European regulators Wednesday slapped Microsoft with a record $613 million penalty for anticompetitive business practices and ordered the software giant to strip media software from its popular operating systems.
The European Union's sanctions go well beyond the U.S. antitrust settlement, and set up what could be another lengthy court battle.
Microsoft called the EU’s decision “unwarranted and ill-considered,” and said it expected to ask a judge to suspend the order pending appeal.
The move, together with an order to open its software for running business computer networks, could give rivals a leg up in their fight to compete with Microsoft and force fundamental changes in how the world’s biggest software maker does business.
“We are simply assuring that anyone who develops new software has a fair opportunity to compete in the marketplace,” EU Competition Commissioner Mario Monti said.
Monti said he limited the order to Europe in deference to regulators in the United States and other countries, but that doing so “will not unduly undermine the effectiveness,” given the size of the European market. Microsoft, which had $32 billion in revenue last year, does about 20 percent of its business in Europe, the Middle East and Africa.
However, late Wednesday, the U.S. Justice Department’s antitrust chief said the huge fine the EU imposed on Microsoft was “unfortunate” and other sanctions against the company could have “unintended consequences.”
“Sound antitrust policy must avoid chilling innovation and competition even by ’dominant’ companies,” Assistant Attorney General Hewitt Pate said in a statement.
Easing the squeeze
The EU antitrust office said it sought to alter Microsoft’s behavior because its five-year investigation found that the software giant tried to squeeze competitors out of Windows-related markets and “the illegal behavior is still ongoing.”
It gave the company 90 days to offer European computer manufacturers a version of Windows stripped of the company’s digital media player, software for viewing video and listening to music that is expected to become pivotal in the industry as multimedia content becomes more pervasive.
The EU also gave Microsoft 120 days to release “complete and accurate” information to rivals in the office server market so their products can work more smoothly with desktop computers running Windows.
“Microsoft has abused its virtual monopoly power over the PC desktop in Europe,” EU antitrust chief Mario Monti said. “We are simply ensuring that anyone who develops new software has a fair opportunity to compete in the marketplace.”
Microsoft’s general counsel, Brad Smith, said he would most likely ask the presiding judge at the European Court of First Instance to stay the order pending appeal — a process that can take years.
“The European Commission has the first word, but the European courts have the final word,” he said.
Microsoft Chairman Bill Gates, announcing a new speech server product in San Francisco on Wednesday, did not mention the EU case.
The fine would automatically be suspended upon appeal, but antitrust experts were divided on the company’s chances for winning emergency relief from the rest of the order.
“It will be up to Microsoft to show that this prohibition causes irreparable harm, which is not an easy thing to do,” said Jacques Bourgeois, a former commission legal adviser now in private practice.
Others noted, however, that the commission would have to show that further delay could result in irreparable harm to competitors, such as the danger they could go out of business. And the court has shown sympathy to arguments about threats to intellectual property rights.
“If it’s later ruled that the commission was wrong” to make Microsoft disclose information to rivals, “how do they put the genie back into the bottle?” said Stephen Kinsella, an international business expert with the Herbert Smith law firm in Brussels.
Microsoft sees legal battle
The fine came after settlement talks collapsed last week when the two sides failed to agree on Microsoft’s future business practices.
At stake was whether Microsoft would agree on general rules over software bundling for future disputes.
“That’s what Microsoft is really worried about,” said Matt Rosoff, analyst at Directions on Microsoft, an independent research firm based in Kirkland, Washington.
Microsoft’s Smith said a negotiated settlement would have yielded immediate action. Instead, he predicted a protracted legal battle.
“Instead of getting immediate action in 2004 we are now on a path to get a result in 2009,” he said.
Monti said the decision gave manufacturers freedom to choose which software they installed in personal computers to play films and music. It did not mean consumers would get PCs and operating systems without a media player, he said.
Monti said it was important to have a decision that would make it easier and quicker to act on future complaints.
The Commission will appoint a special monitoring trustee to ensure the two versions of Windows work equally well, and that information given to rivals is complete.
The EU’s ruling follows a decade of investigations and settlements on narrower issues without any formal findings against the software company.
It mirrors a decision by a U.S. appeals court in 2001 that Microsoft broke antitrust rules. Critics said that decision failed to spur vigorous competition.
The Commission's fine exceeds the record 462 million euro penalty imposed on Switzerland’s Hoffman-La Roche AG in 2001 for leading a vitamin cartel.
Two European court decisions have gone against Monti in recent years. If this decision holds, the changes in how Microsoft operates could have a greater impact than the fine, which amounts to just over 1 percent of Microsoft’s $53 billion cash pile.
The ruling would force Microsoft to offer two versions of Windows, one with Media Player and one without, and would prevent it from offering discounts to computer makers that install the bundled version.
“For the first time in five years (PC makers) are not going to be forced to include Windows Media Player,” said RealNetworks deputy general counsel Dave Stewart, whose firm has lost market share to Microsoft.
Sticking point
Settlement talks broke down last week over the EU’s insistence on just such a precedent-setting element: preventing Microsoft from adding features such as Google-like search to future versions of Windows.
Smith argued that Microsoft’s settlement proposal, which he said included an offer to release a worldwide Windows version that included three competing media players besides its own, would have been more useful to consumers than the penalties.
He called the order to produce a version of Windows without media software an “unwarranted and ill-considered” violation of intellectual property rights under World Trade Organization rules.
Doing so, he said, would be difficult and make other features and even some Web sites work less effectively.
The company made similar claims in the U.S. case, which surrounded Microsoft’s inclusion of its Internet Explorer Web browser in Windows.
Microsoft was also found guilty of monopolistic behavior in the U.S. case, but the EU order strikes deeper, at the heart of Microsoft’s business strategy — regularly adding new features to Windows to help sell upgrades.
The Redmond, Wash.-based company argues that such “bundling” benefits consumers. Rivals call it unfair competition, given that Windows runs more than 90 percent of personal computers worldwide.
The ruling could boost other makers of media software, led by RealNetworks Inc. and Apple Computer Inc. Bob Kimball, RealNetworks’ general counsel, said the EU decision “confirms the merit” of his company’s private antitrust lawsuit against Microsoft.
Reuters and the Associated Press contributed to this report.