LUXEMBOURG – Microsoft (MSFT) suffered a decisive antitrust defeat on Monday when a European Union court upheld a landmark ruling that the world's largest software maker had abused its dominant market position to crush rivals.
The second-highest EU court, the Court of First Instance, dismissed the company's appeal on all key points against the 2004 European Commission ruling and upheld a record 497 million euro ($689.9 million) fine.
A jubilant EU Competition Commissioner Neelie Kroes said the ruling should lead to a "significant drop" in Microsoft's 95 percent market share.
Microsoft's top lawyer said it would affect the way the company markets its products in future.
Shares in the U.S. software giant were down 1.14 percent in morning New York trade after the Luxembourg-based court's ruling, suggesting investors were not overly concerned about the implications for Microsoft's successful business model.
Kim Caughey, senior analyst at Fort Pitt Capital Group, which oversees more than $1 billion including Microsoft shares, for clients, said: "Although this is probably a setback for Microsoft's strategy going forward, it's not that big a deal for investors. The fines have already been accounted for, so none of the stuff announced today had bottom-line impact."
Competition experts said the ruling had serious long-term implications for EU regulation of the hi-tech sector.
"It's clearly a major defeat for Microsoft. There is no doubt it will spur the Commission on to regulate Microsoft much more significantly," said U.K. competition lawyer Chris Bright.
It also gives Kroes a green light to pursue other antitrust cases and complaints involving Intel (INTC), Qualcomm (QCOM) and Rambus (RMBS), and to issue draft antitrust guidelines that were put on ice pending the ruling.
The court said Microsoft was unjustified in tying new applications to its Windows operating system in a way that squeezed out rivals and harmed consumer choice.
The EU's Kroes told a news conference: "The court has confirmed that Microsoft can no longer prevent the market from functioning properly and consumers are entitled to benefit from choice and more innovative products."
An appeal against the ruling is possible only on points of law and not of fact.
Asked how the Commission would assess progress in the Microsoft case, Kroes said: "A market level of much less than 95 percent would be a way of measuring success ... You can't draw a line and say exactly 50 (percent) is correct, but a significant drop in market share is what we would like to see."
Her spokesman later clarified that a fall in market share would be a logical consequence of fairer competition.
A lawyer for Microsoft's rivals in the case said it was the abuse of the company's position that was the problem, not its market share.
"If Microsoft, competing on the merits, achieves more dominance, then so be it," Thomas Vinje, lawyer for the European Committee for Interoperable Systems (ECIS), told journalists.
The court endorsed Commission sanctions against Microsoft's tying together of software and refusal to give rival makers of office servers information to enable their products to work smoothly with Windows.
The Commission ordered the company to sell a version of Windows without the Windows Media Player application used for video and music, which few have bought, and to share information allowing rivals' office servers to work smoothly with Windows.
The court annulled only the EU regulator's imposition of a Microsoft-funded trustee to monitor compliance.
Microsoft General Counsel Brad Smith called the ruling unprecedented and disappointing, saying it gave the Commission "quite broad power and quite broad discretion."
He promised the company would comply fully and said it had not decided whether to appeal to the European Court of Justice.
Microsoft, which had argued that it was entitled to protect its patents and copyright, has used every legal recourse in every case brought against it by governments and regulators.
The firm has weathered a series of defeats in high profile antitrust cases over a decade.
Kroes declined to discuss the implications of the ruling for a pending complaint from ECIS against the new Microsoft Vista on grounds that this operating system too had problems with interoperability.
ECIS and other rivals welcomed the court verdict as setting the ground rules for the company's future behavior and as a signal that EU authorities will not allow Microsoft to pursue anti-competitive practices with impunity.
Another winner was the Free Software Foundation, which makes free, open software for workgroup servers.
"Microsoft can consider itself above the law no longer," said Georg Greve, president of the FSF Europe.
The judges ordered Microsoft to pay the lion's share of the costs of the Commission and of business rivals.
Since the original decision, the Commission has fined Microsoft a further 280.5 million euros, saying it had failed to comply with the interoperability sanction. The EU regulator is considering a further fine for non-compliance.