Will the EU Go for Microsoft's Jugular?

The software giant faces a broad legal assault from the EU

It was a lesson Bill Gates couldn't miss. Last summer, General Electric Co.'s (GE ) John F. Welch flew to Brussels and lobbied for approval of a deal Washington had already O.K.'d, GE's $42 billion merger with Honeywell International Inc. (HON ) Yet by the time Welch emerged from his meeting with Europe's powerful Commissioner for Competition, Mario Monti, the merger was dead.

Now it's Gates's turn to deal with Monti. Just as Microsoft (MSFT ) appears to be nearing the conclusion of its battle with Washington, the debate over its conduct is heating up in Europe, where the software giant pulls in one-third of its sales. By mid-November, Microsoft attorneys must respond to charges in Brussels that it is using its desktop dominance to steamroll a host of rivals in everything from server software to online music.

So how serious a threat does the software giant face? Chances are Monti will steer clear of any attempt to break up Microsoft or order it to release its precious source code, the digital foundation of its empire. But he could well force Microsoft to rip its Windows Media Player, the heart of its multimedia push, out of its operating system, or hit the company with a big fine.

The American and European cases are similar. Both focus on Microsoft's attempts to leverage its strength in desktop. But while the American case focused on the browser wars that raged in the mid-'90s, Monti is looking closely at servers. These powerful computers are at the core of Microsoft's .NET strategy, the giant's bid to extend its dominance from PCs to the entire networked world.

Monti issued preliminary findings in a confidential document in August, and announced that he would "make every effort" to prevent "monopolization through illegal practices." Two days of closed-door hearings are scheduled for December--which means by February, Monti could well be in a position to rule on the case and impose whatever sanctions he deems needed. Here's a look at what could happen:

-- Microsoft Breakup. It's a remote possibility, but EU officials insist they have the power to break up the company. But such a hardball tactic could spark a titanic struggle with Washington, since U.S. regulators shelved their breakup proposal two months ago. Moreover, it would be seen as draconian, since Microsoft has yet to even defend itself against EU charges filed only weeks ago.

-- Open the Source Code. For now, a move to force Microsoft to release its source code also looks like a long shot. Opening the source code would enable competitors to clone Microsoft's Windows arsenal--a disaster for Redmond. But to Microsoft's relief, the words "source code" did not appear in Monti's statement of objections. What's more, many of Microsoft's rivals lobbying on both sides of the Atlantic aren't calling for a source-code remedy. Why? The code is so complex and convoluted that few appear eager to wrestle with it. "It's 30 million lines of spaghetti," says one rival lobbyist.

-- Unbundle Windows. Prospects appear greater that the EU may push Microsoft to take features out of Windows that compete with rival stand-alone products. The most likely: Windows Media Player, which competes with RealPlayer from RealNetworks Inc. (RNWK ) Microsoft crushed Netscape Communications Corp., in part, by bundling the Internet Explorer browser with Windows.

-- Insist on Access. The commission also seems keen on pushing Microsoft to give rivals technical data they need to compete effectively with Redmond. That means timely disclosure of so-called application program interfaces, the hooks developers use to make programs work with Windows. Competitors have accused Microsoft of withholding APIs from rivals, so that developers from Microsoft or its partners can get products to market faster, or make them work better with Windows. Monti is likely to force Microsoft to disclose those APIs earlier.

-- Levy a Big Fine. The commission has the authority to impose a fine of up to 10% of annual sales. That could amount to $2.5 billion--Microsoft's entire projected profit for the current year. Still, money means far less to it than market dominance. Moreover, few in Brussels believe the EU, which has never imposed a fine of more than $100 million, would ask for anywhere near the maximum. That said, few believe Microsoft will walk away with a slap on the wrist, either.

By Stephen Baker with Renee Cordes in Brussels, Jim Kerstetter in San Mateo, and Jay Greene in Seattle

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