Microsoft's EU Antitrust Appeal Hits Brick Wall

A European court upheld the European Union's sweeping antitrust ruling and the penalties against Microsoft (Nasdaq: MSFT), saying regulators acted within their authority when they issued a record-setting fine, forced Microsoft to produce a new version of Windows and required the software giant to share how its server products work.

The Court of First Instance found in favor of the European Commission in almost all instances, agreeing with regulators' 2004 ruling that Microsoft abused its market dominance to hold down other software makers. The 248-page ruling said the commission overextended its authority only in one instance, when it forced Microsoft to fund the hiring of a third party to monitor its compliance with its penalties.

"The Court of First Instance essentially upholds the commission's decision finding that Microsoft abused its dominant position," the Luxembourg-based court said in a statement accompanying the ruling.

Appealing the Decision?

Microsoft will consider the entire ruling before deciding whether to appeal the decision, it said. The company is "100 percent committed to complying with the decision," noted its General Counsel Brad Smith, adding that work remains on some details, such as pricing for sharing communications protocols.

"There's obviously a lot of work that has gone into our efforts to comply with the commission's terms with respect to communications protocols and our duty to license them, a duty that obviously was reaffirmed by the court's decision today," Smith said. "We've made a lot of progress in that regard, and yet we all have to acknowledge that there are some issues that do remain open."

Microsoft shares were down more than 1 percent in midday trading Monday to US$28.70.

Celebrating and Contemplating

Microsoft pointed out that it is already in compliance with parts of the order. The company has already paid close to $1 billion in fines and penalties, for instance, estimates UBS analyst Heather Bellini, and a version of Windows without built-in Media Player software is already available in Europe.

The communications protocols have remained a major sticking point, however, with Microsoft claiming it has spent millions of dollars to craft a licensing program for its server communications protocols. Some European vendors have signed up to access that code, but regulators have said the price remains too high.

The ruling is a major setback for Microsoft, which has been hoping to have at least part of the original order rolled back by the court.

European regulators, meanwhile, hailed the ruling and said that with the court's backing, its order would finally be able to restore balance to the software market.

Consumer Choice

"The court has confirmed that Microsoft can no longer prevent the market from functioning properly and that computer users are therefore entitled to benefit from choice, more innovative products and more competitive prices," said Neelie Kroes, the European Commissioner for Competition. "The court has confirmed the importance of interoperability for consumer choice and innovation in high tech industries," she noted.

"Competition in this market requires interoperability," Kroes added.

The decision could well lead to more head-butting and wrangling over the terms of the communications protocol-sharing requirement, Ovum analyst David Mitchell told the E-Commerce Times.

"Unfortunately, this ruling will not deliver the closure that everyone wishes to see," Mitchell said.

An appeal is possible, he noted -- though Microsoft can only argue points of law on appeal, not the facts of the case as established by the first court. Just as likely is ongoing debate about Microsoft's levels of compliance, especially because of the "vague and unclear original demand" for opening up the code, Mitchell added.

Winners and Losers

While the dispute has been narrowed to the single issue of the protocols, the stakes remain high, Mitchell added. The EU doesn't want its authority weakened -- it has a regulatory action in the works against Intel (Nasdaq: INTC) and has warned Apple (Nasdaq: AAPL) that it dislikes its iTunes-iPod tie-up. Microsoft, meanwhile, wants to ensure it can continue to sell newer products such as Windows Vista.

The Software and Information Industry Association (SIIA) praised the ruling as a victory for consumers and innovators.

"With this action, the only option left for Microsoft is to immediately cooperate and fulfill the requirements of the March 2004 decision," said the group's president, Ken Wasch. "Implementing the decision is important to the software industry."

The timing of the ruling is a blow to Microsoft, as just last week it found itself dealing with a request from a group of U.S. states to have the period of time under which it remains under monitoring requirements and other restrictions extended for several more years.

"Microsoft has been able to keep its antitrust issues contained and remain focused on competitors and innovations, but the length of time these matters are lingering has to be a concern," Yankee Group analyst Laura DiDio told the E-Commerce Times.

Still, Microsoft has long held fast that it needs to be careful with its communications protocols because they are closely tied to operating system innovations and trade secrets that is has spent decades developing.

Though it appealed the entire ruling, the code-sharing demand was the element Microsoft had hoped to have lifted from the penalties, said DiDio.

"From the day the ruling came down, it was clear that requirement was going to be where the battle was fought," she added.