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Setting the stage for what likely will be a lengthy court battle, member states of the European Union have backed a plan to slap a record fine of more than US$600 million on Microsoft (Nasdaq: MSFT) for alleged antitrust violations in the personal computer market.
Although final details of the European Commission's package of sanctions against Microsoft will not be revealed until Wednesday, Microsoft already has responded to word of the fine, saying the commission is overstepping its bounds.
"We believe it's unprecedented and inappropriate for the Commission to impose a fine on a company's U.S. operations when those operations are already regulated by the U.S. government," Horacio Gutierrez, Microsoft's associate general counsel for Europe, said in a statement. "The conduct at issue has been permitted by both the U.S. Department of Justice and a U.S. court."
Wait and See
In some ways, the fine itself would not be a serious blow to Microsoft. In addition to being far less than the $3.5 billion maximum permitted by law, it would represent just a percentage of Microsoft's $50 billion-plus cash reserve.
Still, the implications of the fine and additional aspects of the ruling, which is expected to include a finding that Microsoft negatively impacted consumers in the media player and server software businesses, are likely to prompt Microsoft to appeal the case.
Potential Damages
Analysts say the EU requirement that could be most damaging would be a mandate that Microsoft produce and market an alternative version of Windows for the European market that does not contain its Media Player software. That possibility, as well as the prospect of having to play by different rules in the world's second largest market in terms of annual sales, is what Microsoft will fight, rather than the one-time payout.
"Certainly, they could pay the fine from petty cash," Gartner (NYSE: IT) analyst David Smith told the E-Commerce Times. "But the larger issues, the possibly damaging ones, have to do with how [Microsoft] does business in Europe going forward."
Yankee Group analyst Laura DiDio told the E-Commerce Times that the media player actually could prove technically harder to divorce from the rest of the operating system than Internet Explorer, the main focus of the U.S. antitrust proceedings.
"The player has been integrated into Windows for several versions now," she said. "But the real problem would be future versions of the software," such as the looming Longhorn release. Microsoft has made no attempt to hide its ambitions in the computer-as-entertainment medium area, and the Media Player is a key component of that strategy. "Just the process of making two different versions of Windows seems almost impossible to imagine," DiDio added.
Dangerous Precedent
However, Smith said Microsoft's inability to negotiate a settlement -- talks involving Microsoft president Steve Ballmer reportedly broke down last week -- leaves open the possibility of a ruling that could damage the software giant's long-term business prospects in Europe.
Allowing a regulatory agency to essentially set prices and determine what products a company sells is also a dangerous precedent that Microsoft will want to avoid at all costs, lest it invite others to follow suit, Smith added.
Yankee Doodle
Microsoft is arguing that its conduct already has been deemed acceptable by the United States, and the company seems prepared to portray itself as a U.S. institution being persecuted overseas.
It already has won some backers for that argument. U.S. Senator Patty Murray (D-Washington) issued a statement Monday saying the EU settlement threatens to override the settlement Microsoft reached with the U.S. Department of Justice.
"The EU has now directly attacked the authority of the United States
government and our economy in general," Murray said in a statement, calling
the fine, which is based in part on Microsoft's U.S. sales 
figures, "a
blatant attempt to regulate the U.S. economy."
Murray called on the Bush administration to intervene with the EU on
Microsoft's behalf.
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