One More Hefty EU Fine for Microsoft

After the latest hit, the software giant's European fines total almost $1 billion. But a company lawyer says a resolution may come soon

The European Union's Commissioner for Competition Neelie Kroes sounded like a hard-bitten prosecutor as she slapped Microsoft with an unprecedented $356 million fine on July 12 for failing to comply with the European Commission's two-year-old antitrust ruling. "The company has still not put an end to its illegal conduct," Kroes told reporters in Brussels. "The commission had no option but to impose a penalty."

What's more, Kroes threatened future fines of $3.8 million a day, starting at the end of this month, if the commission decides that Microsoft (MSFT) is still being uncooperative. That's double the rate of $1.9 million per day, retroactive to Dec. 15, used to arrive at the $356 million levy (see, 6/27/06, “EU Close to Fining Microsoft—Again”).

That sum is in addition to the $626 million penalty that the European Commission imposed in March, 2004, after finding that Microsoft was abusing its market dominance. All told, Microsoft has racked up a tab in Europe of nearly $1 billion in fines. (The company is appealing.) Still, as enormous as that sounds, it's only a fraction of the company's $35 billion cash hoard.

Underneath the tough talk, though, was a note of conciliation in the long-running antitrust dispute with Redmond (Wash.)-based Microsoft. Kroes actually praised efforts by Microsoft in recent months to provide information needed by other companies to develop software that can operate smoothly with computer servers running Windows operating systems.


  Failure to provide that information sooner is what prompted the commission to impose the fine. "What they [Microsoft] are doing now is constructive," Kroes said, noting that company Chief Executive Officer Steven A. Ballmer has gotten involved personally in efforts to put together the required documentation. "I'm sure Steve Ballmer is doing his utmost to come out of this situation," she added.

Is Microsoft finally caving in to EU demands? The company maintains it was never resisting the EU orders to share information in the first place—it just couldn't figure out what the commission wanted. (Kroes dismisses that argument, saying, "I don't buy Microsoft's line.") Besides, Microsoft still intends to appeal the fine order.

But Microsoft General Counsel Brad Smith indicated that Microsoft is making more concerted efforts to supply software protocols that competitors need. "I do think we now have a constructive process," Smith said in a conference call with reporters. "I'm hopeful we will bring this chapter to a close over the next couple of weeks."

That would be quite an accomplishment, considering that the EU's original order to Microsoft was in 2004 (see, 4/24/06, “Microsoft's Day in European Court”). It's probably too soon for the photo op of Ballmer and Kroes smoking a peace pipe. But it may well be that Microsoft has calculated that it's time to start cooperating more energetically with the commission.


  For one thing, Microsoft is gearing up to launch its Vista operating system for PCs in early 2007. It doesn't need the new operating system—already delayed—to run into regulatory problems as soon as it makes landfall in Europe. Kroes warned that the European Commission already has its eye on Vista, saying she hopes Microsoft will take previous EU decisions into account when it launches the new product. "That's probably a major motivation [for Microsoft] getting this behind them before Vista," says Bill Clough, an analyst at market research firm IDC in Copenhagen.

And Microsoft may not have too much to lose anymore by disclosing the proprietary interface specifications for its server operating systems. As Kroes pointed out, there is no longer much competition in the European market for those products, other than Linux. And even if Microsoft provides enough information to satisfy the commission, several more steps are needed before competitors get their hands on the information.

For example, the commission still needs to decide who gets access to the software specs and at what price. Microsoft wants to keep the information out of the hands of open-source developers, saying they won't protect the company's intellectual property. If the commission agrees with that argument, it would be a blow to the whole Linux open-source movement, which is the main competition in server operating systems.


  "Even if Microsoft intends to comply, that's far from the end of the game," says Thomas Vinje, a lawyer at Clifford Chance in Brussels who represents the European Committee for Interoperable Systems, an industry group whose members include Adobe Systems (ADBE), IBM (IBM), Nokia (NOK), Oracle (ORCL), RealNetworks (RNWK), Red Hat (RHAT), and Sun Microsystems (SUNW) (see, 3/20/06, “Speak Softly and Carry a Thick Brief”).

Moreover, Microsoft's biggest competitive threat these days comes from the likes of Google (GOOG), not traditional packaged-software vendors. The dominant online-search provider is moving into Microsoft turf with products such as an online spreadsheet program. "The market is having more of an impact than any regulators," says Gartner Group analyst David Mitchell Smith in Bedford, N.H.

Microsoft may be starting to figure it's better to avoid future fights with the European Union and to save its resources to battle even more powerful adversaries.