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PAGE ONE
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THE MICROSOFT CASE
[Gavel]  Read the text of the European Commission's statement.
 
 See a timeline of Microsoft's run-ins with European authorities.
 
 For more coverage of the Microsoft battles with the EU, U.S. and with private companies, see wsj.com/microsoft.
 

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EU's Microsoft Move
Could Set Precedent

Tech Landscape Could Be Transformed
If U.S. Giant Is Made to Ditch Bundling

Europe's latest salvo against Microsoft Corp. in a four-year-old antitrust case against the software giant raises the stakes in a newer, potentially more damaging case just getting under way.

Both cases take issue with a practice, called bundling, that industry officials have long considered a sacred cow for Microsoft. The Redmond, Washington, company makes life easier for consumers by pre-installing or "bundling" programs such as Internet Explorer and Windows Media Player with the Windows software found on most new PCs. That way, consumers don't have to install the programs themselves -- unless they want to use competing software for browsing the Web or playing digital music and videos. Competitors say it is impossible to compete against something so ubiquitous, not to mention free.

If European antitrust regulators force Microsoft to "un-bundle" Media Player from current and future versions of Windows, as the European Commission threatened Wednesday, lawyers on both sides of the issue agree it may set a precedent that could also allow European regulators to prevent the company from bundling other new services, such as potentially lucrative software for instant messaging, photo editing, voice recognition and digital sales of music and videos.

[xx] [Global Journal]
By Brandon Mitchener in Brussels and Don Clark in San Francisco

To be sure, no one is challenging Microsoft's ability to bundle programs in its Office suite of programs -- Word, Excel and PowerPoint -- as a software package. Moreover, in many key markets Microsoft has built such a dominant market position that an adverse regulatory ruling may have little long-term effect on the company.

Still, bundling remains a controversial issue when the practice is applied to Windows, because Microsoft critics charge that most consumers have no real alternative.

"Bundling is the key weapon in Microsoft's competitive arsenal," says Thomas Vinje, a Brussels-based lawyer for Morrison & Foerster LLP. "If they're forced to abandon that weapon then the competitive landscape really will change." Mr. Vinje represents Microsoft competitors including Nokia Corp. and AOL Time Warner Inc. behind the new complaint lodged with the European Commission in February.

A Microsoft spokesman had no immediate comment on the prospect of a bundling ruling, though the company has said it intends to work with the commission, the main regulatory agency in the European Union, to resolve its concerns.

Microsoft has repeatedly resisted attempts to force it to un-bundle Windows features both in Europe and the United States, where the U.S. Department of Justice tried and failed to force Microsoft to sell a version of Windows without Internet Explorer, its Web browser. Company officials have said they will fight the latest assault by the commission, the chief antitrust authority in the European Union, with the same vigor.

"We have to look at it in light of the precedent it may set in preventing the company from continuing to innovate," said one Microsoft official. "Our main concern is once you say yes to Media Player you have to say 'What does that mean for every other innovation you have to add to [Windows] in the future?' "

Weighing in on a case that dates back to a December 1998 complaint by Sun Microsystems Inc., the commission said Wednesday that Microsoft should un-bundle Windows Media Player from current and future versions of Windows, effectively forcing the company to sell a stripped-down version of its operating system that's at least as attractive to customers as the full version. Alternatively, the commission said Microsoft could bundle competitors' products in the media-player software market -- something some legal experts and industry executives think it is most likely.

The commission's threatened remedies, which Microsoft now has an opportunity to respond to before the EU regulators act, elated Mr. Vinje because it bolsters the case he helped put together for the Washington, D.C.-based Computer and Communications Industry Association regarding alleged antitrust abuses linked to Windows XP, the latest incarnation of Windows. "This indicates to me that the decision has really been taken at the highest level to go to the end of the game and to pursue aggressively a robust, meaningful remedy and not to give up until they've gotten it," Mr. Vinje said.

Besides PC operating systems and applications software, CCIA's complaint notes a host of newer markets that Microsoft's bundling activity could affect, including Internet portals and Internet advertising, as well as software for hand-held computing devices, smart phones, videogame systems and TV set-top boxes.

The CCIA complaint listed Internet Explorer, Outlook Express, Windows Media Player, Windows Messenger and Windows Movie Maker 2 as features bundled with Windows XP that thwarted other companies' ability to sell similar products for a profit. The complaint also alleges that Microsoft is trying to leverage its monopoly in desktop PC operating systems into a similar position in the markets for software for cable set-top boxes, hand-held computers and mobile phones.

The commission's investigation of the second complaint has yet to really begin, as regulators say they have their hands full with the older case.

Some lawyers say the longstanding EU investigation regarding Media Player and other competition issues could be a harbinger for a bigger battle to come -- one in which Microsoft could be the underdog. "If the upcoming decision is a proxy for the real battle, un-bundling of Media Player bodes poorly for Microsoft," said Chris Bright, an antitrust partner at law firm Shearman & Sterling in London.

But Nicholas Economides, professor of economics at the Stern School of Business at New York University and an authority on antitrust policy, said an un-bundling order in the first case wouldn't necessarily portend the same for the second case. "Each case has to be seen on its own merits, and whether a particular case has benefits to consumers," he said.

The second case also raises questions for how other large tech players operate. "Where do you stop?" Bundeep Singh Rangar, chief operating officer at London venture capital firm Ariadne Capital, asks rhetorically. Mr. Rangar says he would like to see a solution to that question but believes the best technology that has the highest market acceptance eventually triumphs, whether it is bundled or not.

The allegation that Microsoft illegally ties new products to its monopoly operating systems was a key issue in the Justice Department's antitrust case in the U.S. The agency, and Microsoft's rivals, alleged that the company bundled the Internet Explorer browser with Windows as an anticompetitive act designed to hurt rival Netscape Communications. Microsoft defended the integration of new products as a vital principle that it needs to improve its products, carrying huge benefits to consumers.

A binding precedent on the issue was never established. The Justice Department agreed to a settlement in November 2001 that allowed Microsoft to keep bundling its browser with Windows, as long as it allowed computer makers to disable it.

A key problem, for Microsoft rivals, is the long time delay between the time a case is filed and any potential remedy. In many key markets, including Web browsers, server software and media-player software, Microsoft has already established a dominant position. Though an EU ruling could theoretically stop bundling of some products from continuing, such restrictions wouldn't necessarily reverse gains Microsoft had already made.

Ronald Katz, a Silicon Valley antitrust lawyer who has monitored the company's antitrust battles, doesn't see how the EU actions would greatly help Sun or other existing competitors. "Microsoft is so far ahead," he says. "The successor to Microsoft is somebody that is just being born today."

But the media-player market, at least, is still a battle, with RealNetworks and Microsoft still fighting it out for leadership. "If you take a case like the browser, it's too late," said Steven Salop, a professor of economics and law at the Georgetown University law center in Washington, D.C., who has been a consultant to Microsoft's opponents. "What is significant about the media player is that the time is now -- the market is in a position where its about to tip toward Windows Media Player, but there might still be time to interdict it," he said.

-- James Kanter and Kevin Delaney contributed to this article.

Write to Brandon Mitchener at brandon.mitchener@wsj.com and Don Clark at don.clark@wsj.com

Updated August 8, 2003

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