Antitrust regulators for the European Union (EU) have said they will penalize Microsoft unless the company can answer allegations that it has illegally tied its digital media playback software to Windows and failed to give other vendors information they need for their server software to interoperate with Windows desktops. The EU's proposed penalties could hamper Microsoft's digital media strategy and help competitors in the server market, such as Sun Microsystems. Microsoft will probably work with regulators to settle the case under less restrictive terms. Otherwise, it will likely face a verdict by the end of 2003.

In other legal news, Microsoft altered its licensing terms for certain communications protocols, to stay in compliance with an earlier antitrust settlement with the U.S. Department of Justice (DoJ); lost and will appeal a US$521 million patent infringement verdict on browser technology; and settled a patent dispute with force-feedback company Immersion.

EU: Abuses "Still Ongoing"

The European Commission (EC), the legal body of the EU that handles competition issues, has issued a final "statement of objections" accusing Microsoft of leveraging its dominance in desktop PCs to strengthen its position in the markets for low-end servers and digital media technology.

The statement of objections is not public, but the EC revealed that it had gathered new evidence from consumers, suppliers, and competitors, and as a result of this evidence it decided that Microsoft's antitrust "abuses are still ongoing."

The EC listed two problem areas:

PC-to-server interface information. The EC said that Microsoft is not disclosing certain unspecified information about how Windows PCs communicate with Windows servers, and this is "artificially" influencing companies to choose Windows servers. The EC's proposed remedy is to force Microsoft to reveal this information in a way so that "rival vendors of low-end servers are able to compete on a level playing-field with Microsoft." Possible beneficiaries of this information would be Sun and companies promoting Linux, such as IBM, RedHat, and SuSE.

Media Player tying. The EC also said that Microsoft is "tying" the Windows Media Player to Windows, which "weakens competition…, stifles product innovation, and ultimately reduces consumer choice." The EC suggested two possible remedies for this abuse: Microsoft could be required to offer a version of Windows without the Media Player, or could be forced to include competing digital media playback software, such as RealNetworks's RealOne Player.

The EC also has the power to fine Microsoft up to 10% of its annual revenues (a fine of more than US$3 billion), but indicated no plans to do so.

The EU appears to be unsatisfied that the settlement Microsoft reached with the DoJ will meet European objections. The DoJ settlement requires Microsoft to license certain communications protocols on "reasonable and non-discriminatory" terms and requires Microsoft to offer versions of Windows in which "middleware" (including the Media Player) is hidden from access, but it does not require this middleware to be completely purged from the OS.

This statement of objections is a final warning to Microsoft that it's currently violating European antitrust laws, and is intended to strengthen the EC's hand at the negotiating table. If no settlement is reached, the EC is expected to impose penalties by the end of 2003. Microsoft could appeal this decision to the EU's Court of First Instance, which has had some well-publicized disagreements with the EC: in Nov. 2002, for instance, the court reversed EC vetoes on two mergers and criticized "errors, omissions and contradictions in the Commission's economic reasoning."

Protocol Licensing Terms Altered Again

Meanwhile, Microsoft made some concessions as to what constitutes "reasonable and non-discriminatory" in its settlement with the DoJ.

In Aug. 2003, the company announced the second set of changes to the Microsoft Communications Protocol Program (MCPP) since the DoJ settlement was approved in Nov. 2002. The changes, which lower the cost to license certain communications protocols used by Windows PCs to communicate with Windows servers, are a response to the DoJ's concern that not enough companies were participating in the MCPP.

The changes include the following:

• Creating a new royalty structure based on the licensee's revenue for products that incorporate the protocols (royalties range from 0.5% to 5%, depending on the number and types of protocols and products)
• Reducing the initial fee for licensing the protocols from US$100,000 to US$50,000
• Increasing the scope of the protocols licensed so they now cover legacy Windows 9x desktops.

Following these concessions, Judge Colleen Kollar-Kotelly, who is overseeing the settlement, ruled that Microsoft was in compliance.

This is the second such change in six months: in Apr. 2003, Microsoft changed the MCPP so that companies would not have to sign a non-disclosure agreement before viewing the licensing terms and lowered some associated fees.

Updated information about the MCPP is available at members.microsoft.com/consent/Info/.

Eolas Verdict to Be Appealed

A federal jury in Chicago found that Microsoft violated a patent on browser technology owned by Eolas Technologies and the University of California and ordered Microsoft to pay the plaintiffs US$520.6 million in damages.

The suit concerns software that enables interactive content embedded in Web pages to be displayed directly within a Web browser, rather than requiring a new application to be opened. Eolas founder Michael Doyle claims to have invented the technology in 1994, when he was working for the University of California, and says he offered to license it to Microsoft before creating Eolas to try and capitalize on it and other patents. Doyle, who is Eolas's sole employee, sued Microsoft in 1999 for US$1.2 billion in the U.S. District Court for Northern Illinois.

In Aug. 2003, a jury agreed that Microsoft had incorporated similar technology in Internet Explorer (IE), which it began bundling with Windows in 1995, and that this infringement pushed Eolas out of the market. The jury set damages at US$1.47 for each of the approximately 354 million copies of Windows sold between the time the patent was granted in Nov. 1998 and Sept. 2001. Eolas would receive three-quarters of the damages (the company has about 100 shareholders), with the University of California receiving the rest.

Microsoft is appealing the verdict, saying that the company developed its own technology for displaying interactive content and incorporated this technology into IE. A district court judge is also hearing a Microsoft counterclaim that other inventors had created similar technology before Doyle, thereby invalidating Doyle's patent.

Immersion Suit Settled

Microsoft has settled a patent infringement lawsuit with force-feedback company Immersion and invested US$26 million in the company.

Force feedback, or haptic technology, is most often used in computer gaming and creates sensations in a control unit that match the action taking place on the screen (for example, the control unit vibrates when the player is driving over a bumpy road). Immersion sued Microsoft and Sony in Feb. 2002, saying that Microsoft’s Xbox game console and Sony's PlayStation 2 incorporated Immersion's technology without permission. The Sony suit is still pending.

For background on the patent lawsuits Microsoft currently faces, see "Patent Battles Gaining Importance" on page 27 of the Mar. 2003 Update.