European Commission Fines Microsoft $613 Million

The European Commission on Wednesday ordered Microsoft to pay a record $613 million fine, offer a version of Windows that does not include the Windows Media Player and disclose to competitors the interfaces required to communicate with Windows.

"Today's decision restores the conditions for fair competition in the markets concerned and establish clear principles for the future conduct of a company with such a strong dominant position," European Competition Commissioner Mario Monti said in a statement.

Microsoft general counsel Brad Smith immediately announced plans for an appeal that he said could drag out for four or five years.

The European Commission, the European Union's enforcement arm, has spent five years investigating allegations that Microsoft abused its dominance of desktop operating systems to favor its Windows Media Player against rivals like RealNetworks' player and Apple's QuickTime. The European regulators have also been investigating allegations that Microsoft is leveraging its desktop dominance to favor its own Windows server operating systems over rival "work group" server operating systems.

According to the European Commission, Microsoft operating systems equip more than 95 percent of the world's personal computers.

The EC gave Microsoft 90 days to release to PC manufacturers a version of its Windows client without Windows Media Player. While Microsoft "retains the right" to offer Windows with Windows Media Player, the European regulators specified that Microsoft cannot charge less for the operating system with its own player in order to unfairly make it more attractive to PC makers.

The EC gave Microsoft 120 days to "disclose complete and accurate interface documentation which would allow non-Microsoft work group servers to achieve full interoperability with Windows PCs and servers."

The European Commission will appoint a Monitoring Trustee to oversee that Microsoft's interface disclosures are complete and that the two versions of Windows are equivalent in performance.

The fine, 496 million euros, is the largest imposed by the European Commission for abuse of a dominant position or participation in a cartel. The previous record antitrust punishment was a 462-million-euro fine against Roche Holding of Switzerland in November 2001 for its role in a series of vitamin cartels, according to CNN.

Microsoft immediately announced that it planned to seek a legal review of the commission's decision in the Court of First Instance in Luxembourg. Assuming Microsoft ends up paying the fine, the company can do so out of the nearly $53 billion in assets it has in cash and short-term investments, according to the company's latest quarterly filing with the U.S. Securities and Exchange Commission. Put another way, Microsoft has enough cash available to pay the EC's record fine 86 times.

Microsoft's Smith said the ruling violated the principle that Microsoft and other companies have a right to add features that benefit consumers and Microsoft would fight for that principle "even though the litigation process may well last four or five years."

While Microsoft had not gotten the full text of the commission's ruling on Wednesday morning, the company already expected to seek a stay of several key provisions. Smith said Microsoft would definitely seek a stay on the requirement that it provide a version of Windows without the Windows Media Player. He also said Microsoft expected that the commission's ruling on server interoperability and integration goes behind Microsoft's consent decree with the U.S. Department of Justice and that Microsoft would appeal any portions that didn’t duplicate those existing requirements.

Officials for the software giant also expressed disappointment that negotiations culminating in Microsoft CEO Steve Ballmer's visit to Belgium last week failed and provided some details of Microsoft's settlement offer that the company says European regulators rejected.

"We worked hard to reach an agreement that would address the European Commission's concerns and still allow us to innovate and improve our products for consumers," Ballmer said.

According to Microsoft, the company had proposed to bundle three non-Microsoft media players with every copy of Windows, a move that would have led to the distribution of more than 1 billion competing media players over the next three years. The company also says it offered "wide-ranging proposals" to address interoperability issues.

While Ballmer said he hoped settlement talks could resume at some point, Smith previewed several arguments that Microsoft is likely to raise in the European courts in seeking to stay and eventually overturn the commission's decisions. On the stripped-down version of Windows, he argued that the requirement would break 20 features of the operating system and dilute Microsoft's trademark.

"Even if one takes away the multimedia code and, as RealNetworks has suggested, installs its player in its place, there will remain over 20 features in the Windows operating system that will not function. There will remain many European Web sites that will not function properly, and there will remain European software developers that have products on the marketplace today that will not function on PCs that have that code removed," Smith said.

The European regulators are also making a "sweeping" change to Microsoft's intellectual property rights, Smith said. "We're being ordered to create a derivative work that the EC is designing instead."

On the other hand, Smith argued that it is not difficult to download competitors' products, an argument that Smith made in favor of Microsoft but that can easily cuts the other way.

"Is there anybody on the [media conference] call that would have any trouble downloading an alternative media player in a matter of minutes? Clearly hundreds of millions of people have already done so. Even RealNetworks acknowledges that it has 300 million users around the world," he said.

Smith did not explain why the simplicity of downloading and installing a media player wouldn't quickly fix the problems he mentioned about breaking 20 features of the operating system or breaking European Web sites that rely on Windows Media Player.

On the server side, Microsoft officials say they expect the European ruling to fundamentally differ from the United States consent decree in requiring Windows server protocols rather than client protocols to be shared with competitors.

"The U.S. regime addressed the protocols that are in our client operating system, and they were designed to ensure that they could be use in other people's server operating systems," Smith said. "[The commission's case] focuses on the protocols in our server and it is designed to enable those protocols to be used in other people's servers that directly compete with our own. And so that's a very different situation."

The European Commission opened its investigation in December 1998, when Microsoft rival Sun Microsystems complained that Microsoft refused to provide interface information for Sun's low-end servers to communicate with Windows PCs. Subsequent investigation found that other companies developing server software had also been refused the interface information. "These non-disclosures by Microsoft were part of a broader strategy designed to shut competitors out of the market," the commission's statement on the decision said.

In 2000, the commission broadened its investigation on its own initiative to study the effects of the tying of Windows Media Player with the Windows 2000 Professional operating system.

"This part of the investigation concluded that the ubiquity which was immediately afforded to WMP as a result of it being tied with the Windows PC OS artificially reduces the incentives of music, film and other media companies, as well as software developers and content providers to develop their offerings to competing media players," the commission found. "Microsoft's tying of its media player product has the effect of foreclosing the market to competitors, and hence ultimately reducing consumer choice, since competing products are set at a disadvantage which is not related to their price or quality."

About the Author

Scott Bekker is editor in chief of Redmond Channel Partner magazine.

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