A South Korean government agency has ruled that Microsoft violated trade laws by shipping a digital media player and instant messaging client in the Windows client OS and by shipping digital media streaming functionality with Windows Server. The government has fined Microsoft US$32 million and ordered it to ship modified versions of Windows XP and Windows Server within 180 days; Microsoft is appealing. Although the ruling will have little financial impact on the company, it could encourage competitors to prompt government agencies around the world to investigate Microsoft's bundling practices.

Four-Year Investigation

The Korean Fair Trade Commission (KFTC) began investigating Microsoft for trade violations in Sept. 2001 after a complaint from Daum Communications, a South Korean ISP and Web portal. Daum said that Microsoft's inclusion of Windows Messenger instant messaging (IM) software in Windows XP would hurt the market for Daum's stand-alone IM client. In 2004, RealNetworks filed a similar complaint, alleging that the RealPlayer's market share in South Korea dropped precipitously after Microsoft began bundling the Windows Media Player with Windows ME in 2000. RealNetworks also asked the KFTC to investigate Windows Media Services, a component of Windows Server that allows companies to host and stream digital media files over networks to end users.

Microsoft has since reached private settlements with both companies: it paid Daum US$30 million in Nov. 2005, and paid RealNetworks US$761 million in Oct. 2005. Both settlements included a combination of cash, marketing deals, and other unspecified benefits.

Nonetheless, the KFTC continued its investigation, and in early December it ruled that Microsoft had violated the Korean Monopoly Regulation and Fair Trade Act. The KFTC ordered the company to pay a fine of 33 billion won (US$32 million) and take the following actions in South Korea within 180 days:

• Stop shipping Windows Media Services with Windows Server
• Offer a new version of Windows XP without Windows Messenger and the Windows Media Player
• In new copies of other versions of Windows XP, add links to sites where consumers can download third-party media playback and IM software
• Provide software that lets users add these links to existing Windows XP installations.

Microsoft is appealing the ruling. However, if the penalties stand, they will remain in effect for at least five years. After that, Microsoft may request an annual hearing to discuss changing the penalties due to new market conditions. At most, the penalties will be in place for 10 years.

The KFTC's ruling goes farther than a similar ruling by the European Commission (EC) in Apr. 2004. The EC, which handles antitrust law for the European Union (EU), ordered Microsoft to create an alternate version of Windows without the Windows Media Player, but OEMs perceived little demand for the product and many chose not to offer it with new PCs. By forcing Microsoft to change Windows Server and offer links to competitive products within the standard versions of Windows XP, the KFTC's penalty could more effectively help competitors gain ground in the digital media and IM spaces.

Although South Korea accounts for less than 1% of Microsoft's total revenue (according to news reports), the KFTC decision adds to the precedent set by the EU and could mark a trend in which competitors file complaints in multiple jurisdictions whenever Microsoft adds a new feature to Windows that competes with their existing businesses.

If governments continue to levy penalties in such cases, Microsoft might face two bad choices: build many versions of Windows with significantly different features, which would raise development and testing costs and create uncertainty for hardware and software partners, or strip Windows to a bare-bones OS, which would make it harder to create compelling upgrades. Thus, Microsoft will continue to appeal any government ruling that dictates what it can include in Windows.