Channel Mixed About EU Decision To Force Windows Redesign

The historic ruling, which follows a five-year-old antitrust case in Europe, requires the Redmond, Wash., software giant to offer the new version of Windows to the European market within 90 days and more application programming interfaces and protocols to competitors within 120 days.

Microsoft plans to appeal the ruling before the European Court of First Instance within 70 days and request the court to issue a stay on the sanctions, notably the order to ship a new version of Windows without the media player, said Brad Smith, general counsel for Microsoft, at an international press conference from Brussels, Belgium, on Wednesday morning. He predicted that none of the penalties will take hold until the conclusion of the appeal process, which he said could last five to six years.

Neither Microsoft Chairman Bill Gates nor Microsoft CEO Steve Ballmer attended the press conference. However, later in the morning, Ballmer told the U.S. press corps that Microsoft has just started the appeals process and that a settlement is still possible. Although Microsoft hasn't yet assessed how the fine would impact earnings, if at all, he noted that Microsoft will fight vigorously to preserve its rights to integrate new features and functionality into Windows, especially the next-generation Longhorn version due out in the 2006-2007 time frame.

"As we get into the appellate process, I'm sure there will be intermediate milestones with some kind of guidance from the court and additional clarity [to provide] paths to a constructive settlement," Ballmer said during a brief conference call in response to the decision. "There are no changes in the design of Windows, especially the remedy suggested. . . . We're not doing anything different in what we did yesterday."

Microsoft adheres to the provisions in the consent decree, Ballmer added. "We do absolutely recognize the world in which we operate," he said. "We recognize the position of the court and what the consent decree states. . . . We stepped up to our obligations to live in the new regime and [give] competitors a fair and open opportunity to do their good work."

The penalties that Microsoft faces are far more significant than those the U.S. government imposed on the company three years ago after it was found guilty of violating Sections I and II of the Sherman Antitrust Act. Wall Street investment houses such as Goldman Sachs and Merrill Lynch claim the $600 million-plus fine won't have a long-term material impact on a company that has more than $55 billion in the bank.

But the product remedies--the stripped-down version of Windows and making core interoperability code available to rivals--could be a nightmare for Gates, who has fought tooth and nail to prevent U.S. and European governments from interfering in his company's product integration efforts.

"Microsoft abused its market power by deliberately restricting interoperability between Windows PCs and non-Microsoft workgroup servers and by tying its Windows Media Player, a product where it faced competition, with its ubiquitous Windows operating system," the European Commission said in a statement issued Wednesday. "The commission believes the remedies will bring the antitrust violations to an end, that they are proportionate and that they establish clear principles for the future conduct of the company."

Speaking to European journalists Wednesday morning, Smith characterized the commission's decision to force Microsoft to strip Windows Media Player out of Windows XP as an "unwarranted and ill-considered step" and an inappropriate interference by government into marketplace issues. He also criticized the commission's rejection of a settlement proposal by Microsoft to bundle other media players--including RealNetworks' media player--with Windows XP and said the "code removal remedy" would hurt consumers by breaking many Web sites and software applications that integrate with the Windows Media Player code in Windows XP. In addition, he called the requirement a restriction on innovation and a "setback not only for Microsoft, but our entire industry and for consumers."

The commission's "broad compulsory licensing" orders that require a Windows restructuring and opening up of sensitive intellectual property--including copyrights, patents and trade secrets--infringes on Microsoft's intellectual property rights in Europe and violates the commission's obligations to the World Trade Organization, Smith said.

For its part, the European Commission said interoperability requirements will enable rival vendors to develop products that can compete on a level playing field. It also said the "untying" remedy doesn't mean that consumers will be forced to buy PCs without media players, since PC makers will put together a bundle with the OS and a media player.

Channel partners in the United States and abroad offered mixed views about the European remedies. Unsurprisingly, those in the Linux and open-source camp and parties affiliated with Sun Microsystems, Apple and RealNetworks cheered the decision.

"Sun applauds the European Commission's decision in the Microsoft case. This important, precedent-setting decision comes after more than four years of an exhaustive investigation," said a statement from Sun, whose rival Java and Java Desktop System technologies compete against Microsoft's .Net platform and Office. "The commission found that Microsoft has abused its dominant position in desktop operating systems to create an unlawful advantage for itself in the workgroup server market. In particular, the commission found that Microsoft has not been competing on the merits but instead used interoperability between its desktops and servers to override other factors of server performance offered by its competitors."

One open-source developer project said the opening up of more APIs or protocols won't help much, though the overall climate will give PC makers more choice. "They are still able to manipulate APIs to their advantage, and it's no easier to police this form of abuse than before," said Sam Hiser, a developer for OpenOffice, an open-source competitor to Microsoft Office and the core code behind Sun's StarOffice suite. "But I am more optimistic that the sanctions create a political atmosphere where OEMs are encouraged to bundle open-source programs that operate on Windows, such as OpenOffice and Mozilla ,with PCs they sell." He noted, for example, that Hewlett-Packard recently announced that it will preload Mandrake Linux on PCs.

But many Microsoft U.S. and European channel partners decry the penalties as politically motivated and a detriment to consumers.

"I think that the people in the U.S. see that the European Commission is unfair to Microsoft and are perhaps confusing their feelings against the United States with this verdict against Microsoft," said Per Werngren, CEO of IDE Natverkskonsulterna, a Microsoft solution provider in Stockholm, Sweden, and president of the International Association of Microsoft Certified Partners (IAMCP) in Sweden. "Most Europeans in the IT business see that this is something that might increase costs, because it is always better to include as much as possible in a standard package like Windows XP."

One Microsoft partner said the customer should come first. "The market will take care of Microsoft," said Brad Murphy, senior vice president at Valtech, a systems integrator in Paris. "It's better to get all stuff from one vendor than have to piece together competitive products. It doesn't mean Microsoft should be able to monopolize things, but the market--not what EC regulators say--will determine what is good for the consumer."

Microsoft emerged virtually unscathed after its four-year-long U.S. antitrust battle by preserving its rights to integrate new functionality into Windows and keeping its most valued APIs and protocols protected. Though the U.S. case centered on Microsoft's integration of its Internet Explorer browser into the Windows OS and the negative impact on rival Netscape, many wanted the court to impose restrictions on future integration of features in Windows to prevent the software giant from extending its monopoly into the Web services market.

The European Commission's ruling this week, however, could flip the switch on a new era of regulation for software, industry observers noted.

"I think that government telling software developers what to write is fraught with problems, though not necessarily as many as arise from abuse of a monopoly," said Jonathan Zittrain, a law professor at Harvard University who specializes in Internet and technology law. "The real solution here would be to have reasonable terms for software copyright, meaning that successful companies must continue innovating rather than relying on consumer habits and desires for compatibility to maintain their cash flows."

One consultant agreed that the European Commission is trying to pave the way for a new era of competition in the software market, and Microsoft has a tougher fight on it hands than it did against U.S. Department of Justice under Attorney General John Ashcroft.

"[EC Competition Chief] Mario Monti apparently wants to impose a historical precedent that will apply to bundling and tying across a host of industries in the age of digital products," said James Governor, a London-based principal analyst at RedMonk, a market-research and consulting firm in Bath, Maine. "Such a precedent would certainly have seismic implications for antitrust law internationally, and if such an approach sticks and doesn't collapse under appeal, then the EU will have put itself forward as the global antitrust regulator in the face of the weakness of the [U.S.] DOJ."

Microsoft will be going up against a fierce rival in Monti, who single-handedly quashed General Electric's efforts to buy Honeywell, observers noted. Despite months of talks with the EC to avoid stiff penalties, Microsoft's Ballmer acknowledged last week that the company failed to come to an agreement with Monti and settle the case.

While European antitrust law differs from U.S. antitrust law in its emphasis on preserving competition, Microsoft will employ the International Intellectual Property Law, the EUCD, which is equivalent to the European DMCA, and will battle to the finish to get the government's hand out of software development, Governor said. "IP law will be used by Microsoft to try and grind any such remedy down to dust through the appeals courts. If there is one fundamental right Microsoft will fight to the death for, it's the right to bundle and add functionality to its products," he said.

Even though the sanctions are aimed at the European market, some observers wonder if the harsh ruling will impact the U.S. market and outstanding U.S. cases against Microsoft.

In an interview with CRN in July 2001, Microsoft's Gates repeatedly insisted that the U.S. court upheld his company's product integration rights and claimed that such regulation wasn't on the table.

But the Massachusetts Attorney General's office is currently awaiting a a U.S. appeals court ruling on its longstanding appeal of the Microsoft's 2001 antitrust settlement with the U.S. government. Massachusetts was of nine states that originally appealed the U.S. antitrust ruling, and state attorney general Tom Reilly now stands alone in his efforts to impose harsher sanctions against Microsoft--including an order to force the company to ship a stripped-down version of Windows. The Massachusetts Attorney General's office on Wednesday declined to comment on the European ruling because of its pending litigation before the U.S. appeals court in Washington, D.C.

Legal observers and channel partners are torn over the potential impact in the United States and abroad.

"Despite the EU's strong signals, it's more likely than not that the harsh remedy threats won't materialize," said Hillard Sterling, an antitrust attorney at Chicago law firm Much, Shelist, Freed, Denenberg, Ament and Rubenstein. "The European authorities rarely take and follow through on hard-line antitrust enforcements where the U.S. has not. It would be inconsistent at best--and bad, unworkable law at worst--to demand a restructuring of Windows. The message from the U.S. government is loud and clear: Pro-competitive restrictions are enough to protect competition in these vibrant markets with many strong actual and potential competitors."

One consultant in the security arena predicted that the remedies, if adopted in Europe, won't impact the U.S. market because of its emphasis on consumer choice over competition.

"Microsoft is in the unique position of being punished for its incredible success in the market. If the Federal Trade Commission told General Motors not to strip its cars of a feature that benefited consumers, like Xeon headlights, we would all be left scratching our heads. For some reason, the EU and others feel that this type of treatment is reasonable when it comes to Microsoft," said Adam Lipson, president and CEO of Network and Security Technologies, a consulting firm in Pearl River, N.Y. "If you look back 20 years, when the Japanese started building better cars cheaper than the American manufacturers, the U.S. government did not impose sanctions against imports. Instead, they were supportive of American manufacturers building better cars. If we want to promote competition among operating systems, stripping Microsoft of operating systems functions that consumers are demanding is not the answer."

Another attorney predicted, however, that Microsoft will have to succumb to regulations and restrictions on its product integration rights in light of its dominant position in the software markets.

"Microsoft is learning that it must play by a different set of rules than those that applied when it was an aggressive startup. Some of the difference in the rules is political, some of it is odd and some of it really promotes better competition," said Tom Carey, an intellectual property attorney and partner in Boston law firm Bromberg and Sunstein. "I am not much impressed with Microsoft's product integration rights. Microsoft became the dominant player by promoting an operating system that was supposedly open to third-party developers. Microsoft then successively killed off every major product that was developed for its operating system--not by being better, but by obscuring technical aspects of its operating system, making third-party products unreliable. The monopoly position obtained by Microsoft in this manner is now under assault, as it should be."

One Sun partner said that while the remedies are focused in Europe, the global shift in business will change his business opportunities. "Looking at this from my CEO seat, I see Microsoft's legal negotiations antitrust suits in Europe and Asia spilling over and steadily eroding their market share and sales in America," said Marc Maselli, CEO of Back Bay Technologies, a Boston-area Sun partner, who added that he's taking Linux on the desktop more seriously than before. "We have built a strong service offering around assessing alternative desktop solutions based around Linux, Gnome, Evolution Mail Client and other elements as a cost-effective alternative to Windows and Office. The financial strength of the business cases we have created has been staggering."

Some channel partners view the European decision in the Microsoft antitrust saga as a noteworthy topic but said it won't have any material impact in the United States. Brian Bergin, president of Terabyte Computers, Boone, N.C., said the latest development is much ado about nothing.

"I doubt it [will have impact here]," Bergin said. "Microsoft will simply take Media Player out of Windows, just like they used to not sell 128-bit versions of Windows outside the U.S."