EU Will Fine Microsoft Over $600 Million, Source Says

European Union states on Monday backed a proposal to fine Microsoft Corp. (MSFT) a record 497 million euros ($613.5 million) for abusing its dominance of PC operating systems, an EU member state source said.

"It is 497 (million euros)," the source told Reuters.

If the full European Commission (search) backs the fine as expected on Wednesday it would exceed the 462 million euro penalty imposed on Hoffman-La Roche AG (search) in 2001 for being ringleader of a vitamin cartel.

Microsoft associate general counsel for Europe Horacio Gutierrez said in a statement the fine was unjustified.

"We believe it's unprecedented and inappropriate for the Commission to impose a fine on a company's U.S. operations when those operations are already regulated by the U.S. government and the conduct at issue has been permitted by both the Department of Justice and the U.S. courts," he said.

Microsoft reiterated plans to appeal.

As well as the fine, Microsoft is to be ordered to offer a version of its Windows operating system without Windows Media Player (search) and to encourage computer makers to provide other audiovisual software.

It must also license information to make the servers of rivals more compatible with Windows desktop machines.

The fine amounts to slightly more than one percent of Microsoft's roughly $53 billion cash on hand and did not impress analysts and critics.

"This is a traffic ticket for Microsoft," said Thomas Vinje of Clifford Chance, who represents Microsoft critics.

Neil Macehiter, an analyst with London-based technology research firm Ovum, said even a $3 billion fine would have been "an irritant to Microsoft but certainly wouldn't break the bank."

The absolute limit on a fine is 10 percent of annual turnover for the year before the decision, which for Microsoft would amount to $3.43 billion. But the formula for calculating a fine means the limit is rarely reached.

In Microsoft's view there is no reason it should be fined at all. Commission regulations say a company must infringe rules "either intentionally or negligently" to warrant a fine and Microsoft says it did neither.

The two sides held months of talks to find a settlement. Microsoft spokesman Tom Brookes said the very fact that the Commission rejected such a deal with the firm, in part to obtain a legal precedent, shows no precedent existed before, meaning such behavior had not in the past been found to be anti-competitive.

In a case like this either a symbolic fine or none at all would be justified, Brookes said.

Microsoft is continuing to generate cash at a rapid rate, and on Jan. 22 projected expected revenues of $8.6 billion and operating income of $3.1 billion for the current quarter.

In addition to the fine, two remedies requiring Microsoft to change its behavior will be approved on Wednesday.

One will require Microsoft license at a reasonable fee more information so that rival makers of low-end servers will find their software as compatible with the Windows operating system as Microsoft's own servers.

Some reports say the Commission backed off a stronger remedy for fear of impinging on Microsoft's intellectual property.

The head of legal affairs at Sun Microsystems Inc. (SUNW), which initiated the current case in 1998, said taking away some of Microsoft's intellectual property might be an appropriate remedy, although the company had tried to elevate intellectual property to "the mystical and holy and untouchable."

"When considering a repeat law breaker, a logical approach is to have an asset of that lawbreaker, usually money, taken away in the form of a fine," said Lee Patch, head of Sun Microsystems legal affairs.

"What's so special about intellectual property? It's an asset like many other types."