EU slaps record fine on Microsoft

Regulators hit the software giant with a fine of US$613 million for violating European Union antitrust law and also order the unbundling of Media Player software from Windows.
Written by Michael Parsons, Contributor and  Jo Best, Contributor


BRUSSELS--The European Union on Wednesday issued its ruling in the long-running case against Microsoft, fining the American software giant US$613 million, the heaviest punishment in any European competition case to date.

European Competition Commissioner Mario Monti ruled that Microsoft had failed to provide to rivals information that they needed to compete fairly in the market for server software and that the company has been offering Windows on the condition that it come bundled with Windows Media Player, stifling competition.

Microsoft now has 120 days to provide the information that rival server makers need to compete fairly, and it must continue to update this information in the future, Monti said. It also has 90 days to provide a version of Windows without Media Player, although it can also continue to provide a version that includes the media software.

In the EU's judgment, Microsoft must refrain from using any commercial, technological or contractual terms that would have the effect of "rendering the unbundled version of Windows less attractive or performing. In particular, it must not give PC manufacturers a discount conditional on their buying Windows together with the Windows Media player."

At a Brussels press conference following the release of the decision, Monti said he is sure that the antitrust ruling against Microsoft will stand up to any appeal in the European courts and that it will act as an effective deterrent.

"Of course, I'm confident we have produced a decision that will stand before any appeal," Monti said.

"As for future deterrent, I believe there may be an indirect aspect...to the extent that the decision by the European Commission may be used in the context of private actions against the company," he said. The remedies and the legal precedent were more important than the level of the fine, he added.

Microsoft reiterated its plan to appeal the decision. "We will go forward and seek legal review of this decision in the European Court of First Instance," Brad Smith, Microsoft general counsel, said in a conference call, referring to the European Union's second highest court.

Long road ahead
He said the company would request that implementation of some parts of the commission's decision be suspended--specifically the EU's demand that the software giant produce a second version of the Windows operating system without the Windows Media Player.

"We will ask for that and probably other parts of the remedies to be suspended," he said. He added that he expected "four or five years" of litigation ahead.

Microsoft attempted to settle the case, but talks ended last week after both sides failed to reach an agreement on how to govern Microsoft's future business practices. Microsoft had offered to modify Windows to place copies of competing media player software on PC hard drives during the installation, instead of selling a version of Windows without Media Player, as the EU ultimately ordered the company to do.

Smith played down the impact of the EU decision on the next major update of Microsoft's flagship operating system, which is code-named Longhorn.

"We have had our lawyers working with the product development teams...Based on the work that we have done so far...it is our sense that the kinds of innovations that we have planned for Longhorn are innovations that pass muster under EU law as well as the law elsewhere in the world," he added.

Despite the intense media scrutiny of the five-year investigation, when the verdict came it was with more of a whimper than a bang. On Tuesday, European Commission representatives were warning that they would "need a bigger room" to accommodate all the world's press for Monti's statement. But it was very much business as usual Wednesday at the commission's headquarters in Brussels. There were even a few empty seats at the press conference.

Some observers welcomed the ruling, saying it would provide clarity in a complex market.

"One benefit of the case going to court is that we will get a lot more information, so both Microsoft and others will know what sorts of activities are illegal in Europe," said Nic Francis, a consultant with Europe Economics, a London-based consultancy.

Others expressed surprise at the severity of the fine in a case that turns on some tricky legal arguments.

"This is not a classic parallel trade infringement or cartel case--it's unusual. On the server issue, there's compulsory licensing to a competitor of intellectual property. Generally these cases are borderline," said Marc Hansen, an attorney with Latham & Watkins in Brussels. "On the Media Player, it's a really novel bundling issue, and that is one of the more unresolved areas of law. So suddenly there's a 497 million euro fine for something that no one really knew was illegal?"

Reaction across the industry
Industry organizations representing both sides of the case were quick to issue statements Wednesday morning.

The Computer and Communications Industry Association (CCIA), a trade group representing Microsoft's rivals, praised the EU's actions. "The European Commission's decision today is another confirmation of Microsoft's anticompetitive and illegal business tactics," CCIA President Ed Black said in a statement.

"The decision is also a demonstration of a strongly committed competition authority willing to enforce antitrust laws against Microsoft," Black added. "The issues outlined today will prevent Microsoft from controlling the platform for the delivery and subsequent control over digital content. This is becoming even more important as computers and home entertainment converge."

Jonathan Zuck, president of the Association for Competitive Technology, a pro-Microsoft group, denounced the ruling, saying it will lead to higher software prices for consumers. "The European Commission may be trying to punish Microsoft, but its proposals reserve their harshest effects for consumers and small technology companies. The message from today's decision is forget innovating, start litigating and if you fail in America, try Europe," Zuck said in a statement.

Even the U.S. Department of Justice issued a statement that was bitterly critical of the EU's approach, saying that its own settlement with Microsoft had already led to "substantial changes to Microsoft’s business practices." Forcing Microsoft to remove the Media Player from Windows threatened to distort competition, the agency said.

"Imposing antitrust liability on the basis of product enhancements and imposing ‘code removal’ remedies may produce unintended consequences," R. Hewitt Pate, the assistant attorney general for antitrust, said in the statement. "Sound antitrust policy must avoid chilling innovation and competition even by 'dominant' companies. A contrary approach risks protecting competitors, not competition, in ways that may ultimately harm innovation and the consumers that benefit from it."

The ruling in a nutshell

On Wednesday, the European Union issued a long-awaited decision in its antitrust investigation of Microsoft, saying the company abused its market dominance. Here are some of the main points:

• The fine: A record US$613 million (497 euros)

• Server software: Microsoft has 120 days to disclose software information to server makers.

• Media software: Microsoft has 90 days to provide a version of Windows without Media Player.

• Appeals: Could last up to five years.

The 5-year-old case stems from a complaint issued by Sun Microsystems that Microsoft would not disclose technical interfaces to Windows, meaning that Sun was unable to develop products that communicate properly with Windows PCs.

Sun on Wednesday praised the EU's actions, but noted that Microsoft was able to stretch the process out for five years, boosting its market share in the workgroup server market from 20 percent to 70 percent.

"The result is pretty close to exactly what we were hoping to achieve, which is competition on the merits for workgroup servers," Sun vice president of legal affairs Lee Patch told CNET News.com. "We were not anticipating at the time that it would take this long to achieve this."

Although a negotiated settlement could have taken effect immediately, Patch said it was important to have a ruling that prevented Microsoft from making similar abuses in the future. Patch praised the EU decision for requiring Microsoft to keep its operating system open to rivals: "Microsoft's obligation for disclosure is one which must be updated for each new product release."

Novell, which lost out to Microsoft in the 1990s in the server operating system market and is now pursuing a strategy based on the Linux operating system, supported the European Union's actions.

"Novell believes that the commission's findings, decision and remedies will improve competition, stimulate innovation and benefit consumers of information technology services and solutions," Waltham, Mass.-based Novell said in a statement Wednesday.

RealNetworks, maker of a rival to Media Player, said it welcomed the decision, but was eager to see exactly how the dual-version Windows order would be enforced. The initial summary said that Microsoft could not make the "unbundled" version of Windows less attractive than the traditional version, but did not contain details.

"The Commission today unequivocally ruled that a central part of Microsoft's business model is illegal under clearly established principles of European law that are consistent with U.S. antitrust law," said RealNetworks deputy general counsel Dave Stewart. "We believe that that's good for consumers and competition."

What comes next
The next legal step that Microsoft is likely to take is to apply for an annulment of the decision, which is a relatively long procedure that may take several years, involving two written submissions from Microsoft, two from the commission, and other submissions from competitors and supporters of Microsoft. This process would end with an oral hearing and a judgment.

Microsoft can also apply for interim measures, effectively requesting suspension of the measure on the grounds that it will cause irreparable damage. This process would take a few weeks.

However, attorneys who specialize in antitrust issues say Microsoft will face great difficulty in convincing the Court of First Instance to grant a stay, or suspension, of the measure.

"Where is the irreparable harm?" said an attorney, who formerly served as a high-ranking antitrust official with the European Commission. "It's not as if Microsoft has to withdraw any product from the market...Also, it will be difficult for Microsoft to argue that the matter is urgent because of Longhorn...which after all is still at least two years away."

Antitrust attorneys also note Microsoft may face a difficult time convincing the court to delay the implementation of Monti's ruling beyond the three months the regulator has outlined.

"Although a timing issue would be in less conflict with the commission's decision, Microsoft would still have make a powerful case to show that three months would not be sufficient," said another antitrust attorney, who also previously served in a senior post with the European Commission.

Monti's ruling on the specific question of the Windows Media Player and Microsoft's server software business raises the larger issue of future competition clashes with the commission. The legal issue here is whether it is possible to frame a ruling that will seem fair to Microsoft and also address the commission's concern that the company will not break competition rules in the future.

The commission ended its statement by saying that it "believes the remedies will bring the antitrust violations to an end, that they are proportionate, and that they establish clear principles for the future conduct of the company."

An independent trustee will be appointed to monitor compliance with the ruling, according to the statement, to see "that Microsoft's interface disclosures are complete and accurate, and that the two versions of Windows are equivalent in terms of performance."

Michael Parsons of ZDNet UK reported from London. Jo Best of Silicon.com reported from Brussels. News.com's Mike Ricciuti reported from Cambridge, Mass., and News.com's Dawn Kawamoto and Ina Fried reported from San Francisco.

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