August 8, 2003 11:39 AM PDT

Microsoft media strategy at risk?

With pressure from European antitrust regulators mounting, Microsoft's bid to make its multimedia technology a worldwide standard may be running into a headwind.

As part of a strongly worded rebuke to Microsoft released Wednesday, European Commission officials said they're leaning toward forcing the company to either stop bundling its Windows Media software along with its Windows operating system or include rivals' products along with the operating system. "Microsoft's abuses are still ongoing," the Commission staff wrote.

Although the outcome is uncertain, and some analysts said a settlement that protected the status quo was likely, the regulators' stern warning raised the possibility of new hurdles for Microsoft's media strategy. The company has relied in large part on the omnipresence of its software to promote its proprietary Windows Media audio and video format to everyone from record companies to movie theaters. A forced unbundling could diminish that appeal, analysts said.

"I think if they were forced to unbundle in Europe, it could affect the Windows Media format," said Matt Rosoff, an analyst with Directions on Microsoft, a research firm focusing on the software company's strategy. "You could see (rival standards-based format) MPEG-4 become the de facto next-generation standard."

Microsoft sees digital media as a key leverage point in maintaining the dominance of the Windows operating system on the desktop, and in pushing into other markets such as servers, set-top boxes and handheld devices. Demand for digital media technology is rapidly expanding with the growth of the consumer broadband market and the impending arrival of robust home networks that promise to blur the lines between the PC and other consumer-electronics devices, such as the television.

The commission's antitrust comments, which come as much as several months ahead of an actual ruling, are among the most powerful pieces of support yet for critics' contention that Microsoft has crossed legal lines in elbowing rival multimedia technology companies aside. Companies from RealNetworks to On2 Technologies have long said that Microsoft has an unfair advantage in the audio and video field by including its player and media formats inside the Windows operating system.

"We think what (the commission's comments) demonstrate is that the EC gets it," said David Stewart, deputy general counsel for RealNetworks. "It means they understand markets, they understand digital media, and they understand the critical need to maintain competition in these markets."

The ultimate effect of any order targeting Microsoft's multimedia software is still unclear, however.

Taking the Windows Media Player software out of the operating system could put a dent in the number


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of new computers that ultimately wind up with the Microsoft audiovisual software installed. But some analysts said the company would quickly find ways around any such ban.

Windows already includes features that contact the Microsoft Web site and download updates. Future versions of Windows could simply offer a message prompting consumers to download the Windows Media software, and perform the task almost automatically, noted Richard Dougherty, an analyst for The Envisioneering Group.

"Even if there has been wrongdoing, it seems like that would simply shift the burden to consumers," Dougherty said. "Tens of millions of people would have to do a download for something that they very likely already want."

If the company were forced to include other players or technologies along with the operating system, it could be a huge boon to rivals, however--particularly open standards-based formats such as MPEG-4. Big content companies such as movie studios have historically been more open to using standards-based formats for distribution of their content, and have been loath to tie their digital strategies entirely to Microsoft technology.

However, Microsoft does have other points in its favor, even if its distribution mechanism is ultimately impaired. The company's digital rights management anticopying technology, which is built into the Windows Media technology, has proved to be a critical selling point as Microsoft tries to persuade piracy-shy content companies to use its formats.

A commission order giving other companies greater access to Microsoft's code could allow those companies to create digital rights management technology that works more smoothly with Windows Media--but that ultimately could help support the spread of the Microsoft format as well.

Several other legal uncertainties are hanging over Microsoft's multimedia strategies. Last month, a federal court made a critical ruling in favor of InterTrust, a digital rights management company charging that virtually all Microsoft's major products violate its copy-protection patents.

Rosoff noted that Microsoft executives are holding tens billions of dollars as cash reserves, not simply to pay potential fines or court judgment, but to cover business expenses that could arise from unfavorable judgments. That could include new costs to market or distribute the Windows Media Player or such things as unexpected licensing royalties if InterTrust wins its patent suit, the analyst said.

A Microsoft representative declined to speculate on possible outcomes of the commission's antitrust proceeding but said dialogue remained open between the company and regulators.

The commission said it would give Microsoft a last chance to comment before making a final decision on fines or remedies for the alleged market abuses.

 

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