With Microsoft ruling, a precedent for IT in Europe

Microsoft suffered a humiliating legal defeat Monday when it lost a court appeal to overturn the European Commission's 2004 antitrust ruling against it.

[ Video: MS loses EU antitrust appeal | Plus: EC wins appeal, but MS dominates market | Ruling renews hope for developers ]

The decision took most observers by surprise. The Court of First Instance, Europe's second highest court based in Luxembourg, sided squarely with Europe's top antitrust regulator on the two central issues in the case. Most commentators expected a mixed verdict.

While the details of the lengthy court decision are still being examined in their minutiae, some consequences are already clear: The ruling pulls a legal rug from under Microsoft's strategy of bundling software onto its Windows operating system, providing a powerful legal reference point for any future antitrust litigation against the company, and it strengthens the Commission's authority, especially when dealing with antitrust abuse in the fast-moving information technology industry.

The Commission was right to rule against Microsoft's strategy of bundling its Media Player application into the Windows operating system, the court concluded, after three years deliberation.

Similarly, Microsoft acted illegally by refusing to share the required interoperability information needed by rivals to build server operating systems that work smoothly with Windows, the court said.

Microsoft's most senior lawyer, Brad Smith said the court decision was "disappointing." He hasn't decided whether to appeal it to the top court, the Court of Justice. If Microsoft does this, it can only dispute points of law, not facts established in Monday's ruling.

Smith said Monday's court ruling has important implications for Microsoft's strategy of bundling together a range of applications with the Windows operating system.

This strategy has proved effective in the past. Microsoft eclipsed Netscape in the mid 1990s when it bundled in its Internet Explorer application into the operating system. And RealPlayer dominated the market for streaming media applications until Microsoft started bundling its Media Player into Windows in 1999.

The Commission initially hoped to save RealPlayer from Netscape's fate by ordering Microsoft in 2004 to sell a second unbundled version of Windows, but it was too late. The market had tipped irreversibly in favor of Microsoft even before the 2004 ruling.

The Commission's remedy to restore competition to the streaming media software market in 2004 was to order Microsoft to sell a second version, later dubbed Windows N, with Media Player stripped out. But the remedy has had no impact on the market.

Nevertheless, winning the bundling argument in court was the most important victory of the day for the Commission, and for other companies that believe they suffered from Microsoft's unfair bundling strategy, according to Commission officials and lawyers following the case.