Microsoft Is Yielding in European Antitrust Fight

By STEVE LOHR and KEVIN J. O'BRIEN
Published: October 23, 2007
Microsoft has given up its nine-year fight against antitrust regulators in Europe, saying yesterday that it would not challenge a court judgment from last month and would share technical information with rivals on terms the software giant had long resisted.

The European competition commissioner, Neelie Kroes, negotiated the terms for Microsoft to share information with rivals.

European regulators and some software groups in Europe hailed the deal as a breakthrough that should open the door to freer competition, especially in the market for the server software that powers corporate data centers and the Internet.

The agreement was struck in Europe, but it will have consequences worldwide because the terms for licensing Microsoft’s intellectual property will be extended to competitors in the United States and in other markets. If the new terms enhance competition, as the regulators say, consumers could benefit from lower prices and faster innovation in software.

The Microsoft deal leaves untouched the ruling last month by Europe’s second-highest court that provides a strong legal foundation for the European Union’s power to force a dominant company to share its intellectual property with rivals.

But just how much effect the agreement will have on the global software marketplace remains uncertain because many issues in the case already have been addressed, either by engineering or by previous legal settlements, according to some industry analysts.

As part of its past efforts to settle its antitrust problems, Microsoft has reached costly agreements with competitors that were the company’s most outspoken critics, including Sun Microsystems, I.B.M. and Novell.

In general, analysts said, the private settlements between Microsoft and competitors provided for cross-licensing and sharing technology.

What is clear is how much Microsoft’s room for legal maneuvering was limited by the ruling last month by the Court of First Instance in Luxembourg. The court reaffirmed that Microsoft, the world’s largest software maker, had abused its market power and said the company must obey a 2004 European Commission order to share confidential computer code with competitors.

After the courtroom setback, Steven A. Ballmer, Microsoft’s chief executive, wrote a conciliatory letter to Neelie Kroes, the European competition commissioner, according to a commission staff official. During the first week of October, Mr. Ballmer was on a scheduled trip to Europe and made an impromptu visit to the Netherlands, where Ms. Kroes lives. Over a long dinner, they met and agreed on the broad terms of the deal. To reach the final terms, Mr. Ballmer and Ms. Kroes spoke daily after the dinner meeting, according to a Microsoft executive.

The upper hand in these talks, legal experts say, certainly belonged to Ms. Kroes. “She was really negotiating from a position of strength, which she did not have before the ruling by the Court of First Instance,” said Andrew I. Gavil, a law professor at Howard University.

Ms. Kroes cast the agreement as a victory for Microsoft’s rivals, especially companies that rely on open-source software like the Linux operating system, an increasingly popular alternative to Microsoft’s products on servers.

To thrive in the marketplace, open-source software must work well with Microsoft’s desktop programs, notably the Windows personal computer operating systems. More than 90 percent of PCs run on Windows. Microsoft software also powers about 70 percent of the market for servers, so access to that technology will be crucial for competitors.

The European order mandates that Microsoft share its technology information on fair terms, so competing software can work smoothly, or interoperate, with Windows software. It is those terms to ease interoperability that will become more favorable to Microsoft competitors.

“These changes in Microsoft’s business practices, in particular towards open-source developers, will profoundly affect the software industry,” Ms. Kroes said in a statement. “The repercussions of these changes will start now and will continue for years to come.”

Under the agreement, Microsoft said it would not pursue a final appeal to the European Court of Justice, which could have drawn the case out two to three years more. Microsoft said it would make the server protocols available for purchase through its Web site, at www.microsoft.com/protocols.

Under the agreement, software developers must now pay only a one-time fee of 10,000 euros, or $14,300, to gain access to Microsoft’s communications protocols, which specify how to exchange data between Windows and rival products. These protocols are trade secrets, not patents. If competitors want more information than those trade secrets, they must license Microsoft’s patents, paying a royalty of 0.4 percent of the competing product’s sales. Microsoft had originally demanded 5.95 percent of sales as royalties.

“This is a huge breakthrough,” said Georg Greve, president of the Free Software Foundation Europe, which had challenged Microsoft’s practice of withholding technical information. “Microsoft is finally doing what the commission ordered it to do. This will level the playing field.”

American industry analysts were skeptical that Microsoft’s concession would have a big impact in the marketplace. “This is an important but incremental step,” said Dan Kohn, the chief operating officer of the Linux Foundation, a nonprofit consortium.

For years, Mr. Kohn noted, open-source engineers in a project called Samba have legally picked apart the Microsoft communications protocols and written code that mimics them. This reverse-engineered code, he said, is now included in Linux. “So we have generally good interoperability with Windows now,” he said.

But the hope, Mr. Kohn said, is that the new licensing terms will make it easier for competing software to work smoothly with Windows, without the need for reverse engineering.

He said, however, that he doubted that the agreement signaled a new spirit of openness on Microsoft’s part. He noted that the company was still pushing to make its Office document formats an international standard, a move seen by rivals as an effort to make it more difficult to develop competing personal computer software and Web-based applications. These formats are the digital frameworks that turn bits of data into formatted documents, spreadsheets and presentations.

A group of companies led by I.B.M. have complained to European regulators about Microsoft’s use of its Office formats.

“I think what we’re seeing today is a strategic retreat by Microsoft, a concession in one market and no more,” Mr. Kohn said.

Still, the move by Microsoft does show that the company is intent on removing the cloud that the European antitrust conflict has kept over the company’s business and stock price, analysts said.

“Financially, the antitrust issues have not had a material effect on Microsoft, and it’s not yet clear that this agreement will have much impact on the software market,” said Charles di Bona, an analyst with Sanford C. Bernstein & Company. “But it does help to remove the European cudgel that has been hanging over the company’s head. It removes an element of uncertainty, which shareholders hate.”

Microsoft shares rose 1.13 percent yesterday in regular trading, to close at $30.51.

Microsoft has paid nearly 1 billion euros ($1.43 billion at current exchange rates) in fines since the commission’s initial ruling and could face fines of up to 1.6 billion euros more that began accumulating in December 2005 after Microsoft did not start sharing technical information as freely as the European Commission had demanded.

Ms. Kroes said she would decide before the end of the year whether Microsoft must pay the additional fines. But as of yesterday, she said, “The major issues concerning compliance have been resolved.”