updated 4/6/2005 8:57:06 AM ET 2005-04-06T12:57:06

A new version of Microsoft's flagship Windows operating system will soon hit stores across the European Union. But there will be little advertising or promotion to support the launch. Indeed, Microsoft will probably be hoping the new product will prove a complete flop.

The reason for this strange lack of ambition is that Microsoft never wanted Windows XP Home Edition N, as the new version will be called, to see the light of day. Rather, the group was forced to release it as part of last year's landmark antitrust decision by the European Commission. (MSNBC is a Microsoft-NBC joint venture.)

The ruling which also imposed a record €497m ($639m, £341m) fine on the group for breaking antitrust rules forced Microsoft to offer a version of Windows without Media Player, a program that allows users to play film and music on their computers. The rationale was that it would allow fair competition between Microsoft and rival producers of media player software such as RealNetworks.

It sounded simple enough at the time. But in reality, the Commission has found itself increasingly having to mandate even the smallest details of the new version.

The squabbles over the design and shape of Windows XP Home Edition N (the N stands for "not including Media Player") have so far taken four months. Frustrated by what it sees as a lack of progress on Microsoft's side, the Commission has threatened to impose new fines. Microsoft, meanwhile, has complained that it has been given conflicting guidance. The significance of the dispute goes far beyond the niggling of two organizations that have learned to mistrust each other over the course of a confrontation lasting six years.

It illustrates, above all, the difficulties faced by a regulator who feels confident enough to tell the mighty software industry how to change its behavior and products.

The tabular content relating to this article is not available to view. Apologies in advance for the inconvenience caused. With Microsoft certain to remain under the regulatory spotlight for many years to come, the conflict is unlikely to remain an isolated event. The group is, in other words, being given a first taste of the complexities of designing software with a regulator on its back.

Brad Smith, Microsoft's general counsel, said: "Why is this process a challenging one? I have come to the view that it reflects the complexity of designing software and the issue of regulating software for the first time. Even when you design software without government regulation, it is a complex process."

On this point, even the Commission agrees: "It's a highly complex area and it's one in which the application of antitrust rules is not straightforward," a spokesman says.

This has forced the two sides to engage in intricate negotiations about the inner workings of Windows, with the Commission demanding, for example, that Microsoft change the settings of the program's registry, the database that controls it. There have been so many similar requests that Microsoft now sees the new Windows version as one that has been "designed by the Commission", as one of the group's lawyers puts it.

Some analysts believe the Commission's approach towards tackling Microsoft's dominance has exacerbated the difficulties. Alan Riley, a senior lecturer at the Nottingham Law School, argues that alternative remedies would have been easier to police and more effective: "There is a good argument for saying that a better remedy would have been to require RealPlayer [rival RealNetworks' media player] plus a couple of other players to be placed on to the Windows platform."

Instead, Microsoft will put out a version of Windows without Media Player, even though consumers can still buy the full version at the same price. Microsoft's Mr. Smith says: "To date there has not been much interest in the product, and it does not appear likely that this is going to be a major commercial success. But then we never anticipated that it would be."

Computer manufacturers have for months dismissed the commercial viability of the new Windows version. Though some companies, such as IBM and Hewlett-Packard, have suggested they will offer the new version, others are still waiting on the sidelines.

Opponents argue that Microsoft has been trying to make the unbundled version as unattractive as possible. Dave Stewart, deputy general counsel for Real-Networks, says: "Microsoft's admission that it needs to make changes to unbundled Windows confirms that, while it has been feigning co-operation with the Commission, it has been taking actions to break unbundled Windows."

The Brussels regulator insists it was aware all along that it was embarking on a difficult path. But to regulators elsewhere, the continuing tussle between the Commission and Microsoft offers one daunting lesson: if you believe a software company has broken competition law, be prepared to rewrite its products yourself.

Copyright The Financial Times Ltd. All rights reserved.


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