EU Court Rules Against Microsoft

A European Union court ruled Wednesday that Microsoft Corp. (MSFT) must immediately share some trade secrets with competitors and produce a version of its Windows operating system stripped of a program that plays music and video.

The ruling thwarts the software giant's attempt to delay implementation of an EU antitrust decision designed to have a deeper impact than Microsoft's settlement with the U.S. government.

Microsoft said it would restrict its compliance to the European market, and analysts said the financial impact would be minimal.

The company's stock was barely nicked, trading down 10 cents to $26.97 a share in late afternoon trading on Nasdaq.

EU spokesman Jonathan Todd said the ruling "preserves the effectiveness of antitrust enforcement, in particular in fast-moving markets."

Implementation of the March decision will benefit computer users by expanding their choice of media players and workgroup servers and will stimulate innovation, Todd said.

Seattle-based RealNetworks Inc. (RNWK), maker of a rival to Microsoft's digital media player and Microsoft's last big commercial opponent in the case, praised the decision. The company's deputy general counsel, Dave Stewart, said his company can now compete "based on the merits of products and services rather than the power of Microsoft's monopoly."

The order only requires Microsoft to distribute the alternative version of Windows in Europe; Microsoft said it has no plans to distribute it elsewhere.

Existing users of Windows, the world's dominant operating system, won't be affected. The version stripped of Windows Media Player (search) will cost the same as the regular product.

Brad Smith, Microsoft's top lawyer, said the company would supply the alternative version to computer makers in January and retail distributors in February.

Analysts doubted consumers would embrace it.

"Even if you give people the choice, the odds are very high that they're going to choose the Microsoft solution," said Paul DeGroot, an analyst with independent researchers Directions on Microsoft.

Microsoft is launching a Web site that would provide competing server software makers with information on how they can license source code to enable their products to better communicate with Windows-powered desktops, Smith said.

Under the court order, any company in the world can license the software blueprints, Smith said. But companies can only use that information to develop and distribute software in Europe, not worldwide.

The company hasn't decided how much it will charge for the licenses, Smith said.

It's not clear how many companies will take Microsoft up on the offer. Sun Microsystems Inc. (SUNW), once one of the major players in the case, already has similar access under a settlement it reached with Microsoft earlier this year.

Novell Inc. (NOVL), another rival that reached a settlement with Microsoft this year, said it hadn't yet decided whether to license the code.

In a 91-page ruling on Wednesday, presiding Judge Bo Vesterdorf of the Luxembourg-based European Court of First Instance found that Microsoft "has not shown that it might suffer serious and irreparable damage" if the March decision were immediately implemented.

Smith said Microsoft has not decided if it will appeal Wednesday's decision. Any appeal must be filed within two months.

Meanwhile, the company is continuing to pursue its full appeal of the original March order. That process could take up to five years.

Microsoft has already paid the record $666 million fine levied against it as part of the March antitrust action.

Redmond, Wash.-based Microsoft continued to hold out hope that it would be able to reopen settlement talks with the European Commission, Smith said.

"There is ample room for us to continue to press forward with cause for optimism," Smith said.

But EU officials have said a ruling in their favor would make it unlikely that antitrust regulators would reopen talks.

"We are not in the process of renegotiation," Todd said.

After the March EU ruling that Microsoft abusively wielded its Windows monopoly and locked competitors out of the server software market, Microsoft settled with four of the five major interveners in the EU's case.

Microsoft paid $536 million to Novell and a smaller amount to the Computer and Communications Industry Association (search), leading both to pull out of the case. The company also spent $2.4 billion to settle claims by Time Warner Inc. and Sun.

Judge Vesterdorf had been assessing the case since the final hearings in October.

EU lawyers accused Microsoft of trying to avoid competition and dictate consumer choice. Microsoft insisted the March order would hurt small companies and their customers, since the companies would no longer be assured that their products would work with Windows.

Microsoft's 2002 antitrust settlement with the Bush administration's Justice Department required only that Windows users be allowed to hide Windows Media Player and set another as the default.

Analysts predicted the financial impact of Thursday's ruling on the company would be minimal.

Microsoft has already counted the fine against its quarterly earnings, said Matt Rosoff, an analyst with Directions on Microsoft.

Rosoff said the biggest threat was that the ruling, by compelling Microsoft to strip something out of its operating system, would set a legal precedent for similar lawsuits.

Smith said it was too early to say whether the case would create such legal precedents.

Mark Ostrau, a lawyer who is following the case, said any such precedents could threaten Microsoft's ability to bundle more features into future versions of its operating system.

"The real key to Microsoft's success is its ability to bundle. So not being able to bundle, or having that risk every time they want to bundle, that really does cramp their style," Ostrau said.