Update: EU fines Microsoft $613 million

The European Commission fined Microsoft Corp. $613 million and ordered the U.S. software giant to offer a version of its Windows operating system without the Windows Media Player software within 90 days, at the close of a five-year investigation into the company's business practices in Europe, it announced Wednesday.

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Microsoft will challenge the ruling, it said. An alternative settlement the company proposed to the Commission last week would have offered consumers more choices and benefits, it said in a statement.

The ruling may be too little, too late, according to one analyst. "None of what the European Union (EU) imposed will hurt Microsoft in the short term. The fine doesn't hurt, and the unbundling (of Media Player) won't hurt in the next two years. It's all taken too much time," said Jaap Favier, an analyst with Forrester Research Inc.

The Commission concluded that Microsoft broke EU competition law by leveraging its near monopoly in the PC operating system market to gain advantage in the markets for work group server operating systems and media players.

In addition to the fine, the Commission ordered Microsoft to change its illegal conduct. The company must disclose within 120 days details of the software interfaces used by its products to communicate with Windows and to sell a version of its operating system without Windows Media Player.

The decision will make it possible for fair competition to develop in the markets concerned and sets clear principles for the future conduct of companies with dominant market positions, the Commission said in a statement.

Microsoft abused its near-monopoly market position in PC operating systems by deliberately restricting interoperability between PCs running Windows and work group servers running non-Microsoft operating systems, allowing it to reach a dominant position in the work group server market too, the Commission said.

It ordered Microsoft to provide complete and accurate documentation of the software interfaces between its products so that competing vendors can build compatible systems. The documentation must be updated for each new product released. If this information is protected by European intellectual property laws, Microsoft will be entitled to reasonable remuneration, the Commission said. The ruling does not require Microsoft to reveal its source code.

The Commission also found that Microsoft had abused its position in the PC operating system market to weaken competition in the market for media players, comprising software that replays audio and video content on a PC. Within 90 days, Microsoft must offer a version of Windows without its Media Player software, the Commission ordered. The Commission said Microsoft may not charge PC manufacturers a lower price for the version including its media player. Manufacturers will still be free to bundle competing media player software with their PCs, the Commission said, meaning that consumers will still have access to PCs ready to play video and audio content.

Microsoft will challenge the Commission's ruling at the European Court of First Instance in Luxembourg, it said.

An alternative settlement the company offered to the Commission last week would have given consumers more choice and benefits, Microsoft said. It proposed to install three non-Microsoft media players, in addition to its own, on any PC sold with Windows, a move that it said would have lead to the distribution of more than 1 billion competing media players over the next three years.

Sun Microsystems Inc., one of the two companies whose complaints to the Commission triggered the investigation, also reacted immediately to the ruling.

The decision is important for consumers and for increased innovation and competition worldwide, Sun said in a statement.

With Microsoft forced to disclose details of the software interfaces between its server and desktop operating systems, IT managers will be able to choose from a greater variety of work group servers, knowing that they will be able to interoperate with Microsoft desktops, Sun said.

Microsoft planned a news conference to give its reaction at 12:30 p.m. GMT.

With additional reporting by Scarlet Pruitt in London.