Microsoft Shifts Tactics, and Impact is Worldwide EU Terms Will Apply to Markets Elsewhere

Oct 24, 10:33 AM

Current Headlines: By Steve Lohr and Kevin J. O'Brien

Steve Lohr reported from New York and Kevin J. O'Brien from Berlin. Choe Sang-hun contributed reporting from Seoul.

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The deal Microsoft struck with competition authorities in Europe reflects a global policy shift away from confrontation with regulators, analysts said Tuesday.

Microsoft's decision Monday to accede to European Union demands - that it share technical information with rivals and reduce the royalties it charges - will have consequences worldwide, as the terms for licensing the company's intellectual property will be extended to competitors in Asia and other major markets, including the United States.

"It appears that Microsoft has decided to change its global approach," said Choi Kyoung Jin, an analyst at Goodmorning Shinhan Securities in Seoul. "It's not just a decision for Europe."

Microsoft last week said it would withdraw an appeal against a 2006 antitrust ruling by the South Korea Fair Trade Commission, which fined the company $34 million for bundling media software into its operating systems and abusing its dominant market position in the country.

The company is also seeking an end to monitoring by courts in the United States, imposed after rulings determined that it had used illegal means to bolster its effective monopoly on software for home computers, claiming it has institutionalized compliance with U.S. antitrust law. If a newly contrite Microsoft translates into enhanced competition, as competition regulators around the world say, consumers could benefit from lower prices and faster innovation in software.

Regulators and some software groups have hailed the European 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.

With Microsoft's code now readily available, Asian makers of Windows-compatible software could become much more competitive, Choi said.

"Makers lagged behind in developing upgraded software because the code was not available," he said.

The EU deal leaves untouched the ruling last month by Europe's second-highest court that provides a strong legal foundation for the EU'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, IBM 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 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, Ballmer was on a scheduled trip to Europe and made an impromptu visit to the Netherlands, where Kroes lives. Over a long dinner, they met and agreed on the broad terms of the deal. To reach the final terms, Ballmer and Kroes spoke daily after the dinner meeting, according to a Microsoft executive.

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 toward open-source developers, will profoundly affect the software industry," Kroes said in a statement. "The repercussions of these changes will start now and will continue for years to come."

Under the agreement, software developers must now pay only a one- time fee of 10,000, 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.

"This is an important but incremental step," said Dan Kohn, the chief operating officer of the Linux Foundation, a nonprofit consortium.

For years, Kohn noted, open-source engineers have legally picked apart the Microsoft communications protocols and written code that mimics them. This is now included in Linux. "So we have generally good interoperability with Windows now," he said.

The New York Times

Originally published by The New York Times Media Group.

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