Endgame for Europe's Microsoft Case

The European Commission finally gets the software giant to agree to its 2004 interoperability ruling. But the open-source sector isn't celebrating quite yet

On Sept. 17, the day that the European Commission (EC) won its sweeping court victory against Microsoft (MSFT), Neelie Kroes, Europe's tough competition cop, was asked when she would like Microsoft to comply in full with the EC's 2004 antitrust decision. "The sooner the better," was her terse reply. "Let them start this afternoon."

It took several more weeks of negotiations, including breaking bread with Microsoft Chief Executive Steve Ballmer in a small restaurant near Kroes' hometown of Rotterdam and almost daily follow-up phone calls with him, before she finally got her way. On Oct. 22, a beaming Kroes announced closure to Europe's nine-year-long battle with the U.S. software giant. Microsoft, she explained, agreed to three substantial changes in its business practices that will bring it into compliance with the EC's 2004 ruling. She called the agreement "a victory for consumers."

"It is regrettable that Microsoft has only complied after a considerable delay, two court decisions, and the imposition of daily penalty payments," Kroes said in a press statement. "However, the measures that the Commission has insisted upon will benefit computer users by bringing competition and innovation back to the server market."

Adhering to Regulations

In its strongly worded September decision, the Luxembourg-based European Court of First Instance ordered Microsoft to obey (BusinessWeek, 9/17/07) the European Commission's March, 2004, order to share networking interfaces with rivals and to offer a version of Windows without a built-in copy of the audio and video Media Player.

The court also upheld the EC's record $613 million fine levied against Microsoft. On Oct. 22, Microsoft said it will not appeal the court ruling, marking an end to its showdown with the European Union (EU). The software giant played down what was widely seen as a major defeat, saying only: "We have undertaken a constructive discussion with the Commission and have now agreed on those additional steps."

The agreement announced Oct. 22, after a final, early-morning European time phone call with Ballmer, has three key parts. First, Microsoft agreed that developers of open-source software will have improved access to information from Microsoft regarding interoperability with its networking protocols. Secondly, the royalties for this information will be reduced to a nominal one-off payment of €10,000 ($14,308). Third, the royalties for a worldwide license, including patents, will be lowered to 0.4%, a significant reduction from the 5.95% originally claimed by Microsoft. "I have always said that open-source developers must be able to take advantage of this remedy, now they can," Kroes said in her statement.

Kroes said Microsoft's concessions mean that "we can close this dark chapter in our relationship and move on." She said no fines will be applied to Microsoft after Oct. 22, but declined to say how much more Microsoft will have to pay the EU for its noncompliance to date. Estimates are that the U.S. software maker could end up paying a total of around $1.5 billion.

Legally Interoperable?

The EU decision could be costly for Microsoft in other ways as well. With a powerful legal precedent on the books in Europe, the company may face a future in which its product design decisions and licensing policies (BusinessWeek, 9/14/07) are subject to scrutiny by governments around the world. That could limit Microsoft's ability to add features to Windows, or force it to disclose some of its newer technologies to outside developers.

According to industry estimates, Microsoft now has a 95% share of the desktop PC operating system market and in excess of 70% on the market for workgroup server operating systems that provide services to office workers such as file and printer sharing. To increase competition, the EC ordered Microsoft to disclose to licensees information that will let non-Microsoft workgroup servers interoperate fully with Windows PCs and servers.

Microsoft responded by demanding a royalty rate of 5.95% of revenues for a combination of access to the secret interoperability information and a patent license. That made it impossible for companies in the open-source Linux community to use the software, since their business model requires royalty-free distribution.

The 'Proof Will Be in the Pudding'

The agreement between the EU and Microsoft will be enforceable before the High Court of London. It provides for future remedies, including damages, for third-party developers in the event that Microsoft breaches these agreements. Kroes said the EC wanted outside help in enforcement and the High Court of London was chosen because of its expertise in this area.

The open-source software sector isn't popping open champagne bottles just yet. "There are so many things that could go wrong that we don't want to say anything until we have seen the actual documents and reviewed the actual conditions," says Carlo Piana, a partner at Milan law firm Tamos Piana & Partners, who represents the Free Software Foundation Europe, an industry group that champions open-source software.

A group representing a coalition of tech companies including IBM (IBM), Oracle (ORCL), and Nokia (NOK) was equally cautious. "We are more optimistic than we have been in the past, but the proof will be in the pudding," says Thomas Vinje, a partner in the Brussels office of Clifford Chance who represents the European Committee for Interoperable Systems.

Vinje says the group plans to remain vigilant and will continue to press its case with the EC to force Microsoft to reveal similar interoperability information for newer products, such as Vista and Windows Server 2008. "The number of instances in which Microsoft is engaging in similar conduct is escalating, not declining," he says.

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