Microsoft Ruling Makes Waves for Tech Giants

Apple and Google should be wary of European regulators.
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SAN FRANCISCO -- The European court decision Monday against Microsoft (MSFT) - Get Report has a clear message for Apple (AAPL) - Get Report and Google (GOOG) - Get Report: Watch out.

The Court of First Instance upheld a $689 million (497 million euros) fine against Microsoft, which was levied by the European Commission in 2004 for the company's refusal to make available to competitors the coding to permit Windows interoperability for the work-group server market since October 1998.

Shares of Redmond, Wash.-based Microsoft were down 38 cents, or 1.3%, to $28.66 in afternoon trading.

Microsoft General Counsel Brad Smith said later Monday that the company has not made a decision on whether to further appeal the decision.

However, since Microsoft has already taken a charge for the fine, the larger impact going forward may be greater on other tech giants.

"The major issue was interoperability. The European

Commission wants Microsoft to provide a broad cross-section of its technology, and they want them to provide it for free," says Rob Enderle, principle analyst with Enderle Group. "That could be applied to Google, Apple or anyone who has a dominant position in a market. And that's going to have a big industry impact."

The decision does permit Microsoft to charge licensees for the protocols, but it forced the company to reduce its prices.

"Apple is probably next in line," Enderle says. The EC "has been making some statements that they are unhappy with the way the iPod and iTunes are bundled."

One of the issues upheld on appeal was the EC's finding that Microsoft's bundling of its Media Player with the operating system was anticompetitive.

Microsoft's Smith suggested that the Media Player is not dominant in the market today, and took a swipe at its rival's position. "It is true that Apple does not license its communications protocol for the iPod or iTunes, yet it certainly does not appear that the market has been held back by Microsoft's incorporation of Windows Media Player," Smith said.

"We are open for business when it comes to licensing technology and intellectual property rights that are important for interoperability," Smith said. "We have been working hard over the last few years to address these issues."

Microsoft has already lowered its prices for protocols to European licensees, to 1% of revenue from the product, Smith said. The protection of Microsoft's trade secrets in the way Microsoft protocols are implemented in other manufacturers' source code still needs to be "sorted out."

Much about Microsoft's competitive

behavior has changed since 1998, Smith said. "Everyone agrees ... that the version of Windows that we offer in Europe today is in compliance with the Commission's 2004 decision," Smith said.

Microsoft's Windows Vista operating system, released in 2007, conforms to the commission's decision, Smith added.

"We've sought to be open and transparent, and we've sought to strengthen our ties with the rest of our industry," Smith said. "Just last week we announced a new agreement with

Sun Microsystems

(JAVA)

, and the week before that we announced a new agreement with

Novell

(NOVL)

, two of the companies that started out on the other side of this case almost nine years ago."

Instead of bundling software with the operating system, Microsoft is making it downloadable as part of its Live offerings, according to Directions On Microsoft analyst Matt Rosoff.

The company now must make sure it does not drag its feet in delivering the rest of the protocols, he said.

But the EC may not agree that Microsoft has changed its stripes. Some features in Vista are bundled just as the media player was, says Enderle. "Vista makes an attractive target. Clearly

the EC has been making noise about Vista, indicating they weren't particularly happy with it."

The decision does have the potential to give Microsoft an edge by establishing its technology as the new standard, Enderle says. Any innovation by competitors could slow in the short term as they redirect their research toward making their products interoperable with Windows, an effort not unlike the difficulties that tech companies face after a merger.

"Trying to integrate two things not designed to be integrated is harder than building from scratch," he says.

And with interoperability, the owner of the technology always has the advantage. Microsoft will continue to control the operating system road map. Competitors won't have the flexibility to diverge their own product lines from the roadmap

"Depending on how that's gamed out, that could be a long-term strategic advantage" for Microsoft, Enderle says.