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The Globalization Institute, a Brussels-based European Union think tank, has recommended the EU require all PCs to be sold without preloaded operating systems such as Microsoft Windows.

There is no reason why computer operating systems could not follow the same model as computer hard drives and processors, which comply with standards that allow for broad compatibility as well as competition in the market, said the report, which was submitted to the EU's regulatory body, the European Commission.

Such a policy would lead to increased competition and innovation in the area of computer operating systems, something the Globalization Institute report said it believes the EU is looking for.

"For two decades, Microsoft has enjoyed monopolistic power in the operating system market. The Competition Commissioner has signaled the desire to see more competition in this sector. Unbundling would foster a competitive market, increase consumer choice and reduce prices," said the Globalization Institute report (click here for PDF).

The signal the institute refers to is the September 17, 2007, ruling in which the EU's Court of First Instance upheld commission rulings requiring Microsoft to share certain technical specifications with rivals and to offer customers an unbundled option in cases where Microsoft has tied together two separate products. The court ruling also upheld a $613 million antitrust fine against Microsoft that had been imposed by the European Commissioner for Competition, Neelie Kroes.

Correction: this story has been corrected to remove the implication that iTunes sells audio files in formats other than AAC. iTunes did begin selling DRM-free songs earlier this year, but those files are still in the AAC format. Other stores are selling DRM-less MP3s, but not iTunes.

In 1998, the European Commission began investigating Microsoft on grounds that it was illegally using its desktop operating system (OS) monopoly to squeeze into new markets. At some point along the way, RealNetworks complained that Microsoft was repeating its kill-Netscape tactic by bundling the Windows Media player into Windows. In 2004, the EC agreed, and (among other things) ordered Microsoft to ship a version of Windows without the Media Player in Europe. Microsoft appealed, but was forced to comply while the appeal wound its way through the system.

So Microsoft shipped versions of Windows XP without the the Media Player. But because it didn't have to offer any discount, almost nobody bought these versions at retail, and hardware makers didn't preinstall them. (Even if the free Media Player version had been a few bucks cheaper, I don't expect there would have been much demand. Especially from PC makers--the more different software alignments they have to install and support, the higher their expenses.) The company followed up with similar versions of Vista in 2007.

As anybody who follows technology news now knows, yesterday a European court denied Microsoft's appeal on almost every count. (The full ruling is available from the first link on this page--it's long. Lawyer and technologist Mary Kirwan, writing for The Globe and Mail, had an excellent write-up of the ruling as it relates to Windows/non-Windows interoperability, which I'm not covering here.)

In the wake of the ruling, EC Commissioner Neelie Kroes spoke at some length about the harm Microsoft has done to the consumers, but one statement made me check my eyesight. As reported by Todd Bishop in the Seattle Post-Intelligencer, Kroes said, "Microsoft's media player format has, as a result of its conduct, come to dominate the market."

Say what? I suppose that's true if you define the relevant market as player installations--Paul Thurott reports Nielsen/NetRatings figures showing the Windows Media Player at 50 percent, with the RealPlayer at 22 percent and iTunes at 19 percent. Or if you measure it in terms of the number of commercial stores selling music in the Windows Media Audio format versus some other format.

But in terms of actual usage? Apple's iTunes Music Store owns about 70 percent of the market for legal downloads and has sold more than 2 billion songs. Those songs are in the AAC format, a variant of MPEG-4. And illegal downloads still far outweigh legal ones, and most of those are in the MP3 format. Microsoft's attempt to dominate the digital media market with the Windows Media format has failed so completely that the company is now mimicking Apple's end-to-end, control-all-parts strategy with Zune (which will be lucky to get 10 percent market share any time soon.) In fact, Microsoft's moved so far away from Windows Media, it's even licensing a new DRM technology to wireless phone carriers and handset makers that doesn't rely on or use Windows Media in any way.

In other words, Microsoft's OS monopoly hasn't helped it dominate the digital media market one bit. Turns out that users don't care so much which digital media player is preinstalled on their PC--if a competitor (Apple) sells a separate set of products (iPod, iTunes) that are good enough, people will use them. In fact, I'd argue that--apart from the profits and cash flow Windows generates, which fund money-losing businesses like the Xbox--the OS monopoly hasn't really helped Microsoft enter or dominate a new market for many years. (RealNetworks might disagree, but I wonder if its own actions did more to help Microsoft than Microsoft's monopoly. No slam on Rhapsody, which is a good service...I'm talking about the old RealPlayer and the way Real promoted it.)

Meanwhile, Microsoft's European competition just got harder--the iPhone launches in the U.K. on November 9.