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Microsoft Faces Sanctions on European Software Sales

Posted on: Wednesday, 4 February 2004, 06:00 CST

Feb. 1--The four-year battle between Microsoft and the European Commission is drawing to a close, with the Seattle-based software giant facing sanctions on its European software sales. A draft decision on the anti-trust case is being written and is expected to find Microsoft breached European Union (EU) competition law in two areas.

One involves Microsoft's Media Player, software that is generally bundled with Microsoft's Windows operating system to allow users to listen to audio and watch video clips. Because Windows dominates the laptop and PC market, the commission is likely to find Microsoft guilty of blocking the path to market for rival software.

Microsoft is also expected to be found guilty of breaking EU regulations by using its position in the desktop market to try to dominate the market for more powerful back-up servers.

What could the commission do to enforce its decision? The first sanction available is a fine of up to 10 percent of Microsoft's turnover in the year preceding the decision. But it might not stop at a fine.

It will want to stop anti-competitive practices, which it could achieve by blocking the sale products carrying Media Player. This would cause a huge dent in Microsoft's strategy, preventing it from bundling Media Player or adding other features to its operating system, which powers most of the laptops and PCs sold in Europe.

The software giant is already seeing its long-term cash cow Microsoft Office, which has accounted for roughly half the company's profits, losing market share to low-cost competitors and to software pirates. It is is also engaged in a struggle for the desktop itself, with open-source Linux-based systems competing with Windows.

In this environment, Microsoft must differentiate itself by refreshing and adding to Windows. The simplest way of achieving this is to add features such as Media Player.

Microsoft says it is working with the commission to reach an acceptable solution. Brussels sources believe Microsoft would have to fight the commission ruling in the European Court of First Instance in Luxembourg, which has overturned some of competition commissioner Mario Monti's anti-trust decisions.

The commission's ruling is not expected before March. Before it reaches a formal decision, Monti's draft has to be approved by the EU's army of in-house lawyers and Monti's fellow commissioners. It must also be reviewed by anti-trust regulators from individual EU countries.

The commission is reported to have asked national regulators to come to Brussels to discuss the case at the start of March, with a debate tabled for 15 March. In the past, such steps have been a formality and it seems likely Monti's draft will be adopted unless Microsoft backs down and adopts a new software strategy for Europe.

Microsoft last week won a smaller battle when resellers of rival open-source software, Lindows, were ordered to stop selling the product in the Netherlands. An Amsterdam judge agreed with Microsoft that Lindows was profiting from Windows' success by infringing its trademark. Some Dutch retailers say Microsoft will find it difficult to stop customers buying Lindows software in Germany or purchasing it over the internet. The same logic could apply to any attempt by the commission to stop Microsoft bundling its Media Player software with Windows.

The commission would find it hard to block the global distribution of Microsoft software over the internet, where there is little regulation and only rudimentary trading laws.

The length of the investigation is a result of the commission's gathering evidence from a wide variety of consumers, suppliers and competitors and its findings are far from complimentary regarding Microsoft chairman Bill Gates's market strategy.

Brussels's research confirms Microsoft is leveraging its dominant position from the PC into low-end servers, the computers which provide core services to PCs in corporate networks. The commission says it has contacted a number of small, medium and large enterprises selected from all industrial sectors and from across the entire European Economic Area to ask them whether interoperability considerations were a factor in their purchasing choices, and whether nondisclosure by Microsoft influenced their purchase decisions

According to the commission, an overwhelming majority highlighted that Microsoft's non-disclosure on interface information -- necessary for competing servers -- to properly "talk" with Windows PCs and servers -- artificially altered their choice in favour of Microsoft's products.

The commission also claims that research in Europe and the US highlights the ubiquity of Windows Media Player, which weakens competition on merit, stifles product innovation and ultimately reduces consumer choice.

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(c) 2004, Sunday Business, London. Distributed by Knight Ridder/Tribune Business News.

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