Microsoft loses antitrust appeal

Microsoft Corp., bowing to a court order sending shock waves through the personal computer industry, is readying an alternative version of its Windows operating system for the European market that's stripped of its media player for music and video.

The new Windows version will be shipped to computer makers next month and to other distributors in February, a senior Microsoft executive said yesterday, following a ruling by the European Court of First Instance in Luxembourg that also required the company to divulge some Windows trade secrets. It will mark the first time Microsoft has been compelled to remove features from its operating system, something the software company successfully fought in US courts.

"Certainly it remains our view that the version of Windows that we are being required to prepare is a version that will provide consumers with less value rather than more," Brad Smith, Microsoft senior vice president and general counsel, said in a company teleconference yesterday. "It is a version that will work less well than today's version."

Microsoft will offer Europeans both versions of the operating system that powers the vast majority of PCs worldwide, though Smith said he doubted the one without Windows Media Player would prove popular. PC makers will have the option of installing an alternative media player in Windows computers, and rivals like RealNetworks Inc. already are gearing up to market their media players aggressively.

"This is a great victory for the European Commission and the consumers they are working to protect," said Dave Stewart, the deputy general counsel for RealNetworks in Seattle. "If it restores competition in digital media, it will be a great victory for RealNetworks. Because we believe that when we compete on the merits, we win."

The Windows version required by the European court won't be offered in the United States or in other international markets. But Microsoft critics predicted it could set a precedent for other countries to force Microsoft to unbundle software from its operating system or prevent it from extending bundled versions to other products, such as mobile handsets, consumer electronics, or personal digital assistants.

Some predicted unbundled Windows versions would find their way into the US market, despite Microsoft's efforts to confine them to Europe.

Massachusetts Attorney General Thomas F. Reilly, who lost a legal battle to change Microsoft's business practices in the United States, was quick to hail yesterday's European court ruling.

"Right decision, wrong continent," Reilly said. "But with the markets as fluid as they are, it might work out anyway. It's going to be very difficult for them to keep these unbundled versions off the American shelves in the long term. Somehow, some way, they will get here."

In a 91-page decision, the European court denied Microsoft's request for temporary relief from a European Commission ruling last March that imposed strict controls on how the company markets its Windows-based software in European Union countries.

The court also ordered Microsoft to move immediately to comply with a commission order to release computer code that will enable its competitors' programs to work better on Microsoft software for servers, the machines that run corporate data centers.

Smith said Microsoft would activate a Web page to provide other companies, including competitors, with information on how to license the protocols to make their products work better with Windows in the server market.

Microsoft will continue to appeal the European Commission decision, but Smith acknowledged that that court might not rule on its appeal until 2006, after which either side could further appeal to the European Court of Justice. Yesterday's decision by the Luxembourg court was mainly about whether the remedies ordered by the commission would take effect during the appeals process.

The court's ruling said Microsoft "has not shown that it might suffer serious and irreparable damage as a result of implementation of the contested decision" by the European Commission.

Smith said Microsoft executives found some reason for hope elsewhere in the ruling, where the court suggested that Microsoft's philosophy of integrating new features into Windows doesn't in itself restrain competition. That issue looms large as the company develops its next version of Windows, called Longhorn, which is due out in 2006.

Robert Weisman can be reached at weisman@globe.com.