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European antitrust regulators said they will conduct an in-depth review of the proposed acquisition of digital rights management company Contentguard by Microsoft (Nasdaq: MSFT) and Time Warner.
The European Commission said Wednesday it would proceed to a second-phase investigation of the deal 
, which was announced in April. Under that agreement, the two companies together took over the majority ownership of the firm from Xerox (NYSE: XRX). Contentguard is a spin-off of the Xerox Parc research labs. The value of the deal was never disclosed, but is believed to be less than US$100 million.
The commission said that the two companies had offered some concessions, agreeing to some unspecified limitations on the sale, but that regulators still felt the review was necessary.
If nothing else, the inquiry will delay the deal for at least several months. The Commission has until January of 2005 to render a final decision.
The impact on the business operations of Microsoft and Time Warner is harder to determine. Microsoft has had a stake in the company for some time but has not disclosed exactly how it would deploy its digital rights technology.
DRM Markets
In fact, the weariness of European regulators might suggest concern about how much of the market for digital rights management (DRM) the companies would control, although it seemed more focused on Microsoft than its partner.
Microsoft has made little effort to conceal its belief that establishing and controlling the prevailing standard for DRM would help it become a major player in the entertainment industry as the personal computer transforms itself into a music- and movie-playing device.
"The transaction might possibly create or strengthen a dominant position by Microsoft in the market for digital rights management solutions," the Commission said in a statement. "The Commission will also investigate further competition concerns related to the vertical integration of Microsoft in other markets."
Evolving, Slowly
Others are not convinced the level of DRM adoption would change dramatically even if Microsoft and Time Warner took control of Contentguard, which already counts Sony (NYSE: SNE) as one of the biggest licensers of its technology.
Gartner (NYSE: IT) analyst Ray Wagner said that because there are competing standards still vying for supremacy and because most emerging technologies do not work with one another, no single acquisition will alter the marketplace significantly.
"There is also a question of business models -- no one has yet made it clear how investing heavily in DRM makes someone money in the long run," Wagner said. Microsoft is banking on the entertainment industry adopting its standard, which would then drive demand for Microsoft's media players, he noted.
Microsoft announced its deal for Contentguard just before it settled a long-standing lawsuits with InterTrust, another DRM firm. Microsoft also is working on its own technology for limiting the rights that a person has to digital media -- enabling it to be viewed but not copied, for instance, or viewed only a certain number of times.
Everyone from record and movie studios and software makers to companies that have sensitive data stored in digital files are likely users of the technology.
Wagner noted that most DRM available to date has proven relatively easy for hackers to break, a fact that has further delayed adoption of a single standard.
The Race is On
Both companies had hailed their partnerships on the purchase as proof that the $750 million settlement the two companies reached to put old legal issues to rest had cleared the way for a new era of cooperation.
But the decision instead represents the second roadblock that European regulators have thrown up in front of Microsoft this year. Microsoft's appeal of the Commission's $600 million fine for past behavior in the browser and media player markets is scheduled to begin next month.
Yankee Group senior analyst Michael Goodman said that Apple (Nasdaq: AAPL), which has taken the lead in the digital music space, has not moved to assert its own digital rights platform outside its own music store, leaving the door open for Microsoft.
"Microsoft definitely has the potential to dominate DRM in the future, whether they build their own devices or have their software on other vendors' devices," Goodman said.
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