RAY SUAREZ: Microsoft and its Windows operating system took a big hit yesterday from the European Union. The EU ruled Microsoft was abusing its "near monopoly" on the market and unfairly promoting its media player, that plays digital music and videos over the Internet.
SPOKESPERSON: A ringa-ding-ding.
RAY SUAREZ: After a five-year investigation, the European Commission, the top antitrust regulator in the European Union, slapped Microsoft with a record fine of more than $600 million. They ordered Microsoft to change its business practices, mainly to stop bundling its own multimedia software into its operating systems. And it gave Microsoft 90 days to offer two versions to consumers, one with the media player and one without. That opens the field to rivals like Real Network's Real Player and Apple Computer's Quick Time. Also under the decision, Microsoft would be required to disclose more details about its Windows system to competing server companies. Mario Monti, the EU's competition minister, explained the reasoning.
MARIO MONTI: We are saying that consumers and P.C. hardware manufacturers ought to be able to decide which media player software they want to preinstall in their computers. They ought to choose -- they ought to choose, not Microsoft. Our decision is about protecting consumer choice and stimulating innovation.
RAY SUAREZ: But Microsoft's CEO said the decision would hurt consumers.
STEVE BALLMER: There's an important principle at stake in this case. We believe that every company should have the ability to improve its products to meet the needs of consumers. The commission's actions would freeze our technology where it is today, and that's not good for consumers or for software developers.
RAY SUAREZ: Microsoft said it would appeal the ruling to the European courts. The action went well beyond the terms of a U.S. settlement Microsoft reached with the Department of Justice in 2001 over similar issues. Responding to the latest penalty in a statement, the department said "sound antitrust policy must avoid chilling innovation and competition even by 'dominant' companies."
For more, I'm joined by Joe Wilcox, a Microsoft analyst at Jupiter Research, and Eleanor Fox, an international antitrust expert at New York University School of Law. Well, after a pre-finding negotiation failed, after all the sides pled their briefs, what did the EU decide that Microsoft had done wrong?
JOE WILCOX: Basically, Microsoft or basically the EU said that Microsoft had used its dominant position with Windows to gain an unfair advantage in the work group server market and that also Microsoft had illegally tied the media player to Windows.
RAY SUAREZ: So this was a litigation about bundling?
JOE WILCOX: Yes. On the one hand, bundling in the sense of that Microsoft had kind of an unfair advantage over competitors in the server market with their software not necessarily working as well with Windows as Microsoft's, and with the media player, Microsoft having an unfair market advantage over competitors because their software was not included in windows.
RAY SUAREZ: Professor Fox, besides levying the fine which is sizable but certainly wouldn't break Microsoft's bank, what has the EU required Microsoft to do?
ELEANOR FOX: Well, the EU, which is requiring fair access for the rivals to in effect hook up with the operating system of Microsoft, is requiring Microsoft to order -- to offer a version of the operating system that does not have the media player so that the P.C.-makers are able to choose which media player they want to put in, and it's also ordering that Microsoft disclose interface information so that workplace servers can interoperate with the Microsoft operating system rather than be at a disadvantage because at the current time they are unable to interoperate smoothly.
RAY SUAREZ: So if the EU verdict eventually is played out in the marketplace, there will be two versions of Microsoft operating systems on the shelves in European computer stores?
ELEANOR FOX: It probably won't be exactly like that. What will be the case is that the operating system will be more modular and functions like media player can be -- can be loaded on the machine by the P.C.-maker to respond to whatever consumers want so many consumers will want real network and they will have real network media player. Other consumers who want Microsoft -- they will have Microsoft. There will be other media players in the market and the hope of the commission is that this ruling will be forward-looking and that facts that are very similar that come up in the future, and it may be instant messaging or it may be search engines would fall under a certain principle so that consumers would be able to decide through the P.C.-makers' choices what they want to use on their P.C..
RAY SUAREZ: Now, Joe Wilcox, in advance of the ruling, Microsoft offered to include these other products in their offerings that in effect you'd get other discs with the programs loaded on, and if you wanted to put on real player, if you wanted to put on QuickTime, that would be your choice, and the EU said no. They wanted instead Microsoft to detach these other products and offer a version without these other things for playing music, for playing video. Why was that battle so critical?
JOE WILCOX: Well, there are a number of issues. For Microsoft, I mean, Microsoft doesn't want to be regulated. It doesn't want government agencies to come in and tell it how to design its software. For the European Union, I think it was an issue of choice. I mean, right now you have Windows media player as part of Windows. If these other countries can operate their software, it would allow more differentiation of the operating system. Look at the P.C. market right now. Many P.C.-makers, their systems look kind of the same because of the commodization of hardware and then also because they run Windows but if you put something else on it, at least with respect to digital media software, to have more differentiation, that's good for consumers and it's good for competitors. Professor, go ahead.
ELEANOR FOX: Can I jump in, too?
RAY SUAREZ: Please.
ELEANOR FOX: The commission was also looking at its notion of what enhances innovation so its position is that as long as Microsoft can bundle functionalities on the operating system can actually dry up the market for any competitors. Netscape makes Navigator, the browser, and then Microsoft comes out with a browser and bundles it into the operating system that dries up the market for outside browsers. Real networks makes media player and Microsoft then decides to bundle it in and that drives up the market for outside media players, so the commission's position is that nobody is going to invest in the applications if they don't have a fair chance at the market so they do see this as an innovation problem. But I have to say on the other side, of course, Microsoft sees this as an innovation problem, too, because Microsoft says that under the restrictions of the commission it won't be able to innovate as much.
RAY SUAREZ: Is the European Union tougher, professor, on monopoly cases when it finds a company like Microsoft have an overwhelming market power in a particular product? Are they likely to be tougher in American courts?
ELEANOR FOX: As a matter of fact, they are. They start with a somewhat different premise. They start with the premise that a dominant firm has the responsibility not to block out rivals on the merit, not to fence them out. The United States starts from a different premise. It starts from the premise that even a dominant firm should have great freedom to what to do, what products to offer and how to offer them and no responsibility to help the rivals so starting from that different plane, the nations could come to different conclusions, but it turns out here that they have come to relatively the same conclusions, that is, the details of the commission case are different from the facts that were looked at in the U.S. case, but in terms of whether the Microsoft is unfairly -- unfairly using its dominant market power, they have both come to similar conclusions.
RAY SUAREZ: Well, where does this leave Microsoft, Joe Wilcox? If the European decision stands, are they faced with offering very different products to different markets around the world because the law is different here in the United States?
JOE WILCOX: Well, of course, everything is predicated on what happens, whether the appeal, if the remedy is stayed or not, and, of course, that's a legal question, but if Microsoft is forced to or compelled to deliver two different products, that would happen in Europe within 90 days. It would be one version. That's the normal version of Windows, another version that would have the Windows media functionality removed. Of course, the question is then will P.C.-makers ship the second version or not, and I think that's something that we will see over time.
RAY SUAREZ: Professor, in recent cases, sometimes the appeals and the added litigation have lasted longer than the products have, and new versions are available by the time it's all over. Is Microsoft likely to play for time in European courts now?
ELEANOR FOX: Well, of course it will, and, of course, just naturally it will take some years, maybe three and a half or so, for the appeals to be completed, and this is exactly why the commission wanted bold relief that will be forward-looking and that's incorporated in a decision, not just a settlement so that the principles it lays down in this decision will be applicable to a next product and that hopefully its certain principles are set in place and Microsoft will abide by them in the future.
RAY SUAREZ: And right now where does that leave Microsoft? They have got another big product stream coming soon to shelves, right?
JOE WILCOX: Well, if Microsoft is forced to take the media functionality out of Windows, at least in Europe, it could affect other products like Windows media, Windows XP media edition which is out now and other products coming later in the year such as the Windows media extender and then also a product called portable or mobile or portable media center.
RAY SUAREZ: Joe Wilcox, Professor Fox, thank you both.
ELEANOR FOX: Thank you.