An Acid Test For "Nickel Neelie"

The EC's new competition czarina has to bring Microsoft to heel

The hot seat doesn't get much more scorching than this. European Competition Commissioner Neelie Kroes, in office just since November, has given software giant Microsoft Corp. (MSFT ) until May 31 to comply with the European Commission's March, 2004, antitrust ruling or face fines of up to $5 million a day. For Kroes, still struggling to fill the big shoes of predecessor Mario Monti, the Microsoft face-off is a crucial test. "How this turns out will be a defining moment," says Christopher Bright, a London-based partner with law firm Shearman & Sterling.

At stake is more than Kroes's reputation. Monti's decision against Microsoft, which came after the company settled its antitrust travails with the U.S. Justice Dept., was the first time the EC has ever landed an antitrust blow against a tech company. He ordered Microsoft to create a version of Windows with its Media Player stripped out, license secret software protocols used for communication among Windows servers, and pay a $605 million fine -- the largest the EC ever levied. More than 14 months later, the EC still isn't satisfied with Microsoft's response. If Kroes blinks, Europe's fledgling high-tech antitrust program could be dealt a setback -- and Microsoft will have dodged the last major governmental effort to rein in its power.

So far, the 63-year-old businesswoman is sticking with the tough talk that earned her the moniker "Nickel Neelie." On May 23 she went public with the commission's May 31 deadline, adding that "we are waiting for the Microsoft people to do their homework." Microsoft Associate General Council Horacio Gutierrez declined to comment, saying only that Kroes has demanded results "over a clearly defined timetable." If the commission isn't happy with Microsoft's proposal, it can begin proceedings to levy a fine of up to 5% of the company's daily revenue. Even with nearly $40 billion in cash, Microsoft would feel the sting. The fine would drain about 12% of earnings for the current quarter and the fiscal year that starts July 1, says Charles DiBona, an analyst with Sanford C. Bernstein & Co. (AC ). Microsoft would almost certainly appeal the levy.

Microsoft has already addressed two parts of Monti's three-pronged order. It paid the $605 million penalty months ago. And a version of Windows without Media Player will launch in June. The remaining hurdle is the server protocols. The EC ordered Microsoft to reveal unpublished software interfaces so that rival server applications such as Samba can better link to Windows. Arguing that doing so is tantamount to handing over trade secrets, Microsoft is holding out for restrictive licensing terms. But rivals -- especially open source software makers such as Red Hat and Mandriva -- say that without the specs, their programs play second fiddle in Windows networks. The bottom line: Microsoft wants to charge a royalty for every copy of the spec, while open sourcers want to pay for a one-time license. The EC seems inclined to the latter approach.

The spotlight on Kroes is intense. A longtime power broker in the Netherlands, her nomination to the EC sparked controversy because she had sat on dozens of corporate boards. That fed concerns Kroes might be soft on antitrust and merger enforcement. To assuage doubts, she agreed to resign her board positions and recuse herself from cases involving former affiliates. She put her shareholdings in trust and vowed never to return to the private sector.

Now, as one European antitrust lawyer put it, Kroes "needs to prove herself." She must craft a settlement that upholds the spirit of Monti's case while allowing Microsoft a graceful retreat. Otherwise, she'll spend years facing flack for caving in -- or overseeing a never-ending legal tussle with the software colossus.

By Andy Reinhardt in Paris and Jay Greene in Seattle

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