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NEWS ANALYSIS

Microsoft Is Seen as Unmoved by Ruling

March 25, 2004|Joseph Menn | Times Staff Writer

With all the complaining -- from Microsoft Corp. to the halls of the Senate -- about Wednesday's precedent-setting antitrust ruling by the European Commission, a casual observer might think that the software Goliath is being forced to change the practices that have made it the third-most valuable company on Earth.

But the order will do no such thing, Microsoft and its rivals agree.

While going further than their counterparts in the U.S., the European regulators haven't come close to knocking Microsoft off the mountaintop, antitrust experts, analysts and technologists said. Armed with $53 billion in cash and the Windows operating system, which runs more than 95% of the world's personal computers, Microsoft has cruised into new market after new market.

Whenever possible, it ties new products back to Windows, giving the Redmond, Wash., company an enormous advantage in everything from hand-held computers to server software for running networked machines in the workplace.

And when a competitor has a "killer application" -- be it an Internet browser or a music and video player -- Microsoft includes its own version in the Windows operating system.

After five years of investigation, nothing that the commission did Wednesday will do anything to change Microsoft's battle plans, even if the ruling is upheld by European courts in an appeals process that could last until 2009.

The problem, antitrust lawyers said, is that the core of the decision addresses past behavior, where the damage is done. Going forward, the statement that bundling products together is unacceptable if it harms "competition on the merits" is so vague that Microsoft can continue incorporating new products into Windows until courts tell it otherwise.

"We're not doing anything different than we were doing yesterday in terms of how we think about new design," Microsoft Chief Executive Steve Ballmer said. "We will continue our high level of investment in the development of great technologies and products, and we will ensure the continued availability of those technologies."

In the two fields explicitly targeted by the commission's competition officials -- media players and server software -- analysts said Microsoft had come too far to be turned back.

The commission directed Microsoft to offer computer makers a version of Windows without its media player, so that some manufacturers could choose to install rival players from RealNetworks Inc. or Apple Computer Inc. at the factory. But it didn't say the stripped-down Windows had to be any cheaper.

"If they don't have to offer a difference in price, you might as well take the Windows that has the media player in it," said former Federal Trade Commission antitrust lawyer Joel Grosberg, now with McDermott, Will & Emery in Washington. "I don't see much of an impact on Microsoft's business."

Although RealNetworks invented the business of software for streaming audio and video files over the Internet, the Seattle company's software is used only 20% to 25% of the time, estimated independent analyst Phil Leigh of Inside Digital Media, which has business relationships with RealNetworks. About two-thirds of the market belongs to Microsoft.

RealNetworks and others have a chance to come back now, but only if they come up with products so compelling that the PC makers want to turn down Microsoft's free goods, he said.

In the server market, Microsoft has boosted its share of the market for entry-level server software from 20% to 70% during the course of the European investigation, according to server rival Sun Microsystems Inc., which filed the initial complaint to the commission in 1998.

The commission directed Microsoft to disclose enough information, for a reasonable fee, so that Sun and others could make their gear work as well with Windows PCs as Microsoft's server software does. The process will be overseen by a trustee.

But that won't undo Microsoft's recent leap forward.

"In the past in our industry, it has been very difficult to unwind that kind of advantage," said Lee Patch, vice president for legal affairs for Santa Clara, Calif.-based Sun.

The grounds for the greatest hope among Microsoft's competitors is that the ruling establishes a new threshold for what constitutes improper behavior.

Although the commission didn't spell out what future activity would trigger additional penalties, it did give a broad hint.

"Dominant companies have a special responsibility to ensure that the way they do business doesn't prevent competition on the merits and does not harm consumers and innovation," Competition Commissioner Mario Monti said in the ruling's summary release.

More detail may come in the full ruling when it is made public, or clearer guidance may have to wait for a ruling from the courts.

In the meantime, said Robert Kimball, RealNetworks' general counsel, Monti's words indicate that "bundling an application with the operating system and using that to crush the competition is not legal."

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