The year may be ending on a stormy note for Microsoft (MSFT) in Europe. On Dec. 22, the European Union threatened the software giant with fines of $2.37 million a day for not complying with a landmark ruling, handed down almost two years ago, that accused the company of being an abusive monopolist.
In March, 2004, the EU fined Microsoft $613 million and ordered it to make a series of sweeping changes in how it deals with competitors (see BW Online, 3/25/04, "A New World for Microsoft"). For one thing, Microsoft would have to share technical information that would help rivals' server software work better with the Windows operating system. The EU says Microsoft isn't holding up that side of the bargain.
FIGHTING WORDS. Redmond (Wash.)-based Microsoft has failed to provide key documentation to competitors, according to a report by the European Commission, which handles competition issues for the EU. The EC called the information that Microsoft has provided so far "incomplete and inaccurate," and said it may impose the fines after giving Microsoft an opportunity to respond.
In a Dec. 22 statement, Microsoft called the EC's claims "unjustified," accusing the commission of failing to take into account documents submitted only on Dec. 15. "We are fully committed to comply with the decision," Microsoft General Counsel Brad Smith said in a statement, adding that his company will contest the EC's objections within the EU legal system.
As menacing as the threats may sound, some analysts say the EU's bark may be worse than its bite in this case. Even if Microsoft does end up paying the fine, it will be hardly more than "an annoyance" to the company, which booked $9.74 billion in sales in its latest quarter alone, says Roger Kay, president of tech consultancy Endpoint Technologies Associates.
LEGAL WRANGLING. The fine will eat an estimated 2% of the company's revenue -- not welcome news considering concern over the pace of Microsoft's growth. Yet, says Jason Maynard, an analyst with Credit Suisse First Boston in San Francisco, "I can't imagine that [the fine] would be a meaningful number." Microsoft's shares fell about half a percent, to $26.59, after the news was reported.
None of that is stopping Microsoft from contesting the EC's findings. Microsoft is supposed to respond to the commission by Jan. 25. Then, the company says, it will demand a hearing. It claims that its more than 15,000 pages of documentation and some 100 changes to its software should be more than sufficient to ensure compliance with the EC's requirements.
Microsoft also claims that those requirements keep changing. "We are frustrated because they constantly move the goalpost," Smith tells BusinessWeek Online.
Another cause of frustration is the short notice given by the EC: On Dec. 9, the agency asked the Redmond behemoth to make additional changes to documentation by Dec. 15 -- a request that had Microsoft programmers working 24 hours a day and on weekends, according to the company.
After the hearing, the European Commission will make a formal decision. That might come in the spring, when Microsoft's appeal of the EC's decision itself is expected to be debated by the courts. Legal and industry experts anticipate that the legal wrangling will take years.
NO END IN SIGHT. It may make more financial sense in the long term for Microsoft to pay the fine and hold off on providing much more documentation. Some of the code the commission requested relates to the inner workings of Windows, and its release "can open the door to the production of clones of parts of the Windows operating system," says Smith, who believes that the release of this code wasn't originally part of the EC's sanctions.
Besides, in the fast-paced software industry, the code is constantly changing, and Microsoft likely will continue to provide additional documents for months, if not years, to come. While the EC is dealing with Windows XP, Microsoft is preparing to introduce its new operating system, Vista. And that product might require a flurry of new documentation to be sent to the Commission as well, further prolonging the Microsoft-EC proceedings.
As the EC struggles to modernize Europe's intellectual-property laws, "I think that it's not inconceivable that your children will be reporting on this," says Mark Ostrau, partner at law firm Fenwick & West in Mountain View, Calif.
FRIENDLY FOCUS. In the meantime, Microsoft hopes to avoid setting precedent of releasing lots of its internal code. Once such a precedent is set, regulatory bodies in Asia and Europe might require the company to do the same, potentially vastly reducing the value of its intellectual property. Prolonging the legal process actually makes sense for Microsoft since, in a few years, Europe's regulatory climate could become more favorable, says Richard Doherty, director of consultancy The Envisioneering Group in Seaford, N.Y.
Until then, Microsoft can make friends in Europe in other ways. Perhaps the company could promise free software for European schools, says Doherty. Or it might set up its corporate business in such a way as to pay Europe more taxes. This fall, Microsoft's Xbox chief, Robbie Bach, met with European regulators to discuss family-friendly games, a topic of much interest in Europe. With European antitrust regulators at large, Microsoft needs all the friends it can get.
Kharif is a reporter for BusinessWeek Online in Portland, Ore.
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