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Europe to probe Microsoft
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February 9, 2000: 12:14 p.m. ET
European regulators to examine Windows 2000 for antitrust violations
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LONDON (CNNfn) - The European Union took investors by surprise Wednesday by announcing an antitrust probe into the activities of software leader Microsoft, after previously indicating it was prepared to go along with the findings of the U.S. Department of Justice's investigation into the company.
EU Competition Commissioner Mario Monti told a news conference that he feared the introduction of the Windows 2000 operating system could breach European Union antitrust rules by bundling the personal computer operating system with server software.
In New York Wednesday morning, Microsoft stock fell 2-1/2 to 107-7/16.
Monti, chief cartel watchdog at the European Commission, the Brussels-based executive arm of the European Union, said Microsoft had been given four weeks to respond to allegations that the new system could impede the growth of e-commerce.
Michael Kwatinetz, an analyst at CS First Boston, said the EU's action goes to the heart of the software business.
"The central question in these antitrust probes is 'Should Microsoft be allowed to add more value?' When you bundle more software with the operating system, it makes things easier for the user. To the extent they make it easier to get onto a network right out of the box, that is a good thing for the consumer, but potentially bad for a competitor. There is a danger of moving in the direction of making less efficient suppliers more competitive, which is not good for consumers. However, I do believe that equipment manufacturers, such as Dell, should be allowed to make substitutions in the software that comes bundled with operating system if consumers request it.
Senior Microsoft (MSFT: Research, Estimates) officials in Europe had previously told CNNfn.com that they did not anticipate a European investigation of the firm's activities, based on their talks with the commission's officials.
MSFT balks at the argument
Microsoft executives denied any claims of anticompetitive activities and said the commission's concerns were caused by "misconceptions."
John Frank, Microsoft's director of law and corporate affairs for Europe, told CNNfn.com that the firm received a letter from the commission last week asking for information on Windows 2000 and "other industry-related matters," but that he received three or four similar letters from the commission every year. Frank admitted he was surprised by Monti's decision to publicize the probe at this early stage.
Frank was in little doubt that the inquiry was instigated at the behest of Microsoft's archrival, Sun Microsystems (SUNW: Research, Estimates), and added, "We're very disappointed that Sun continues to lobby against Microsoft."
Monti's statement also took competition experts in Brussels by surprise.
"The threat of parallel action by the commission has been talked about, but has never been taken seriously," said Wilko Van Weeld, a partner at Brussels-based law firm Stanbrook & Hooper. However, he pointed to close links between Monti and U.S. antitrust chief, Joel Klein, which has resulted in joint efforts by regulators on both sides of the Atlantic to probe other industries.
Van Weeld said it is "quite unusual" for the commission to launch a probe into a product that had yet to be introduced. However, he said that the commission could act on its own initiative or in response to a complaint.
"They could have extrapolated from [the dominance of Microsoft's] existing software packages," Van Weeld said. "They would have to have established that an abuse had already taken place."
The U.S. Justice Department was also surprised by the EU move.
"We learned about the EU probe today. We had no advance notice," Gina Talamona, U.S. Justice Department spokeswoman, said.
The Justice Department declined to comment further on the probe.
The nature of the claim
According to allegations made to the European Commission, Microsoft, through Windows 2000, had bundled its personal computer operating system with its own server software and other Microsoft software products, known as middleware, "in a way which permits only Microsoft products to be fully interoperable," he said.
Windows 2000 is due to launch in Europe and North America on Feb. 17. Microsoft's Frank said the commission's investigation would not affect or delay the launch of the operating system.
Monti claimed the bundling of server software with the new operating system could put rivals wishing to enter e-commerce markets at a competitive disadvantage.
"Whoever gains dominance in the server software market is likely to control e-commerce too," he said.
The commission's antitrust rules are among the toughest in the world, and center around Article 82 of the Treaty of Rome, which created the European Union. The article regulates the creation, and forbids the abuse, of a dominant market position. Unlike probes into mergers and takeovers, there is no set time limit on investigations carried out under Article 82.
The U.S. Department of Justice is considering whether to break up Microsoft after a federal court issued a preliminary ruling that the company engaged in anticompetitive behavior. In November, judge Thomas Penfield Jackson said in his finding of fact that the company caused "consumer harm by distorting competition." The U.S. court case is likely to continue for years. 
-- from staff and wire reports
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