Microsoft, EU Face Off over Antitrust Issues

Redmond giant's latest antitrust court drama begins Monday.

(Luxembourg) -- Microsoft Corp. began a challenge Monday before the EU's second highest court of the European Commission's landmark antitrust ruling against it, arguing that the future of innovation in the technology industry was at stake.

In its opening statement, Microsoft said the Commission made "serious errors" in its decision two years ago that the company abused its dominant market position.

The hearing, expected to take five days, will focus on Microsoft's behavior in the late 1990s, with EU regulators using evidence from the company's rivals.

At its core, the hearing is focusing on two issues. The first is Microsoft's bundling of Media Player as a core part of its operating system, the second is on the Commission's order that Microsoft share information and code with competitors to help them make software that worked smoothly with Windows.

In 2004, Microsoft was fined a record 497 million euros ($613 million) after the European Commission found that the company had taken advantage of its position as the leading supplier of software for PC operating systems to elbow in on rivals for work group server operating systems and for media players.

The commission ordered Microsoft to share information and communications code with rivals and to market a version of Windows without the media player to give consumers a free choice of media software.

In opening arguments, Microsoft's lawyers claimed that stripping out Media Player from Windows XP left consumers without the ability to listen to more music or watch more video.

On the Commission's order, Microsoft made available for purchase Windows XPN, which did not include the ubiquitous player. That, lawyers said, meant consumers could not listen to CDs or play music from providers like Yahoo or Napster.

"Many functions ... were lost in creating Windows XPN," Microsoft said, adding that all media functionality in Windows is part of the platform.

Both the world's largest software company and its rivals argue that the right to innovate lies at the heart of the case. Microsoft says it must be allowed to enhance its programs and guard its intellectual property. Critics argue the giant cannot be allowed to use its dominant market position to strangle competitors.

"The ability to innovate is important for the success of any company and for the economic success of any country," said Microsoft lawyer Brad Smith before the hearing. "We think that the facts will show that there is strong competition and consumer choice."

Smith said the EU court's decision, which isn't expected for a year to 18 months, would reverberate across the industry, regardless of the outcome.

"The impact of this case goes far beyond Microsoft," he said.

The EU said in December that Microsoft has not done enough to help its rivals develop compatible software and threatened Microsoft with daily fines of up to 2 million euros ($2.4 million), backdated to Dec. 15, unless it complied. It has not yet decided whether it will levy these extra fines.

In the hearing, EU regulators will use evidence from RealNetworks on the media player case and IBM, Novell, Oracle and Sun Microsystems on systems compatibility

None of those companies are currently involved in the legal battle, although they are members of two broad industry coalitions -- the European Committee for Interoperable Systems and the Software & Information Industry Association -- that will back the Commission.

In the aftermath of the EU's ruling, companies have moved into offering their own work server options, such as the popular Linux software that shares its code openly.

Times may have changed, but Microsoft's behavior has not, ECIS asserted as it filed a new complaint with regulators in February, claiming that Microsoft was up to its old behavior on a wider scale.

ECIS lawyer Thomas Vinje says the latest version of Microsoft's desktop software, Vista -- due in stores early next year -- will try to squeeze out rivals by bundling security, search engine and office functions.

Vinje says Microsoft vs. the European Commission has the potential to set the "rules of the road" for the software giant before it launches Vista.

"The bottom line in this case is about the future, whether consumers will have the choice of that innovation in future or whether Microsoft will be allowed to contain competition and innovation," he said.