Future of innovation at stake in Microsoft case

BRUSSELS, Belgium (Reuters) -- Microsoft and its critics agree that the future of innovation is at stake when the U.S. software giant challenges a landmark 2004 antitrust ruling next week before the European Union's second highest court.

But they will take opposite tacks on what that means before a special 13-judge panel of the Court of First Instance, which starts five days of public hearings on Monday.

The court has to decide whether to overturn the European Commission's finding that Microsoft abused the near-monopoly of its Windows operating system to muscle out rivals. That prompted a record fine and an order to change its business practices.

Microsoft will argue it acted within the law to compete with other makers of audiovisual software, used to watch films and listen to music, and office server software, used to print, access files and sign on. But it says the stakes are bigger.

"At issue are whether companies can improve their products by developing new features and whether a successful company must hand over its valuable intellectual property to competitors," the company said in a statement this week.

Opponents say Microsoft sees innovation as a one-way street.

"What Microsoft is talking about is freedom for them to innovate, not others," said lawyer Thomas Vinje, representing a group of competitors that will speak at the hearing.

With more than 90 percent of the world's personal computers running Windows, every piece of software -- from word processors to virus checkers -- must be compatible with the operating system created by Microsoft founder Bill Gates.

'Conquer the Internet'

The Commission will argue that a four-year investigation found abundant evidence that Microsoft cut off information and used other tactics to grab market share from successful software rivals and drive them out of business.

Last year, Microsoft Chief Executive Steve Ballmer told Germany's Manager Magazin: "We needed the first years to conquer the PC and those following to be ahead in the server business. In the upcoming years we'll conquer the Internet."

To Vinje, that sounds ominous. Microsoft's next goal is "to eliminate the openness of the Internet, to proprietize the Internet," the lawyer said, adding the groundwork will be laid in Microsoft's forthcoming new operating system, Vista.

Last month, EU Competition Commissioner Neelie Kroes wrote to Ballmer expressing concerns about whether Vista, due out early next year, will comply with European law.

The company has a history of running into trouble for abusing its dominance. A U.S. court found in 2001 that Microsoft violated antitrust laws there, the company is appealing against similar charges in South Korea and it has had trouble in Japan.

The Commission found Microsoft tied its own Windows Media Player so it would appear on every computer running Windows, unfairly competing against RealNetworks' Real Player and others.

It ordered Microsoft to make available a version of Windows without the application.

Microsoft eventually complied, but computer makers were not interested in selling PCs with rival audiovisual software strapped on to Windows in place of Windows Media Player.

Trade secrets

RealNetworks gave up competing last year after Microsoft paid it $761 million to settle a private antitrust suit and for a marketing agreement.

That was more than the Commission's record fine in the case of 497 million euros ($609.3 million).

The other violation under review next week involves the Commission's finding that Microsoft made certain its own work group server software ran better with desktop and laptop computers than that of rivals.

Microsoft says it has done nothing to hurt the market and Brussels's effort to enforce interoperability risks infringing its legitimate trade secrets.

"There is healthy competition and interoperability in all the markets covered in this case and we will bring those facts to the court next week," the company said in its statement.

The court will not deal with the side issue of a Commission threat to fine Microsoft up to 2 million euros a day for failing to comply with the interoperability order.

The EU regulator is expected to decide on that in May, and that could give rise to a separate appeal later.

In the main case, the Court of First Instance will determine whether to overturn or modify the Commission's ruling and fine. It will take months and possibly a year to reach a decision.

Its ruling on facts is final, but legal issues may be the subject of an appeal to the European Court of Justice, the highest EU court.