Updated from 8:18 a.m. EST After European regulators did only the expected Wednesday morning, traders sent shares of Microsoft ( MSFT) up a fraction on moderate volume. Long before U.S. markets opened, the European Commission hit Microsoft with a $612 million fine and ordered it to develop a version of Windows that doesn't include its media player. The Redmond, Wash., company must also release programming code that will allow Windows computers to run better with other companies' servers. The ruling was "proportionate" and "balanced," European Union Competition Commissioner Mario Monti said at a news conference. "Dominant companies have a special responsibility to ensure that the way they do business doesn't prevent competition. We are simply ensuring that anyone who develops new software has a fair opportunity to compete in the marketplace." Later in the day, Microsoft CEO Steve Ballmer said his company and the commission had been very close to a settlement "that would have been much better for consumers." He said Microsoft hopes that a European court will stay most of the penalties pending an appeal and added that he believes a settlement can still be reached. While Ballmer played the good cop, expressing his respect for the commission, Microsoft's general counsel Brad Smith sounded much tougher. During a conference call with reporters, Smith said the ruling is "a step in the wrong direction" and criticized the commission for ignoring the existing agreement between Microsoft and the U.S. Department of Justice. Under the settlement it proposed to the commission, Microsoft would have added three competing media players to Windows, thus allowing consumers a wide range of choice and giving competitors a much more level playing field, Smith said. Removing Microsoft's media player from the operating system, the company claims, will disable 20 other features of Windows. "The code removal
removing the Windows Media Player will in theory help a small number of competitors at the expense of consumers," Smith said. In recent trading, the software giant had gained 21 cents, or just under 1%, to $24.36.
Why the quiet reaction on the market? There had been reports
Monday of a fine in the $610 million range, so Wednesday's decision was largely as expected. Although the fine was the largest ever levied by the European Commission, it could have been much larger. And with over $50 billion in cash on hand, Microsoft can easily handle the penalty. As to the other restrictions, Microsoft has already signaled that it will appeal the ruling, an action that could drag on for four or five years, the company's chief attorney said. Microsoft shareholders, who have seen the stock grind about $1 lower over the last 12 months during a 50% run-up in the Nasdaq Composite, are far more concerned about any precedent in which Windows is modified to diminish the company's competitive advantages, than the fine. Jason Maynard of Merrill Lynch was one of the first U.S. analysts out of the gate with a note on the ruling: "We continue to believe shares of Microsoft are undervalued and are reiterating our buy rating on the stock. Shares of Microsoft trade at 21 times our fiscal year 2004 EPS estimate of $1.20, which represents a discount to its peer group." (Merrill does not have a current banking relationship with Microsoft.) Similarly, Piper Jaffray's Gene Munster said: "We would be buyers of Microsoft today as a cloud of uncertainty has been removed. In our opinion, the remedies are mild and in line with expectations." Piper Jaffray does not have a current investment banking relationship with Microsoft. The ruling was immediately hailed by two of the software maker's biggest rivals: Sun Microsystems ( SUNW), which believes Microsoft has horded source code to keep other players out of the server market; and RealNetworks ( RNWK), which thinks the bundling of Microsoft's media player with Windows threatens to marginalize its own sound and video software. "This decision is fundamentally significant because the European Commission has formally declared that Microsoft's media player bundling strategy is illegal and has established the guideposts for future bundling cases," RealNetworks said, noting it was the first legal review of Microsoft's media player bundling practice. "While we have not yet seen the complete decision, we support the European Commission's efforts to provide European consumers with all the benefits of a competitive marketplace, including choice in digital media products," the company said. In recent trading, RealNetworks' stock was off a penny to $5.59 a share. If the ruling stands, Microsoft will be forbidden from offering manufacturers a discount for shipping versions of Windows that include its media player. A trustee would make sure other anticompetitive ploys weren't attempted. The EU concluded that Microsoft's marketing currently "deters innovation and reduces consumer choice in any technologies which Microsoft could conceivably take an interest in and tie with Windows in the future." "The ongoing abuses act as a brake on innovation and harm the competitive process and consumers, who ultimately end up with less choice and facing higher prices," EU's Monti said in a statement.
Wednesday's order is similar to a settlement with the U.S. government reached in 2001, but goes further in precluding the future bundling of technologies in a market where Microsoft does about 30% of its business. As for its server practices, the EU found that "nondisclosures by Microsoft were part of a broader strategy designed to shut competitors out of the market." The company will be allowed to collect a fee from programmers wishing to access the server source code.