Microsoft, European Union Fight It Out in Appeals Court

Microsoft (MSFT) ended RealNetworks' (RNWK) reign as the maker of the world's favorite media player after it ditched its rival's Net Show and bundled its own program with the Windows operating system, the European Commission told an EU court Tuesday.

Providers like RealPlayer and even Apple's (AAPL) QuickTime were pushed aside by consumers because new personal computers came bundled with Microsoft's own Media Player, said Commission lawyer Per Hellstrom.

"How can you compete with ubiquity?" Hellstrom asked, saying Microsoft's 1999 decision to integrate its own media player into the hugely popular Windows operating system was a move to push into another market "by pure force," he said.

The European Union is defending itself against Microsoft's challenge of the EU's landmark antitrust ruling that the company took advantage of its dominant position in PC operating systems to elbow in on rivals for work group server operating systems and for media players.

While a court decision on the ruling is not due for months, a decision backing the Commission could force Microsoft to change the way it does business in the future and endorse the EU's ability to hold back aggressive corporate behavior.

Thirteen judges from the Court of First Instance were asking questions Tuesday based on the testimony given by both sides a day earlier, when the world's largest software maker claimed that EU regulators had forced it to offer a product that virtually no one bought.

Judge John D. Cooke asked Microsoft why it had decided to add Media Player — a move the Commission said was designed to squeeze out RealNetworks Inc., whose own RealPlayer was previously packaged with Windows.

"Was it a marketing strategy designed to gain market share?" he asked.

Microsoft's lawyers didn't answer directly, but said the move was part of the company's strategy to further integrate its operating system.

Microsoft Corp. maintains that adding its own media functions into Windows was part of a natural computing evolution that created a better product.

But the Commission argues that as early as the 1990s, Microsoft's top executives had singled out RealNetworks as a likely threat, citing e-mails between company executives that called for the elimination of RealNetworks by incorporating the company's own Media Player into the Windows operating system.

The e-mail, from executive Jim Durkin, said RealNetworks was "like Netscape; the only difference is we have a chance to start this battle earlier in the game."

It went on to add that "Bill's comment was 'this is a strategic area and we need to win it,'" referring to Microsoft co-founder and Chairman Bill Gates.

Microsoft lawyer Jean-Francois Bellis said the judges should not try the company on a few lines in marketing memos that trumpeted the media functions when Microsoft made its decisions to develop software on a technical basis.

The EU fined Redmond, Wash.-based Microsoft a record 497 million euros ($613 million) in 2004 and ordered the software maker to provide a version of Windows without its Media Player in order to offer a free choice of media software to consumers and computer makers.

Bellis told the court Monday that the product had been a spectacular failure. In its core market, no computer maker had shipped a PC or laptop with the media-free Windows XP N version. Some 90 percent of Windows sales come from being pre-installed on new computers.

XP N sales represent 0.005 percent of overall XP sales in Europe, Microsoft told the court, and many of the ones produced may remain unsold.

Microsoft also claimed Tuesday that the European Commission broke world trademark law by forcing it to offer a product it did not want to sell. The company said it was the owner of an exclusive trademark and only it had the right to decide how it should be used.

"We argue that the Commission is basically ordering Microsoft to put on the market a product that it would never have put on the market ... that product is fundamentally inconsistent with its business model," Microsoft lawyer Jean-Francois Bellis told the court.

Providing extra media players with Windows would force the company to import software into its operating system that might not be consistent with its business model and licensing policies, it said.