Microsoft talks with EU collapse

A stalemate between Microsoft Corp. and European antitrust officials has set the stage for a ruling that could significantly change the way the Redmond company sells its biggest product in one of the world's largest markets.

Months of negotiations were officially called off yesterday without a settlement, despite the fact that Microsoft and the European Commission were able to agree in principle on a plan to resolve current antitrust complaints against the company.

Talks broke down over the commission's desire for a broader agreement restricting the future incorporation of extra programs and features into Windows, the company said. Such restrictions would address complaints that Microsoft gives itself an unfair advantage over competitors by using the dominant operating system to expand into other segments of the software market.

"Basically we reached a point this morning where we had to agree to disagree," said Brad Smith, Microsoft's general counsel, who was returning yesterday to Seattle from Brussels, Belgium.

"They were interested in something that would address all possible types of product integration issues," Smith said. "But in our view, there is no single formula that will give you an instant answer to all future technology scenarios."

With the talks ended, European Union antitrust chief Mario Monti said yesterday that the commission would proceed with a ruling against the company Wednesday. He is expected to present a proposed fine to an advisory committee Monday.

"In the end, I had to decide what was best for competition and consumers in Europe," Monti said in a statement. "I believe they will be better served with a decision that creates a strong precedent."

Microsoft plans to appeal the ruling in the European courts, Smith said. Drawing parallels to the United States antitrust case, he said he is still optimistic that a settlement can ultimately be reached, perhaps after a court weighs in.

Smith said the company has not yet decided whether it will seek to have the ruling stayed pending the outcome of the appeal, as happened in the United States. A December report in the London newspaper the Financial Times quoted a senior European Union judge as saying such a request might not be granted, making the ruling effective immediately.

Although the details of the proposed ruling have not been officially released, the European Commission is widely expected to impose a fine that could total hundreds of millions of dollars, while ordering Microsoft to disclose technical information to competing software companies to improve the way their programs work with Windows.

In addition, the commission is expected to order the company to offer two versions of Windows in Europe -- one with Windows Media Player and another without. The remedy is intended to level the playing field for companies that sell competing media playback technologies, including Seattle-based RealNetworks Inc.

RealNetworks would support "an effective remedy that addresses Microsoft's illegal tying," spokeswoman Erika Shaffer said yesterday.

"We think the remedy being proposed is useful and valuable," added Ed Black, president of the Computer and Communications Industry Association. He acknowledged, however, that the group would prefer to see the media player stripped from all versions of Windows and sold as a separate product.

Microsoft said negotiations with the European Commission were held almost non-stop for months. Smith said he has spent more time in Brussels than in Redmond during the past two months. Microsoft Chief Executive Steve Ballmer flew to Brussels this week to take part in negotiations.

"We all worked very hard together," Smith said, noting that the tone of the talks adds to his optimism about the possibility of a future settlement. "It was an extremely constructive dialogue and a very cordial relationship between Steve and Mario Monti."

Monti also praised "the constructive and cooperative spirit displayed by Microsoft in the last few weeks."

Through the negotiations, the two sides were able to work out a proposed solution to the media-player bundling complaint that would have differed from the remedy likely to be adopted next week, Smith said. He declined to provide details but said the approach would have applied around the world, not just in Europe.

The Associated Press quoted sources as saying Microsoft made a last-minute offer to include rival media programs with Windows, along with its own, in hopes of avoiding an "unbundling" order that could interfere with its business strategy.

That provision, like the rest of the proposed settlement, collapsed with the talks.

Smith said a consensus was also reached on a plan to share technical information with competitors to help their programs work more effectively with Windows. A similar deal was struck as part of the U.S. antitrust settlement, but Smith said the European provision "would have extended our obligations beyond those that we have in the U.S."

The company's practice of bundling into the operating system extra programs such as Internet Explorer was a central complaint in the landmark antitrust case in the United States. But the settlements reached with the U.S. Justice Department and most of the involved states didn't restrict the practice.

Europe is a significant market for Microsoft. Sales in Europe, the Middle East and Africa brought the company $6.67 billion in revenue last year, not including programs preinstalled on computers, Microsoft said. About 10,000 of the software maker's 55,000 worldwide employees are in Europe.

The effect of the proposed European Commission remedy will depend largely on how it is implemented, legal experts said. A key factor will be whether the price of Windows without Windows Media Player is low enough to persuade computer makers to install that version, rather than the one with the media player.

"If the price is not significantly lower, then it may not have much effect at all," said Daniel Rubinfeld, a law and economics professor at the University of California-Berkeley and a former deputy assistant attorney general in the Justice Department's antitrust division.

On one hand, the inclusion of extra programs with Windows is more convenient for consumers, said Robert Becker, senior equity analyst at Argus Research Corp. in New York. At the same time, Becker said, it's clear that the practice gives Microsoft a competitive advantage over other software companies.

"You have two truths to contend with," he said.

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