Microsoft asked to strip SW off OS

David Lawsky and Reed Stevenson

BRUSSELS/SAN FRANCISCO: European regulators fined Microsoft Corp. a record 497 million euros ($606 million) for breaking antitrust law and ordered it to strip media software from its operating system.

That move, together with an order to open its software for running business computer networks, could give rivals a leg up in their fight to compete with Microsoft and force fundamental changes in how the world's biggest software maker does business.

"We are simply assuring that anyone who develops new software has a fair opportunity to compete in the marketplace," EU Competition Commissioner Mario Monti said.

Microsoft General Counsel Brad Smith said the company would appeal in European courts, which could delay action on the order for years, a more likely outcome, analysts said.

The commission gave Microsoft 90 days to separate its Windows Media Player, which plays music and videos over the Internet, from its Windows operating system. It ruled that Microsoft bundled its player to damage such rivals as RealNetworks Inc. RealPlayer and Apple Computer Inc.'s Quicktime.

The commission also ordered Microsoft to let makers of servers, the big computers that run networks, to view its software code so that they can make systems that are compatible with those running on Microsoft software.

Microsoft's Smith said he was "very optimistic" the courts would suspend the EU orders. "We believe we have excellent arguments about how this would cause consumer confusion and disrupt the industry."

Two European court decisions have gone against Monti in recent years. If this decision holds, the changes in how Microsoft operates could have a greater impact than the fine, which amounts to just over 1 percent of Microsoft's $53 billion cash pile.

The ruling would force Microsoft to offer two versions of Windows, one with Media Player and one without, and would prevent it from offering discounts to computer makers that install the bundled version.

"For the first time in five years (PC makers) are not going to be forced to include Windows Media Player," said RealNetworks deputy general counsel Dave Stewart, whose firm has lost market share to Microsoft.

The sanctions were stricter than those Microsoft agreed to in a 2001 settlement with the U.S. Justice Department. The department's antitrust chief, Hewitt Pate, expressed reservations on Wednesday about the size of the fine and warned that the other sanctions against the company could have "unintended consequences."

U.S. Senate Majority Leader Bill Frist, a Tennessee Republican, was more blunt in his criticism. He called the ruling "preposterous" and said it could be the first salvo in a trans-Atlantic trade war.

MICROSOFT SEES LEGAL BATTLE

The fine came after settlement talks collapsed last week when the two sides failed to agree on Microsoft's future business practices.

At stake was whether Microsoft would agree on general rules over software bundling for future disputes.

"That's what Microsoft is really worried about," said Matt Rosoff, analyst at Directions on Microsoft, an independent research firm based in Kirkland, Washington.

Microsoft's Smith said a negotiated settlement would have yielded immediate action. Instead, he predicted a protracted legal battle.

"Instead of getting immediate action in 2004 we are now on a path to get a result in 2009," he said.

Monti said the decision gave manufacturers freedom to choose which software they installed in personal computers to play films and music. It did not mean consumers would get PCs and operating systems without a media player, he said.

Monti said it was important to have a decision that would make it easier and quicker to act on future complaints.

The Commission will appoint a special monitoring trustee to ensure the two versions of Windows work equally well, and that information given to rivals is complete.

The EU's ruling follows a decade of investigations and settlements on narrower issues without any formal findings against the software company.

It mirrors a decision by a U.S. appeals court in 2001 that Microsoft broke antitrust rules. Critics said that decision failed to spur vigorous competition.

The Commission fine exceeds the record 462 million euro penalty imposed on Switzerland's Hoffman-La Roche AG in 2001 for leading a vitamin cartel.

(Additional reporting by David Milliken, Paul Taylor, Patrick Lannin and Peter Nielsen, Peter Kaplan, and Reed Stevenson)

© Reuters