By Dawn Kawamoto and Ina Fried
Thursday, December 23 2004 11:17 AM
URL: http://www.zdnetasia.com/news/software/0,39044164,39210610,00.htm

A European court on Wednesday dealt a blow to Microsoft, ordering the company to start offering a version of Windows without a bundled-in media player.

Bo Vesterdorf, president of the European Court of First Instance, said that Microsoft must comply with penalties imposed by the European Commission in March even as the company's appeal wends its way through the system.

The Commission ruled in March that the software giant used its monopoly in operating systems to try to manipulate the markets for media players and work group server operating systems. It ordered the company to offer a version of Windows without its bundled media player and to share more technical detail with rivals--orders that will now go into effect.

"The evidence adduced by Microsoft is not sufficient to show that implementation of the remedies imposed by the Commission might cause serious and irreparable damage," the court said in a statement.

The company, however, has the right to appeal Wednesday's decision to the president of the European Court of Justice. Any appeal would have to be lodged within the next two months.

Microsoft hasn't yet decided whether it will appeal the ruling, general counsel Brad Smith said during a conference call on Wednesday.

"We don't know whether we will appeal. I don't think it will take two months, but I think we should take enough time to decide whether to do that," he said.

Smith told reporters he remained optimistic that the company still had a good chance to win out on the merits of the case.

"The court nonetheless recognized we have a number of arguments that are important and will need to be weighed seriously and could well win at the end of the day," he said. He later added that "I'm not suggesting that victory is guaranteed, but there's clearly cause for optimism as we see the litigation path moving forward."

For instance, "the court recognizes there's an important question in respect to Microsoft's argument that the Commission should have given more weight to the positive effects (of the combination)," he said.

Smith said that the company would act immediately to begin addressing the ruling. Microsoft plans to set up a Web site later Wednesday so that the company's competitors will be able to begin licensing various communications protocols specified in the ruling.

While some of Microsoft's protocols are already available for licensing, the ruling covers a new category of communications protocols in the Windows server.

Smith said the company does have some experience with this, pointing to the company's consent decree with the United States government.

The company will also continue working on a special version of Windows, excluding Media Player, for the European market. That product should be available for manufacturers in January and work its way through to resellers by February. Microsoft said the pricing should be the same as that of existing versions of Windows.

Analysts said they see little demand from either consumers or computer makers for a version of Windows without Media Player. But the decision could establish a major legal precident that could ultimately affect how Microsoft builds future products.

Smith said the costs of implementing the remedy would not be significant for a company of Microsoft's size, adding that developers had been working on the alternative version of Windows for several months. If Microsoft eventually wins the underlying case, the company will be able to withdraw the product from the market, but Smith said Microsoft had not specifically addressed how they would do that.

Microsoft had already covered the monetary portion of the penalties, depositing US$600 million in an escrow account. The other requirements were temporarily suspended after the company requested an emergency stay.

Settlement a possibility
Microsoft on Wednesday also held out hope that the ruling could lead to renewed settlement talks.

"We are hopeful that the issues highlighted by the Court will create an opportunity for the parties to discuss settlement," Microsoft said in a statement. "As we have always stated, we believe that there are better ways to address such complex and technical issues, with a minimum of harm to European consumers and the European technology sector."

Microsoft had engaged in settlement talks just before the European Commission ruled in the spring, but the talks broke off.

In its U.S. antitrust case, the company eventually reached a settlement with the Department of Justice.

Wednesday's decision comes ones month after Microsoft reached agreements with software rival Novell and the Computer and Communications Industry Association, a computer industry trade group, leading to their withdrawal from the EU case. RealNetworks, which makes software that competes with Microsoft's Media Player, is the only major rival left in the case.

RealNetworks has been a key participant in Europe's antitrust actions against Microsoft, and in December 2003 it filed its own lawsuit, charging Microsoft with illegally using its monopoly in desktop computer operating systems to thwart competition in the market for digital-media players.

RealNetworks hailed Wednesday's decision. "We believe that the court's decision is ultimately a victory for the Commission and for consumers," Dave Stewart, RealNetwork's general counsel, told CNET News.com. "Clearly this creates an opportunity for OEMs (original equipment manufacturers) and for consumers in Europe, and we will work with PC makers to meet that opportunity."

In a statement, the Commission said Wednesday's ruling will stimulate innovation and protect consumer choice.

"Today’s order is important because it preserves the effectiveness of antitrust enforcement, in particular in fast-moving markets as in this case," the Commission said in a questions-and-answers document regarding the ruling.

The court sets a high standard for those trying to get a stay of an order while an appeal is pending. Plaintiffs must show both the urgency of the need for a stay as well as the fact that such urgency outweighs the public interest of seeing the penalties imposed. Only points of law can be appealed.

In its ruling, the court said Microsoft had not demonstrated the necessary urgency: "After examining the circumstances of the case, the President finds that Microsoft has not shown that it might suffer serious and irreparable damage as a result of implementation of the contested decision."

If Microsoft decides to appeal Wednesday's decision, the process could take from three weeks to a couple of months, depending on the complexity of the case, European legal experts said.

"I would advise Microsoft to appeal if I was representing them. There is no downside. There may be a chance the upper court will rule differently," said a European antitrust lawyer whose firm is involved in the case.

The European Commission statement said it does not expect that Wednesday's ruling would be put on hold if Microsoft appeals it to the president of the European Court of Justice.

"The Commission is not aware of any precedent where the president of the ECJ has suspended the operation of a Commission decision pending his own assessment of an order of the president of the CFI already rejecting the request for suspension," the Commission said. "It is also not the Commission's practice to suspend on its own motion the enforcement of a decision in circumstances of this type, where the president of the CFI has already concluded that there is no need for suspension."

An appeal of Wednesday's ruling would be dealt with long before the Microsoft appeal on the antitrust ruling goes before a judge, which could take up to a couple of years, European legal experts said. During that time, legal and industry experts noted, much could change in the technology world.

The Association for Competitive Technology, a trade group that has sided with Microsoft in the case, criticized the ruling, saying it will harm consumers and small software developers.

"While intended to constrain Microsoft, the Commission's sanctions will impose billions of dollars in new costs on small software developers and consumers and threaten the future of innovation," ACT president Jonathan Zuck said in a statement.

Likewise, Hugo Lueders, European director of public policy for the Computing Technology Industry Association (CompTIA), which was an official third-party intervener in the case, warned that the ruling could have a chilling effect on intellectual-property development.

"Allowing competitors to use information that they did not create will create an unhealthy precedent and blunt incentives for all companies to develop intellectual property in the first place," Lueders said in a statement.

He added that "the ruling sends a message to the industry that intense competition will be penalized, not rewarded. This 'level the playing field' approach to competition policy does not promote risk taking, nor encourage growth in the IT industry in the EC and around the globe."

CNET News.com's Margaret Kane and Mike Ricciuti contributed to this report.