The EU vs. Microsoft: A Rugged Endgame

The one principle Microsoft Chairman William H. Gates III will defend to the end is his company's right to have complete control over the design of its products. Once again, that is being challenged. On Aug. 6, the European Commission's competition czar Mario Monti sent Microsoft (MSFT) a third and final "statement of objections," giving the company one last chance to respond to allegations that it is illegally leveraging its Windows operating system monopoly to gain unfair advantage in the server and audiovisual software markets. To bolster his case, Monti has gathered more evidence from consumers, suppliers, and rivals to show "abuses are still ongoing."

The end of Microsoft's four-year-old case is near, and Monti is digging in for a fight. In a press statement, he laid out potential remedies and revived the key policy issue facing global software: to what extent Microsoft can freely bundle new technologies into its monopoly operating system. While U.S. regulators have allowed Microsoft to do that, rivals see Monti as their last best hope to constrain the giant.

His statement left them ecstatic. "The Commission's case has been really nailed down," says Thomas Vinje, a lawyer for the Computer & Communications Industry Assn., a trade group of Microsoft's rivals.

NOT NEGOTIABLE? But will EU sanctions be more worrisome to Microsoft than U.S. penalties? Monti's proposal that Microsoft be forced either to rip the media player out of Windows or to bundle in rival products such as RealNetworks' (RNWK) media player could be most disquieting. Microsoft declined to discuss Monti's proposals. But the company has consistently balked at any remedy that dictates what it may and may not put inside Windows. At a meeting with analysts and large shareholders in July, Microsoft CEO Steven A. Ballmer said some matters weren't negotiable. "We will go through a litigation process when we need to," he said.

That would likely happen if Monti tries to force Microsoft to put out a version of Windows without its media player. The player is a key part of Microsoft's strategy to rule the growing online media business. Record companies and movie studios are desperate to find a way to stop consumers from illegally copying music and movies. Microsoft software helps control access to digital material, giving providers control over how their products are used. If the Windows Media Player -- which includes antipiracy technology -- becomes the de facto standard, studios and record companies will have little choice but to use Microsoft's software.

But Monti's alternative -- including RealNetworks' player or other rivals within Windows -- would also pose big difficulties for Microsoft.

REVEAL THE INNARDS. The precedent would turn Windows into what lawyers call "an essential facility": tantamount to public property. Then, Microsoft might be required to add to Windows products made by rivals that argue they're disadvantaged by Microsoft's monopoly. Microsoft is fighting a similar legal move by Sun Microsystems (SUNW) to include its Java technology inside Windows.

Bundling isn't the only issue still before European officials. To redress complaints that Microsoft leveraged its Windows monopoly to gain an unfair advantage in the server-software market, Monti is also proposing to force the company to disclose proprietary technical information. The idea is to give rivals such as Sun information that would allow their products to connect more seamlessly with Windows PCs and servers. Microsoft might be willing to give ground on this issue since it agreed to a similar provision in a settlement reached with U.S. regulators.

Lastly, the commission can push for a fine of up to 10% of Microsoft's annual revenue. That would be $3.2 billion, based on the year ended June 30. But few believe a fine would climb so high -- 50 times what European regulators have ever levied in an antitrust case.

Microsoft has two months to reply, and it will clearly work to settle. Barring that, it is likely to appeal a negative ruling to the Court of First Instance for the EC in Luxembourg. That process could take up to five years -- but having battled this far, Gates won't back down. By Jay Greene in Seattle and Andy Reinhardt in Paris, with Mike France in New York

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