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Feature Story

Friday, March 19, 2004

Heeding The Market: How "The Big Picture" column recognized the signs of weakness as the bear market began.
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Europe's Regulators Ready To Rule Against Microsoft


Talks to settle the European Commission's antitrust probe of Microsoft Corp. (MSFT) broke down Thursday over regulators' requirements that the software maker change the way it bundles features into future products.

The European Commission and Microsoft had reached much agreement, but "were unable to agree on principles for new issues that could arise in the future," Microsoft Chief Executive Steve Ballmer said in a statement.

Analysts say the European Union's antitrust arm might have overplayed its hand by trying to address the issue of bundling features into future Windows operating systems.

"Microsoft firmly believes they cannot let governments dictate what they can and can't put into Windows," said Matt Rosoff, an analyst with independent researcher Directions on Microsoft.

Politics also might be playing a role in Europe's tough stance against the U.S. tech giant.

Politics is "absolutely" playing a role in the EU's case, said David Smith, an analyst with market research firm Gartner Inc.

"This is very much a matter of not wanting to back down and wanting to declare victory more than anything," Smith said.

The failure of settlement talks clears the way for the European Commission, the EU's executive branch, to issue a decision in the case next week. EU Competition Commissioner Mario Monti said he would propose a fine and recommend that Microsoft be ordered to change its business practices.

Monti gave no amount for the fine, but it's likely to be in the hundreds of millions of dollars.

The 20-member European Commission is slated to rule on the proposal Wednesday in Brussels, Belgium. The EU says Microsoft uses its monopoly status in personal computer operating systems to dominate the market for media players, or software that plays music and shows video. Microsoft has integrated its media software into Windows.

The European Commission says this has unfairly hurt competitors such as RealNetworks Inc.'s (RNWK) RealPlayer and Apple Computer Inc.'s (AAPL) QuickTime.

The commission is expected to demand that Microsoft offer computer makers in Europe a version of Windows without its media player pre-installed.

The EU's case also has probed the advantages Microsoft has in making both PC and server operating systems.

The commission is expected to require Microsoft to provide greater access to its underlying Windows code so that servers made by rivals, such as Sun Microsystems Inc., (SUNW) can work well with computers running Windows.

Microsoft agreed to similar terms in its November 2002 settlement with the U.S. Justice Department, but observers say Europe might seek more concessions.

Resolving the media player and server issues apparently wasn't the biggest disagreement between the European Commission and Microsoft. It was the product-tying, or bundling, issue.

This is the same issue the Justice Department ultimately decided to back away from because it didn't believe it could win in court.

"We made substantial progress toward resolving the problems which have arisen in the past, but we were unable to agree on commitments for future conduct," Monti said in a statement. "In the end, I had to decide what was best for competition and consumers in Europe. I believe they will be better served with a decision that creates a strong precedent."

That precedent would "establish clear principles for the future conduct of a company with such a strong, dominant position in the market," he said.

But Microsoft would "fight to the death" for its right to add new functions to its Windows operating system, said analyst Rosoff.

The company's next-generation operating system, code-named Longhorn and due out in 2006, is expected to have an integrated search engine and other new functions.

The European Commission wanted concessions beyond what the case was about, said Nicholas Economides, a professor of economics at New York University's Stern School of Business. Microsoft likely would win the bundling issue in court because it benefits consumers, he said.

The Microsoft case is the most politically charged competition probe since the EU blocked General Electric Co.'s planned acquisition of Honeywell International Inc. in 2001.

Europe's handling of the Microsoft antitrust case is more in keeping with its legal history rather than on any divisions stemming from disagreements over the U.S.-led war in Iraq, Rosoff said. European legal history puts more emphasis on the power of government and less on the power of business, he said.

"It's more of a long-term political-cultural divide than anything that happens to be related to how the geopolitical situation is right now," Rosoff said. "Most of the governments in Europe would be considered socialist by American standards."

Microsoft could appeal the EU ruling to the Luxembourg-based Court of First Instance and later to the European Court of Justice, a process that could take years.

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