Europe Takes Aim at Microsoft

The European Union said Wednesday that it would fine Microsoft Corp. billions of dollars and demand that the software giant make modifications to its Windows operating system if the company can’t refute “strong evidence” that it has monopolized European markets for computer server and audiovisual software.

If imposed, the penalties would be the most far-reaching ever levied against the world’s largest software developer.

In a final statement of objections from the European Commission, the EU’s executive branch, antitrust regulators said Microsoft should either remove its key Media Player software for playing music and video files from Windows or offer competing products in its flagship operating system. The statement also said the company should reveal more about how Windows PCs interact with Microsoft’s software for running computer networks.

Microsoft, which has been under investigation by EU antitrust regulators for four years, has two months to respond to the proposed penalties.

They would fall short of competitors’ calls for the company’s breakup or a sweeping disclosure of the Windows software code. But what the EU proposed would be much tougher on Microsoft than what was required by the settlement Microsoft reached last year with U.S. regulators to end its antitrust battle with the Justice Department.

A spokesman for Microsoft declined to say whether the company was surprised by the toughness of the EU’s recommendations. In a carefully worded response, spokesman Jim Desler said, “We take this investigation very seriously and will work hard with them to maintain a dialogue that will allow for a positive resolution of these issues.”

The proposed penalties would pose a significant setback to Microsoft’s efforts to extend its PC dominance to the industrial-strength computers that run the Internet and corporate networks. They also could help Seattle-based RealNetworks Inc. -- Microsoft’s chief rival in audiovisual software -- just as the proliferation of high-speed Internet connections is creating a booming market for software to play music, movies and other forms of entertainment on the Internet.

Rob Enderle, a technology analyst with Forrester Research, said resolving the EU case should be at the top of the “to do” list for Microsoft Chief Executive Steve Ballmer and Chairman Bill Gates. Enderle added that the practices the company is able to pursue in the U.S. “will not play in Europe.”

EU antitrust officials, who have been criticized by European courts for conducting sloppy antitrust investigations, say they assembled a strong case after examining documents and testimony from 203 companies.

“The case as it stands now is too strong to ignore,” said European Commission spokesman Tilman Lueder in Brussels. “We have taken our time to develop the evidence necessary to build a very strong case.”

Simon Strong, a services and software analyst at WestLB Panmure in London, said Microsoft’s rivals were watching the case closely. “It could have a big impact on the software market,” he said.

Although few European software makers have been directly affected by Microsoft’s aggressive business practices, the technology industry there thinks that the Redmond, Wash., company has “used Windows to get too big and powerful,” Strong said.

The EU’s investigation started with a 1998 complaint filed by server computer maker Sun Microsystems Inc. accusing Microsoft of violating European Union competition rules.

Throughout the investigation, Microsoft has signaled a desire to settle. But the company has balked at regulators’ demands that it un-bundle certain software components from Windows, contending that consumers benefit when new applications are built into the operating system because it makes computers easier to use.

Microsoft has invested heavily on digital media technologies, aiming to make its software the de facto standard for electronically delivered music and movies. Media Player is the most popular program in the U.S., with at least 50% more users than competing software from RealNetworks or Apple Computer Inc.

Decoupling Media Player from Windows could complicate Microsoft’s efforts in the digital-media market, said Joe Wilcox, a Microsoft analyst at Jupiter Research.

“The EU’s decision could help keep the playing field level,” he said. But he added that it could take years for the EU’s case against Microsoft to be resolved.

In Brussels, Microsoft has been outmaneuvered at the commission by its U.S. rivals and hamstrung by a lack of political and economic clout in a region that boasts its own high-tech Goliaths, such as Swedish mobile phone maker Nokia and the French utility and media giant Vivendi Universal.

The proposed Microsoft penalties come two years after the European Union formally rejected General Electric Co.’s proposed $42-billion acquisition of Honeywell International Inc., which would have been the largest industrial merger ever. That case is now on appeal to Europe’s Court of First Instance.

Microsoft might appeal its case to the Court of First Instance, which can review the EU’s legal conclusions and finding of facts, said Spencer Weber Waller, director of the Institute of Consumer Antitrust Studies at Loyola University in Chicago.

The EU “seems to have taken its time to build a strong case,” he said. “But this is a new and complex area, and it’s difficult to predict how it will turn out.”

Microsoft shares dropped 1 cent to $25.65 in Nasdaq trading Wednesday.

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Times staff writer Jon Healey contributed to this report.