Update: European Commission threatens to fine Microsoft

IDG News Service - The European Commission said today that it could fine Microsoft Corp. up to 10% of its global annual sales for monopoly offenses.

Microsoft is still committing the monopoly abuses it was first accused of in 1998, the commission said in a preliminary ruling in its long-running antitrust case against the company.

The commission has sent an updated statement of objections to Microsoft, reiterating previous accusations that the software maker has leveraged its dominance in the market for computer operating systems into the markets for server systems and media-player software.

The latest statement also outlines the remedies the commission wants to impose on Microsoft to ensure that competition in these markets is freed up. It comes after extensive research was conducted by the European competition regulator earlier this year to strengthen its legal arguments, commission spokesman Tilman Luder said.

"We now have a very strong case. The issue as it stands now is too strong to ignore for the company at issue," Luder said.

Mario Monti, commissioner for competition issues, said in a statement that the European Commission is giving Microsoft "a last opportunity to comment before the Commission concludes the case."

In addition to forcing changes in the way Microsoft does business, a fine of up to 10% of Microsoft's annual global sales may be levied, but the size of the fine won't be decided until the weeks before a final ruling. Luder said that may come in the next few months.

"The final decision is months rather than years away now," he said.

The fact that the commission believes the monopoly abuse is still ongoing makes a large fine likely. Under European Union law, the gravity of an antitrust offense is determined partly by how long it lasted. However, the EU has never fined a company the maximum 10% of sales.

Microsoft is studying the new statement of objections, company spokesman Jim Desler said. The software vendor wasn't informed ahead of time that the commission would issue a new statement of objections, he added.

"We're currently examining the contents of the commission's statement of objections to thoroughly assess their concerns," Desler said. "We take this investigation very seriously and will continue to work toward a positive resolution of these issues."

This latest statement of objections is the European Commission's third; the first two were issued in August 2000 and August 2001, according to Desler. The statement is a private document that details the commission's concerns, and Microsoft has two months to respond, he said.

The issuance of the new statement will prolong the case, noted Horatio Guttierez, Microsoft's chief lawyer for Europe, the Middle East and Africa. Now, "there is no short-term culmination of the official process," Guttierez said, adding that he is "disappointed" about that prospect. He declined to comment about the details of the statement.

The commission wants Microsoft to reveal all the software code that competitors would need in order to make their server systems as compatible with Windows as Microsoft's own server software.

In order to restore competition in the market for audio and video playing software, the European regulator has proposed two solutions: Either Microsoft must stop selling its Media Player as a package with its ubiquitous Windows operating system, or Windows should be forced to also carry a competing product.

"It's an extremely positive outcome," said Thomas Vinje, a lawyer in the Brussels office of Morrison & Foerster LLP, which represents several Microsoft competitors.

"It indicates that the commission is serious about pursuing the company," Vinje said, adding that only a few months ago, many people feared that the European Commission "might let the case fade away."

The remedies the commission is proposing go a long way toward helping restore competition in the two markets concerned, Vinje said. However, he expressed doubt about the "must-carry" solution for media software.

"If Microsoft is allowed to keep bundling Media Player into Windows with another rival product, it will find ways of giving an advantage to Media Player," he said.

He added that it will be hard to choose the rival that will benefit from having must-carry status on Windows and that it would be complicated to enforce the rule.

The commission's action to restore competition in the media-playing software may be too late.

"The game is up," said one content provider who asked not to be named. "It's expensive to tailor content for different media players. If we know that Microsoft's Media Player is in Windows, then there isn't much incentive to adapt our products for other players," he said.

The two best-known rivals to Media Player are RealNetworks Inc.'s Real Player and QuickTime, a system designed to run on Apple Computer Inc.'s computers. Dave Stewart, deputy general counsel at Seattle-based RealNetworks, rebutted the contention that Microsoft has already won the media-player battle.

"I think the commission's statement reflects that this is a very important market," Stewart said. "They would not be putting all those resources into this if they thought competition was over in digital media. We view this as the commission ensuring there will be a level playing field in the future." He added that as one of Microsoft's main rivals, RealNetworks has provided information to the European Commission when asked to do so.

According to Richard Doherty, an analyst at The Envisioneering Group in Seaford, N.Y., more than 75% of the PCs in use worldwide have other media players installed in addition to Microsoft's technology. "RealNetworks and Apple have done fairly well, despite the home-team advantage Microsoft has with bundling Media Player," he said.

If a final ruling follows the same lines as the commission's latest position, Microsoft will have a chance to file an appeal at the European Court of First Instance in Luxembourg, which hears disputes involving commission rulings, chiefly those involving competitive issues. Microsoft can also request that the European Commission's remedy in the case be stayed -- or put on hold -- pending an appeal.

Meanwhile, under pressure from the U.S. government, Microsoft is changing the terms under which companies can license protocols that allow third-party software to interoperate with Windows. At a recent hearing with U.S. District Judge Colleen Kollar-Kotelly, who is overseeing the U.S. antitrust case against the software giant, U.S. Department of Justice officials said that changes that Microsoft is making to the licensing terms of the protocols are making progress toward satisfying the concerns the government has about the company's compliance with the November 2002 antitrust settlement.