Digital media technology company Burst.com and Microsoft have reached a settlement in their antitrust and patent infringement case. The deal leaves RealNetworks as the only private company currently pursuing antitrust claims against Microsoft. In other antitrust news, European Union (EU) authorities ordered Microsoft to change the name of a version of Windows that does not include the Windows Media Player and expressed concern that its protocol-licensing program was too restrictive and expensive but allowed its partial acquisition of a digital rights management (DRM) company to go through. Also, U.S. Department of Justice (DoJ) antitrust officials met with Microsoft to discuss the next version of Windows (co e-named Longhorn).

Burst Settles

On Mar. 14, 2005, Microsoft announced it had paid Burst.com US$60 million and acquired a nonexclusive license (without sublicense rights) for Burst's patent portfolio. In exchange, Burst has dropped all legal claims against Microsoft.

Founded in 1990 as Instant Video Technologies, Burst sued Microsoft in June 2002, alleging that Microsoft had improperly incorporated Burst’s techniques for delivering digital video streams over IP networks, including the Internet. Burst.com claims it showed Microsoft patented technology in 1999 as part of an effort to enter a licensing deal. Then, according to Burst.com, Microsoft incorporated similar technology into Windows Media Services 9 Series (originally code-named Corona), the streaming media server that shipped as a component of Windows Server 2003.

Burst also alleged that a 1997 deal between Microsoft and RealNetworks included an illegal agreement to exclude small competitors from the streaming media market, and that Microsoft purposely changed Windows Media Player 7 (released in 2000) to break a Burst plug-in. These allegations relied partly on findings of past anticompetitive behavior that emerged during the DoJ antitrust case, which is why Burst's case was consolidated with other private antitrust lawsuits in the U.S. District Court of Maryland, rather than being treated strictly as a patent-infringement case.

Recent hearings in the case have focused on whether Microsoft executives illegally ordered e-mails about the potential Burst deal to be destroyed. By settling the case, Microsoft ends this line of inquiry and reduces its slate of private antitrust opponents to one company: RealNetworks. Hearings in that case are expected to last through 2005, with a trial expected in 2006. However, given Microsoft's recent drive to dispose of its remaining antitrust litigation, a settlement is likely before that time.

EC Warns

In early 2005, the European Commission (EC) twice expressed concern that Microsoft was not complying with its Mar. 2004 antitrust order, despite a judge's decision in Dec. 2004 that the company must begin complying immediately. The EC warned the company that it could fine it up to 5% of its average daily global sales until Microsoft begins to comply.

One aspect of the EC's order forces Microsoft to offer a version of Windows XP without the Windows Media Player to European OEMs. However, in Feb. 2005, when Microsoft announced it would call the new OS "Windows XP Reduced Media Edition," the EC objected, saying that the name was derogatory, and ordered Microsoft to come up with a new name. (The name was not finalized as of press time.) In addition, the EC reportedly expressed concern about an onscreen message that appears during the OS setup process warning customers about the absence of "certain multimedia technologies." Despite these negotiations, the new OS—whatever it ends up being called—will have minimal impact on the European market. Many major OEMs, including Dell, Fujitsu, and Hewlett-Packard have said they will not offer the new OS at all, citing the increased cost and complexity associated with offering multiple versions of Windows, and the fact that few customers are likely to want a reduced-function OS at the same price.

The other part of the EC's order requires Microsoft to license information about protocols used by Windows Server to communicate with other PCs (clients and servers). However, open-source software proponents, including a European group called the Free Software Foundation (FSF), complained that the terms of the license prohibit the protocol information from being incorporated in open-source software such as Samba (software that enables non-Windows servers to emulate Windows file and print servers). One problem arises because the licenses require a per-unit royalty—a challenge for open source software that is generally free of charge, with no central body to track license sales or deployments. In Mar. 2005, the EC agreed with these concerns and also said that the licenses were too expensive.

This portion of the conflict could be difficult to resolve. Microsoft does not want information that it considers to be proprietary intellectual property to be covered by open source licenses that allow organizations to modify and share it without Microsoft's permission. Microsoft might try for a compromise under which it lowers licensing fees and creates a new Shared Source license that allows some of this information to be freely exchanged, but still contains restrictions designed to protect Microsoft's intellectual property. However, if the EC refuses such a compromise, Microsoft will have little choice but to modify its licensing terms—Microsoft shareholders will not look kindly on the company's sacrificing 5% of its revenues for this principle.

Microsoft has appealed the EC's decision of Mar. 2004. In Mar. 2005, the EU named its list of interveners in the case—that is, the list of third parties that may testify and view legal filings (which are closed to the public). RealNetworks, the FSF, and the Software and Information Industry Association (SIIA) are among the interveners on the EC's side. Microsoft counts DRM software provider DMDsecure, business software companies Mamut and TeamSystem, and two industry bodies that have traditionally allied with the company in antitrust cases: the Association for Competitive Technology (ACT) and the Computer Technology Industry Association (CompTIA).

EC Approves ContentGuard Acquisition

Separate from its current antitrust oversight of Microsoft, the EC planned to investigate the proposed acquisition of ContentGuard by Microsoft and Time Warner. ContentGuard specializes in DRM technology for protecting content (such as documents and digital media files) from unauthorized use, and the EC expressed concern that Microsoft would use the acquisition to create or strengthen a dominant position in DRM.

However, in Nov. 2004, French technology company Thomson agreed to take a one-third stake in the acquisition, removing the EC's authority to investigate the deal—the EC may only investigate mergers among two parties. The deal closed in Mar. 2005, but the EC said it would continue to watch ContentGuard's activities in the DRM market for possible antitrust violations.

DoJ Looks at Longhorn

In Feb. 2005, regulators from the DoJ met with Microsoft to discuss Longhorn and ensure that the upcoming OS, expected in 2006, does not violate the terms of the consent decree signed in late 2001.

Neither party would discuss the talks, but they probably focused on Longhorn features that could be considered "Microsoft middleware" by the dictates of the consent decree—that is, any feature that

• Microsoft has distributed separately from the OS within a year of including it in the OS
• Is trademarked by Microsoft
• Is similar to stand-alone products that expose APIs to which third-party ISVs could write, and that have shipped at least 1 million copies in the previous year.

For instance, if Microsoft builds antispyware capability into Longhorn, it might be considered middleware because Microsoft currently offers a separate downloadable product, Microsoft AntiSpyware, that could be deemed to meet these criteria.

The consent decree allows Microsoft to add new middleware to its OSs, but the company faces certain restrictions when doing so: for instance, it must disclose all APIs that the middleware uses to communicate with the OS and may not enter certain types of agreements with OEMs and other parties that promote this middleware at the expense of competitors.

Resources

Information about Microsoft's current implementation of the EC's order, including the protocol-licensing program, is at www.microsoft.com/mscorp/legal/eudecision.

The full text of the EC's Mar. 2004 ruling is available at europa.eu.int/comm/competition/antitrust/cases/decisions/37792/en.pdf.

Microsoft's current Shared Source licensing programs are listed at www.microsoft.com/resources/sharedsource/Licensing/default.mspx.

A district court judgment that incorporates the DoJ consent decree, including definitions of "middleware" and Microsoft's obligations related to it, is at www.microsoft.com/presspass/legal/11-12FinalJudgment.asp.