Business

Microsoft Memo Outlines Strategy on EU Ruling

A memorandum from Microsoft argues against the European Commission’s antitrust decision, stating that Brussels is creating legal precedents that inflict long-term damage on the software developer’s business model.

The memo outlines the legal strategy that the Redmond, Washington, software maker is to take in the appeals court in Europe shortly.

The case is already dampening the outlook for the company. Microsoft last week reported fiscal third-quarter revenue that was above expectations, yet saw its earnings dented by the costs of a fine by the European Union and its settlement with Sun Microsystems.

Fiscal Impact

The results included stock-based compensation expenses that amounted to five cents per share and legal charges equaling 17 cents per share. Excluding those items, Microsoft would have had earnings of 34 cents per share — ahead of the 29 cent First Call estimate.

The software maker said it earned $1.32 billion, or 12 cents per share, on revenue of $9.18 billion, for the three months ended March 31st. That compares with earnings of $2.14 billion, or 20 cents per share, on revenue of $7.84 billion in the same quarter a year ago.

The Microsoft memo — a copy of which was obtained by TechNewsWorld — said the software giant will claim that the EU verdict threatens all industrial innovation and ignores international treaty obligations. The memo has been circulated to the company’s lawyers.

Massive Fine

The decision, announced March 24th, is being appealed to the European Court of First Instance in Luxembourg. The European Commission ruled that the company has violated European Union antitrust laws and ordered it to pay a fine of more than US$500 million for “abusing its market power” in the EU.

The regulators also said Microsoft must license code to its competitors so that their software systems can communicate more effectively with the Windows operating system and Microsoft won’t have an advantage on the basis of its dominant market share. The regulators also ordered Microsoft to offer a stripped-down version of Windows without the Windows Media Player.

“The novel legal standards announced in the decision will affect all industries, altering market dynamics and reducing incentives for research and development that are essential to global economic growth,” the memo said.

Regarding the sharing of secret computer code, the Microsoft memo said: “The decision goes well beyond established legal precedents by asserting a broad and ill-defined duty on dominant firms to share the fruits of their research and development with other companies in the same product market.”

Unbundling the Media Player

Regarding the issue of unbundling Windows Media Player, the company said the regulators’ unusual ruling “opens the door for even a single complaining component supplier to argue that innovation should be thwarted if its market position may be harmed.”

Microsoft said it must now offer a downgraded version of Windows but continue to market it under the same trademark “even though there is no reason to believe a consumer would want the resulting product.”

The company also said that the EC decision is “so squarely stacked against innovation that one may fairly question whether any dominant firm can be confident when integrating a new component of features in the future.”

Taking the EC to Task

Microsoft also took the EC to task for its treatment of international treaty obligations, saying that the World Trade Organization only permits compulsory licensing in special cases. Microsoft called the EC ruling a “troubling departure” from international legal norms.

There are likely other grounds for appeal.

According to the written decision, issued last month, the European Commission’s antitrust ruling relied exclusively on evidence from the company’s competitors, meaning that the “evidence” might not be objective.

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