'Profound' effect seen from Microsoft's EU compliance

Microsoft's decision to cooperate with the EU ruling means open-source developers will be given access to the interoperability protocols inside Windows

Changes Microsoft will make to its business practices to comply with the 2004 European Commission antitrust ruling will "profoundly affect the software industry," European competition commissioner Neelie Kroes said Monday.

For three and a half years Microsoft dragged its feet and used every legal avenue available to delay complying with the 2004 antitrust ruling. But after its appeal of the ruling to Europe's second highest court failed last month, the company decided to cooperate.

"At the time the Court of First Instance issued its judgment in September, Microsoft committed to taking any further steps necessary to achieve full compliance with the Commission's decision. We have undertaken a constructive discussion with the Commission and have now agreed on those additional steps," Microsoft said in a statement Monday.

Open-source software developers will be given access to the interoperability protocols inside Windows that Microsoft was ordered to reveal. Until recently the software giant had steadfastly refused to allow that. The protocols will be available for a fraction of the license fee Microsoft intended to charge and they will be valid worldwide, the Commission said Monday.

These concessions were agreed to between Microsoft CEO Steve Ballmer and Kroes in a recent meeting at a restaurant near Kroes' home town of Rotterdam in the Netherlands. The final details were agreed to in a transatlantic phone call Monday morning Brussels time, Sunday evening in Redmond, Washington, from where Ballmer made the call.

Kroes was visibly delighted at Microsoft's decision to respect the Commission's authority. "I hope we can close this dark chapter in our relationship," she told journalists at a news conference at the Commission's headquarters in Brussels.

However, she also made clear that while Microsoft's latest efforts substantially respect its obligations under the 2004 ruling, other points of conflict could occur.

"New issues may arise," she warned, pointing to "a couple of other cases on our desks" concerning the company.

One of those cases was sparked by a complaint from the trade group ECIS (European Committee for Interoperable Systems), whose members include IBM, Oracle, and Red Hat. The Commission declined to comment on other cases.

Besides complying with the 2004 ruling, Microsoft also said Monday that it wouldn't appeal last month's defeat at the Court of First Instance, ending the legal uncertainty that continued to face software and hardware developers long after the 2004 ruling.

While doubts remained about the validity of the Commission's 2004 antitrust ruling, the computer industry was unable to plan future product development with full confidence. Now they know, for example, that open-source software developers will be able to compete for a share of the market for workgroup server operating systems -- the computers that run networks of PCs.

Microsoft has a 95 percent market share on the desktop operating system market and over 70 percent of the market for workgroup server operating systems. Open-source workgroup server products are virtually the only alternative for users and are thus the main surviving competitive constraint on Microsoft, the Commission said.

"More competition on this market should offer consumers more innovative products, with improved functionality at better prices. For that reason, it is vital to the effectiveness of the 2004 decision that Microsoft also complies by giving access to open-source developers access to the interoperability information," the Commission said.

While failing up to now to provide all the information demanded by the Commission, Microsoft has been providing two separate licensing arrangements to companies. The first is a "No Patent Agreement" allowing licensees access to the interoperability information, but without taking a license for patents that Microsoft claims is necessary, a contention disputed by some third parties.

Microsoft Monday confirmed it has made three changes to this license. Besides granting access to it to open-source developers, it has reduced royalty fees to a single flat rate payment of €10,000 ($14,308, based on Monday's exchange rate). It has also agreed to allow licensees to dispute the accuracy or completeness of the interoperability information and seek damages in private enforcement claims at the High Court in London.

Kroes said the London court is the best qualified court in Europe to handle such disputes.

The second type of license offered by Microsoft includes rights to use patent-protected interoperability information. Microsoft was demanding payment for the patent-protected information amounting to 5.95 percent of the licensee's revenues from the product that benefited from the information. Microsoft agreed Monday to slash this to 0.4 percent of revenue, the Commission said.

Of the 154 protocols being licensed, only 31 are patent-protected. Licensees are free to choose if they need to take out a patent license or if they can work around the patents, Kroes said.

While Monday's agreement between the Commission and Microsoft draws a line through most of the outstanding legal issues they have fought over for the past nine years, the Commission still hasn't decided how much to fine the company for failing to comply up to now.

Two years ago the regulator fined Microsoft €280.5 million for failing to provide adequate interoperability information, and imposed further daily fines. The additional fines will add up to tens, possibly hundreds, of millions of euros in additional fines. The Commission will announce the full tally of fines before the end of this year, spokesman Jonathan Todd said.

Another outstanding question is whether Microsoft will withdraw an appeal of the ruling that imposed the noncompliance fine. That appeal was lodged with the Court of First Instance in 2005. Microsoft spokesman Tom Brookes said he was unaware of any decision to withdraw the appeal.

In 2004 the Commission, Europe's top antitrust regulator, fined Microsoft €497 million for abusing the dominant power of its Windows operating system. It ordered the company to reveal secret protocols inside Windows to rival makers of workgroup server operating systems to allow them to build systems that worked properly with PCs running Windows.

It also ordered the company to offer consumers a second version of Windows that has the media player stripped out, because the Commission concluded that by bundling Microsoft's own audio and video playing program into the operating system, it was putting rival media players at an unfair disadvantage.

Copyright © 2007 IDG Communications, Inc.

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