March 8, 2004 4:00 AM PST

Is EU looking at yesterday's Microsoft?

As the European Union considers restrictions aimed at preventing Microsoft from unfairly using its dominance in PC operating systems to gain control of the market for multimedia software, some say the war has already moved on.

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What's new:
European regulators are expected to conclude a five-year antitrust probe of Microsoft this month.

Bottom line:
The EU is seeking restrictions that would prevent Microsoft from unfairly using the dominance of Windows to gain control over audio and video on the PC. But the penalties may be too little, too late.

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EU antitrust regulators have concluded that the software giant violated competition rules by "tying" its media player to Windows. Now they're weighing remedies due to be announced this month that could go as far as forcing Microsoft to offer computer makers two different versions of its operating system, one with audio and video playback features and another without them.

The idea is to give consumers more choices over multimedia software on the PC. But some say that's yesterday's battle, as Microsoft and others race for dominance in new markets, from portable music players and cell phones to TV set-top boxes and digital cinema.

"Certainly as a practical matter, given how fast Microsoft and the market for technology move, it's very hard for the law and regulatory bodies to keep up," said Mike McGuire, an analyst with Gartner G2, a division of the Gartner research firm.

PC technologies are rapidly converging with traditional consumer electronics devices, promising to wipe out boundaries between computers, televisions, radios and even the telephone. The winners in this transformation have yet to be determined, and competitors are lining up to duke it out. For example, Microsoft faces a suddenly reinvigorated rival in digital music: Apple Computer, whose iTunes Music Store accounted for about 75 percent of all legal digital song downloads in its first year of operation.

In this fast-changing environment, the EU's antitrust ruling could prove to be a sideshow, some analysts said. Among other things, Microsoft is all but certain to fiercely resist significant changes in its software, raising the prospect of further delays and a possible EU defeat on appeal. That possibility could lead EU regulators to seek milder restrictions that call for less drastic measures but stand a greater chance of getting implemented now.

The EU antitrust review is the latest, but not the last, legal challenge aimed at limiting Microsoft's power to turn its past dominance into unfair advantage in new technology markets.

The European review has worked on different lines than its American counterpart. While U.S. prosecutors focused largely on the browser market, Europeans have alleged that Microsoft unfairly tied its multimedia software into the Windows operating system and that the company has also made it difficult for rivals' server software to work on Windows-based machines.

Regulators have done extensive investigations, including multiple interviews with many of Microsoft's competitors such as RealNetworks. In a preliminary review released last August, European Commission officials said they believed the company's actions remained problematic.

"In light of this evidence, the commission's preliminary conclusion is that Microsoft's abuses are still ongoing," officials said.

Since that time, settlement negotiations have been ongoing. According to recent reports, commissioners may settle for allowing big PC makers to choose what multimedia software to install on new computers, instead of forcing Microsoft to pull Media Player out of Windows altogether.

Microsoft has kept its comments on the issue to a minimum. "We continue to be actively engaged with the commission in hopes of coming to an amicable resolution of the matter," said company spokesman Jim Desler.

A new antitrust review may also be pending in Japan, where government investigators raided Microsoft offices late last month. If a new examination is in fact pending, it would be the third such review of the company's practices in that country.

Yesterday's battle?
Regardless of remedies, a European ruling against Microsoft will be undeniably painful. At the very least, the company faces a fine in the hundreds of millions of dollars, according to reports.

But the decision may be too little, too late to have a major impact on the future direction of the digital multimedia market.

Regulators have little choice other than to focus on PC-based software, experts say--after all, they're looking specifically at how the company may have abused its operating system dominance, and can't speculate on what might happen in new technology markets.

On the media player side, at least, it's clear Microsoft has moved its ambitions, and its fingerprints, well beyond the PC.

For years now, the company has been assiduously courting big record companies and movie studios in hopes that they would release digital content in Microsoft's media format. This is starting to pay off. Most new online music services, barring Apple's and RealNetworks' stores, sell music in Microsoft's format and use a variation of the Media Player.

Microsoft's relationships to Hollywood studios are improving too. The company recently announced a broad alliance with Disney, under which Disney would license Microsoft's digital rights management tools and explore ways the companies could release content together, such as using the high-definition Windows Media format.

Microsoft's media format is now supported by dozens of MP3 players and other portable devices. The format is beginning to show up on copy-protected audio CDs around the world. And most recently, a DVD standards group gave provisional approval for Microsoft's video compression technology to be included in the next-generation specifications for high-resolution DVD video.

All of this is a sign that the digital media industry, and Microsoft with it, is looking well beyond the personal computer and the PC-based media player.

To be sure, analysts say, the PC remains at the core of Microsoft's strategy. The company views Windows-based machines, such as the Media Center displayed at this year's Consumer Electronics Show (CES), as the hub of a digital media environment. For this to be entirely advantageous to Microsoft, those PCs must also be loaded with the Windows Media Player.

Already PC makers have shown that they are willing to break from Microsoft in some cases, most notably Hewlett-Packard recently decided to make Apple's iTunes the default media player on some of its new computers. If the European Commission were to push that trend further, eliminating developers' certainty that Microsoft's media player would be installed on every PC, the market could slowly shift, some say.

"If application developers, including Microsoft's own, could no longer be able to count on Win media being there, they might think that maybe they need to ship their own player along with their products," said Rob Helm, research director for Directions on Microsoft, a research firm focusing specifically on the software company. "Then they might go to RealNetworks or someone else. That opens up a lot more competition on PC platforms."

RealNetworks itself is suing Microsoft on antitrust grounds, alleging that the software giant has made it impossible to compete fairly in the PC media player market. But Real is focusing more and more heavily on future platforms such as mobile phones, and worries too that Microsoft may yet use its Windows dominance to move into those fields.

"Microsoft's illegal conduct has reduced our revenues in the PC-based software markets, and limited consumer choice," said Dave Stewart, deputy general counsel for RealNetworks. But "getting a remedy to stop PC-based conduct in digital media markets will definitely safeguard competition on other devices."

Consumer electronics makers, however, are far less beholden to Microsoft than their PC counterparts, meaning that Microsoft's hold in the post-PC world could be tenuous. Manufacturers of set-top boxes and other non-PC devices aren't tied to Windows by their customers' previous experiences and have already in many cases adopted the Linux operating system as an alternative.

Nevertheless, it's hard to imagine--ruling or no ruling--that Microsoft's presence in the post-PC world is not already assured, analysts say.

"Microsoft might have wanted more time," Gartner's McGuire said. "But they've done a pretty good job of seeding the market."

 

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