In Europe, Microsoft Girds for Round 2

By next week, the software giant is expected to challenge the EU's sweeping antitrust ruling. Here's a look at its strategy

By Jay Greene and Andy Reinhardt

In recent months, a mellower Microsoft has settled a spate of pending legal cases. In April alone, it resolved the long-simmering antitrust lawsuit filed by Sun Microsystems (SUNW ), a complex patent suit filed by InterTrust Technologies, and a class-action case brought by consumers in Minnesota, also on antitrust grounds (subscribers, see BW, 5/31/04, "Teaching Microsoft To Make Nice?").

Try as it might, however, Redmond wasn't able to settle the antitrust claims brought by the European Commission in Brussels. That failure led to the commission's landmark Mar. 24 ruling, which requires Microsoft (MSFT ) to share proprietary technical information to help rival products work better with the Windows operating system and to offer a version of Windows without Microsoft's digital media technology. The EC also ordered the company to pay a $613 million fine.

Now, it's Microsoft's turn to take its legal gloves off. The company is putting the final touches on its appeal to the Court of First Instance, the Luxembourg court where EC decisions are challenged, and is expected to file by June 9. Pending a final decision, Microsoft will also request a stay of the remedies ordered by the EC, though that will be filed later in the month.


  What's Redmond's strategy? While lawyers will refine its arguments up until the last minute, its core contentions will be variations of ones that the company has used since it first defended itself against antitrust claims nearly a decade ago in the U.S., albeit with a European twist.

Microsoft will argue that the commission is creating new European laws that will hamper innovation, not just for Microsoft, but for all companies doing business in the Old World. As spelled out in its 302-page March decision, the Commission says it's justly applying long-standing antitrust principles and precedents -- mostly developed in non-technology cases -- to a situation involving software. And it will undoubtedly assert that its ruling against Microsoft encourages, not hampers, free-market innovation.

Microsoft's first challenge will be to undermine the commission's order that it must provide rivals with more information about the inner workings of Windows. In its ruling, the Commission found that Microsoft put undisclosed technology in Windows that aids software interactions between PCs and server computers. So it decided to compel Microsoft to disclose those "secret handshakes" in order to level the playing field for competitors that don't have the advantage of leveraging a dominant PC operating system.


  Microsoft's arguments will lean heavily on an Apr. 29 decision by Europe's highest court. In the case, IMS Health vs. NDC Health, the European Court of Justice ruled that a company with dominant market position may be compelled to license its intellectual property to rivals only if three conditions are met: the company requesting the license intends to offer new products or services that aren't simply "me too" duplicates of those supplied by the copyright owner; the refusal is not objectively justified; and the refusal has the capability to eliminate all market competition.

Redmond contends that server-software rivals aren't seeking the "secret handshake" information to offer new products but rather to improve existing products. Further, it will claim that the lack of that proprietary information hasn't and won't eliminate server operating system competitors. The company points to the growth of Linux as proof. "The [Apr. 29] decision was a fatal blow to the commission's ruling against Microsoft," argues Microsoft spokesman Jim Desler.

Others have a different view. "The [IMS Health] ruling doesn't change much of anything," contends Thomas Vinje, a partner in the Brussels office of law firm Clifford Chance, who is representing a group of Microsoft rivals in a separate antitrust case brought before the European Commission.


  "It's a confirmation of existing principles," Vinje adds, noting that the court cited the 1995 Magill case, which found that a refusal to license can constitute abusive behavior in certain circumstances. In any event, Microsoft's recent settlement with Sun Microsystems, which was the lead complainant in the EC case, won't affect the appeals process, since the EC's ruling also applies to other software rivals.

Microsoft could have a tougher time coming up with supportive precedents in its efforts to keep the Windows Media Player inside all versions of Windows. The commission ruled that Microsoft used its dominant position to gain an unfair advantage entering into the digital-media market by bolting the media player into its operating system. So it ordered Microsoft to create a separate version of Windows without the technology, giving computer makers the option of buying a stripped-down operating system and adding alternative media playing technology from a Microsoft rival.

The stripped-down version hasn't yet shipped, and Microsoft will likely win a temporary reprieve while the court considers its request for a stay of the EC's proposed remedies during the multi-year appeal.


  Microsoft will argue that it's not using contractual restrictions to force customers to buy the Windows Media Player. Indeed, the player is offered for free, as a part of Windows. Nor has it restricted consumer choice by eliminating competition, it will say. Its chief rival, RealNetworks, has distributed more than 300 million copies of its media player, primarily through Web downloads. "Our appeal will say that computer users have benefited massively from computer integration," Desler says.

In truth, there's not much legal precedent for either side. The handful of rulings relevant to the massive EU antitrust case tend to favor the Commission, depending on how markets and bundling are defined. In a 1994 case involving Hilti Corp., the European Court of Justice ruled that the dominant maker of nail guns could not force customers to buy its nails. And in 1996, the court said aseptic packaging giant Tetra Pak could not restrict the ability of its customers to use cartons or packaging equipment from rivals.

The success of Microsoft's appeal may ultimately revolve around whether the court sees media players as products separate from operating systems. If the court comes to that conclusion, it could uphold the commission's ruling as a way to level the playing field in the distribution of media players. "Microsoft still has the ultimate home-court advantage," says RealNetworks spokesman Greg Chiemingo. "Downloading will never beat pre-installation."

Microsoft has spent more than $5 billion settling cases in the last two years. But the European antitrust case remains its toughest nut to crack. In the appeal Microsoft is about to file, there will be no contrition and no turning back.

Greene covers Microsoft from the Seattle bureau of BusinessWeek. Reinhardt covers technology issues and EU antitrust from the Paris bureau

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