By Matt Rosoff [bio]
Posted: Sep. 24, 2007

The following is the full text of an article published by Directions on Microsoft, an independent research firm focused exclusively on Microsoft strategy & technology. More samples of our content, as well as a list of upcoming articles and reports are also available.

The European Court of First Instance has dismissed nearly every part of Microsoft's appeal of a 2004 antitrust ruling. The judgment will have little short-term effect other than reinforcing Microsoft's need to comply with the 2004 ruling, but it could bolster the chances of new antitrust and unfair competition complaints. Microsoft has also settled its long-running patent dispute with Eolas over Web browsing technology and has released new documentation explaining some planned changes to Vista's desktop search feature to make it compliant with Microsoft's 2002 antitrust settlement in the United States.

EU Appeal Fails

In Mar. 2004, the European Commission (EC), the administrative body that oversees competition law for the European Union (EU), completed a six-year investigation into Microsoft spurred by complaints from Novell, Sun Microsystems, and RealNetworks (among others). At that time, the EC ruled that Microsoft had monopoly power in the market for desktop OSs, and had "abused" this power by "deliberately restricting interoperability" between Windows computers (clients and servers) and non-Windows servers and by "tying" the Windows Media Player to the Windows desktop OS. The EC fined Microsoft 497 million Euros (then worth US$613 million), ordered Microsoft to license information that would allow non-Windows servers to achieve "full interoperability" with Windows PCs and servers, and ordered Microsoft to offer a version of Windows without the Media Player for sale in Europe.

Microsoft appealed the EC's ruling, but a court ordered Microsoft to abide by the ruling while the appeal was under way.

Microsoft paid the fine and released a version of Windows without the Media Player, but the company and the Commission sparred repeatedly about the documentation for the communications protocols, and in June 2006 the Commission fined Microsoft an additional 280.5 million Euros (then worth US$357 million) for noncompliance. Further fines over allegedly unfair licensing fees for the communications protocols were averted in early 2007 when Microsoft lowered those fees.

On Sept. 17, 2007, the European Court of First Instance dismissed nearly all parts of Microsoft's appeal. (The one exception: the court found that the EC gave too much power to an independent monitoring trustee and improperly forced Microsoft to pay all of the expenses associated with this monitor.) Microsoft indicated it would need some time to study the complete decision, and as of press time had not decided whether to appeal the court's ruling to the highest EU court, the European Court of Justice; it has two months to make this decision. However, the appeal would have to focus on procedural errors, not factual disputes.

The ruling will have little short-term effect. The company maintains it has already been attempting to comply with the 2004 ruling, and the EC has already proven willing to impose further fines if it believes that Microsoft is falling short.

However, the EC's clear victory may embolden competitors to file new complaints. European Competition Commissioner Neelie Kroes said the ruling confirmed that "consumers are suffering" as a result of Microsoft's behavior, and she expects a "significant drop" in Microsoft's desktop OS market share as evidence of compliance. Since Vista's release, security companies have criticized certain Vista features that make interoperability difficult, VMware has attacked Microsoft's licensing terms for its virtualization products, and Google has complained about Vista's bundled desktop search feature. In some of these cases, Microsoft has tried to stave off government intervention by making feature changes or releasing new documentation, but the EC's stance suggests that it would be sympathetic to such complaints and would not hesitate to take further action, including imposing more fines, ordering Microsoft to unbundle certain features from Windows, and forcing the company to document information necessary for competitors to duplicate certain features of its products.

The judgment by the European Court of First Instance is available at curia.europa.eu/jurisp/cgi-bin/form.pl?lang=EN&Submit=rechercher&numaff=T-201/04.

Eolas Settlement

Microsoft has settled a patent-infringement suit brought by Eolas, a company created to capitalize on patents on Web browsing technology owned by the University of California.

Eolas sued Microsoft in 1999, arguing that Microsoft's Internet Explorer (IE) Web browser infringed a patent covering the ability of a Web browser to launch other applications in order to support interactive elements, such as ActiveX controls, embedded in a Web page. The case made headlines in fall 2003 when a jury found Microsoft liable and fined the company US$520.6 million. Microsoft claimed that the verdict would require major changes to IE, which in turn would require Web sites to redesign certain pages or force users to face a cascade of dialog boxes. This claim convinced the World Wide Web Consortium (W3C) to intervene in the case, and in Mar. 2005, an appeals court vacated the original verdict and ordered a retrial. The United States Patent and Trademark Office (USPTO) upheld the Eolas patent in fall 2005, and Microsoft made some minor changes to IE to avoid further infringement, but reversed those changes with a service pack shortly thereafter, claiming that ISVs and Web developers had told Microsoft they weren't ready to accommodate the changes.

In July 2007, the companies announced a delay to the retrial, and on Aug. 24 they reached a settlement, ending the case. The terms of the settlement prohibit the parties from disclosing further details, although an Eolas letter to shareholders noted that they would receive between US$60 and US$72 per share, suggesting that Microsoft paid Eolas to settle the case.

Desktop Search Documentation

Microsoft has released preliminary documentation detailing how ISVs should integrate their desktop search applications with Vista once SP1 is released. In particular, a new search protocol in SP1 will let third-party applications execute searches launched from anywhere within the Vista interface.

The documentation is part of a response to complaints from Google, which claimed earlier in 2007 that the desktop search feature is subject to certain restrictions under the 2002 antitrust settlement between Microsoft and the U.S. Department of Justice (DoJ). The judge overseeing Microsoft's compliance with the settlement did not rule on this matter, but Microsoft offered to make several changes to the feature so that OEMs and end users could more easily choose competing desktop search products.

An overview of the desktop search changes in Vista SP1 is at support.microsoft.com/?kbid=941946.

Documentation on using the new search protocol is available at msdn2.microsoft.com/en-us/library/bb776808.aspx.