EU's Decision Clear; Results May Not Be

The European Commission's ruling (if it stands) will have a host of technical and legal ramifications for Microsoft, but will it achieve the intended result? Special Report: Microsoft Hit with Record EU Fine EU Reaction: Microsoft Challenges, Rivals Cheer
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As expected, the European Commission on Wednesday levied a record fine of $613 million and imposed other penalties against Microsoft, including stripping its Media Player software from Windows in European markets , after ruling it abused its monopoly position.

Although companies can't sue another software company for being successful, Microsoft's dominant market position made it a target. While no figures are available specific to Europe, analysts estimate that Windows holds 90 percent to 95 percent of the operating system market.

According to research firm IDC, the Windows server environment accounted for 54 percent of shipments worldwide in 2002, with Linux holding about 24 percent share. UNIX held 8 percent of the market and Novell's NetWare platform at 7 percent.

Today's decision, which the Redmond, Wash., software giant plans to appeal, will be watched closely in legal and IT circles in Europe and around the world.

Impact U.S. software markets

The EU ruling won't have much effect in the United States, where Microsoft already has made changes to its practices and software following its settlement with the Department of Justice.

"The Appeals Court laid down some narrow parameters for what the Department of Justice could and couldn't do with Windows, so the DoJ dropped it," said Directions on Microsoft analyst Matt Rosoff. "Microsoft still has the legal right in the U.S. to include what it wants want in Windows."

Will OEMs Change Their Ways?

In Europe, Microsoft's sales channels and OEMs will ultimately have more influence on the market than the Commission.

Since most computer users get Microsoft's operating system through the hardware manufacturer, it's not clear whether breaking down the OS into finer granularity will have the impact some people think it will.

"How [hardware manufacturers] choose to package it may be very different from what the EU intends. They may decide to keep the package together as before," IDC analyst Dan Kusnetsky said.

Such a strategy would save OEMs money on everything from packaging to support. In any case, the huge installed base of Windows machines won't immediately upgrade, he said.

But the ruling could influence the evolution of Longhorn -- the next major release of the Windows OS following XP. Earlier, Microsoft President Steve Ballmer and commissioner Mario Monti said Microsoft's future actions were the sticking point in negotiating a settlement. That could mean Microsoft was willing to accede to demands about Windows, but balked at limits on Longhorn.

"I'd like to see Microsoft disclose exactly what it offered," said Jupiter Research analyst Joe Wilcox. He said doing so would let the world see whether the company really made a meaningful offer or not.

Instead of being intractable, he said, "Microsoft might have been the victim of European politics. We wouldn't know unless something were clearly disclosed -- not leaked." (Jupiter Research and this publication are owned by the same parent company.)

Kusnetsky said Longhorn is still a project, not a product, and Microsoft hasn't made any decisions about what to include. He said that while Microsoft's strategy has always been to keep piling on features at lower prices than you'd pay for them separately, the company has been grappling with concerns over the size and complexity of Windows. Strong competition from Linux shows that many users want cheaper, simpler software.

"If they are told to break Windows into pieces," Kusnetsky said, "they may decide to change future products."

Impact on Server Software and Operations

Kusnetsky said the impact on Microsoft's server business is less clear.

"Unless they specifically say that Microsoft for the foreseeable future must adhere to guidelines, Microsoft will comply, but not for one moment longer."

Jupiter's Wilcox pointed out that Microsoft already discloses some of its server APIs in the States, following the DoJ settlement.

"There's huge contention about whether Microsoft has licensed them in an easily accessible manner," he said. "The trustbusters have chimed in and said no, so Microsoft is making adjustments yet again."

Look for the same back-and-forth as the company tweaks compliance with the EU demands, Wilcox said.

Influence on Microsoft's Digital Media Strategy

If Microsoft ships alternative media players in the box, "Which ones?" asked RedMonk analyst James Governor. "All of them? Will the EU choose? It's a very difficult challenge."

Governor believes that the only real solution to opening up the Media player to competition lies at the interface level, by making media software an open component.

See page 2 for what the appeals process will entail.


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