the big question now is how hard regulators will come down on the company. Microsoft recently agreed to loosen 25 marketing contracts with European Internet service providers, such as France Telecom, who advertise on Microsoft's Web page. The service providers were required to promote only Microsoft software to clients attracted through the ads. But regulators, fearing that would wipe Netscape off the market, pressed Microsoft to drop the exclusivity clause. Such clauses "fly in the face of competition," gripes the European Community's antitrust chief, Karel Van Miert.

Legal experts see precedents developing in Europe for far tougher action against Microsoft. For instance, Van Miert is expected to ban food giant Unilever Group from giving away freezers to stores in return for a promise to stock its ice cream. That is similar to Microsoft giving away its Explorer browser with its Windows software, antitrust experts say. "Bundling is bundling, whether it has to do with ice cream or computers," notes Peter Alexiadis, a lawyer at Squire, Sanders & Dempsey in Brussels. In another case, Van Miert is threatening to block Bertelsmann's proposed digital-TV alliance with Kirch. The reason: He sees potential for the partners to achieve a monopoly-like standard in a fast-developing new technology, thwarting rivals from ever getting a foothold. The U.S. Justice Dept. seems ready to make a similar case against Microsoft, lawyers say.

TARNISHED IMAGE. Short of money, time, and staff, European Commission officials have preferred so far to let Washington take the lead against Gates. But that could change if a Microsoft competitor such as Netscape or Sun Microsystems makes a formal complaint in Europe. In an earlier case against Microsoft, networking rival Novell persuaded the commission to force Microsoft to stop requiring PC makers to pay for a Windows license if they did not want to use it.

Worried about further antitrust actions, Microsoft is struggling to burnish its image. It is building an $80 million research lab in Cambridge, England, and recently made a $110 million investment in a Belgian speech-recognition company. But critics call that window dressing, noting that the company still has no plans to transfer any software development to the Old World and that only 3,000 of its 23,000 employees are in Europe. Admits Leftwich: "Our image across Europe has taken a knocking."

Bill Gates found that out the hard way on his recent European trip. As he arrived for a meeting with Belgian business and government leaders, a prankster threw a cream pie in his face. Now, the Microsoft chairman can only hope the Europeans refrain from throwing an expensive and disruptive legal case at him next.

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