Even after more than a decade embroiled in clashes with government antitrust regulators, Microsoft had managed to keep its engineering hands free to design products the way it...

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Even after more than a decade embroiled in clashes with government antitrust regulators, Microsoft had managed to keep its engineering hands free to design products the way it chose.

That was until yesterday.

In a major legal setback for Microsoft, a European court rejected the company’s request to suspend antitrust sanctions imposed by European Union regulators earlier this year.

The decision clears the way for a regulatory body to impose, for the first time, restrictions on how the software giant builds its flagship Windows operating system.

The decision essentially means Microsoft must alter the way it does business in Europe. Starting in January, it will have to provide a version of its Windows operating system with the Windows Media Player stripped out. It must also begin to make confidential technical information available to competitors.

Those penalties were imposed by the European Commission in March when it found Microsoft had violated European antitrust law. The commission also fined the company 497 million euros, or $612 million when Microsoft paid it earlier this year.

Judicial process
in Europe

European Commission:
Investigated initial complaint by Sun Microsystems and issued decision against Microsoft, imposing sanctions. Microsoft appealed decision to Court of First Instance and asked for delay in sanctions.

European Court of First Instance:
Rejected Microsoft’s request for delay. Separately, a five-judge panel is considering appeal of the commission’s decision.

European Court of Justice:
Microsoft can appeal Court of First Instance decisions to this court.

Microsoft argued before the Court of First Instance, based in Luxembourg, that the penalties should be postponed while its full appeal of the case is heard. That appeal could take years to resolve.

Until then, even if the case is reversed on appeal, Microsoft will not suffer “serious and irreparable damage” by carrying out the remedies imposed by the court, said Court President Bo Vesterdorf, the judge in the case.

Microsoft General Counsel Brad Smith said the company will begin complying with the ruling immediately and has not decided whether to challenge it in Europe’s highest court.

“Compliance is our first order of business,” he said. While the company lost the chance to delay the measures, Smith said he found some reason for optimism in Versterdorf’s analysis of the case.

“The court recognized we have a number of arguments that are important and could well enable us to win at the end of the judicial day,” he said.

Microsoft will continue pursuing discussions with the commission toward a settlement.

“We’ll just have to see first of all whether there’s interest in pursuing those kinds of discussions on the other side of the table,” Smith said.

He said Microsoft will provide a version of Windows minus the media player to European computer manufacturers next month and expects resellers in Europe to have the version available for sale by February. The company will charge the same price for the stripped-down version as it does for the original product, he said.

Whether there will be much demand for the more limited product at the same price is an open question. In addition, Microsoft has no obligation to offer it outside of Europe.

“We have always been skeptical that there would be significant consumer interest in this product,” Smith said. “Now we’ll all find out.”

The company will also start a Web site for competitors to begin licensing Microsoft’s communications protocols, which enable competing server software to operate smoothly with Windows.

Seattle-based RealNetworks, which makes a competing media player, hailed the ruling.

“For the first time, PC makers will be given greater flexibility to configure their PCs the way they want,” said Dave Stewart, RealNetworks deputy general counsel.

“To the extent PC makers, consumers and content providers decide what media player to support based on merits rather than monopoly, we believe that will be good for RealNetworks,” he said.

Limiting its ability to add features to Windows is something Microsoft has long resisted. To reach settlements with once-bitter foes, it even agreed to share technical information with companies like Sun Microsystems.

After Microsoft this year settled with Sun, which had brought the initial complaint in Europe; and Novell, an intervenor; both Sun and Novell withdrew ended their participation in the case.

The one settlement Microsoft couldn’t reach was over the European Commission’s determination to address the practice of tying a new product to an existing, dominant one. That issue proved the key stumbling block in last-ditch negotiations between Microsoft CEO Steve Ballmer and the commission’s antitrust watchdog earlier this year.

Forcing Microsoft to strip out its media player could set a precedent as the company develops future Windows versions that could include Internet search tools, antivirus software and other additions, analysts said. At some point, it might have to remove those features, too.

“The decision itself is not that harmful to Microsoft’s business,” Goldman Sachs analyst Rick Sherlund wrote in a research note yesterday. “It is the precedent which is really at issue.”

Erik Simon, president of VideoBanner, a small Los Angeles software-development company involved in the case since August, said it’s too early to tell whether the ruling will help companies like his.

“The devil is in the details,” he said. “We think there’s an important principle to be established. There are other technologies we’ve refrained from developing because Microsoft can take a similar idea, bundle it into their operating system and undercut our business opportunities.”

It’s also unclear what benefit the decision might have on free and open-source software competing with Microsoft.

Microsoft is allowed to charge fees for the licenses it provides, a proposition that holds no appeal for open-source developers that require their software to be distributed for free.

Jonathan Zuck, president of the Association for Competitive Technology (ACT), an intervenor in the case, argued the decision would have a chilling effect on innovation. It creates a broad precedent that “could prevent the addition of new functionality to any successful product, regardless of the industry,” Zuck said.

Smith said Microsoft would not change its plans for future products based on yesterday’s ruling.

“I think the reality is that no one will really know what precedent is set for the court until the court makes a determination on the merits of the case,” he said.

The ruling goes further than any antitrust sanctions that courts have upheld against Microsoft in the past, said Andrew Gavil, professor of law at Howard University School of Law. “This is the first time that Microsoft has been required to alter its basic business model,” he said.

Microsoft shares closed yesterday at $26.97, down 10 cents. RealNetworks got a 4 percent boost, with shares up 26 cents to $6.72.

Kristi Heim: 206-464-2718 or kheim@seattletimes.com