EC wins appeal, but Microsoft dominates market

The European Commission won an appeals court challenge from Microsoft on Monday, but its 2004 antitrust decision has done little to change the competitive landscape for media players in Europe.

The Commission decision forced Microsoft to sell a separate version of Windows without its Windows Media Player as well as disclose key interoperability information to competitors.

RealNetworks, maker of the RealPlayer multimedia application, dominated the market until 1999, when Microsoft started bundling its own media player with Windows. That effectively ended the ability of RealPlayer to compete with Windows Media on the "basic intrinsic merits of the two products," according to the Monday appeals ruling from the Court of First Instance in Luxembourg.

In 2003, RealPlayer, which most users had to download, was only on 60 percent to 70 percent of PCs compared to a 100 percent install rate for Media Player on Windows client PCs, the appeals ruling noted.

"We think they [the court] are absolutely right to uphold the Commission's conclusion," said Piers Heaton-Armstrong, general manager for RealNetworks Europe. "Microsoft can't use their operating system to provide its applications with an unfair advantage."

As part of the Commission's remedies, Microsoft was ordered to sell a version of its OS minus the media player, a version "N." Few copies of that version were sold. That move was intended to give consumers more choice, but the Commission allowed Microsoft to continue shipping its media player with Windows.

Since the 2004 decision, RealPlayer never regained its market-leading position.

According to the figures from July from Nielsen//NetRatings, the top three multimedia applications were Windows Media Player at 41.1 percent market share, followed by RealPlayer at 24.3 percent and Apple's QuickTime at 18.5 percent.

Competition commissioner Neelie Kroes told journalists on Monday there are no plans to rework the 2004 bundling remedy even though the Commission agrees that it failed.

But Monday's ruling still sets an important broader precedent on bundling, not just in media players, said Philip Lowe, director general of the Commission's competition department.

"It's not for us to change the remedy, it's up to market players to take advantage of the ruling now," Lowe said.

RealNetworks understood the media-player market situation years ago. Since 2000, RealNetworks moved into other business areas such as online music with its Real Music premium radio service in six European countries,and short-form video content and partnerships with news providers for online news, Heaton-Armstrong said.

In October 2005, RealNetworks settled its U.S. and European antitrust complaints against Microsoft for US$460 million in cash as well as other arrangements to promote digital music and games.

Part of that cash fueled RealNetworks acquisitions, such as that of games company Zylom Media Group, to expand its business, Heaton-Armstrong said. But overall, the RealPlayer application is "less important to Real's business as it was in the late 90s," Heaton-Armstrong said.

Other software vendors that don't make media players hope the decision will cause the Commission to look at other programs that Microsoft includes with Windows.

The appeals decision "sends a very clear signal to Microsoft and other companies that they cannot behave the way they've been used to behaving," said Hakon Wium Lie, chief technology officer for browser-maker Opera Software.

Opera, which holds just a low, single-digit percentage of the browser market, typifies the struggle smaller software vendors have against Microsoft, which ships its Internet Explorer application with Windows.

The wide-ranging distribution of Windows has powered the widespread use of Explorer, which has enabled Explorer to dominate the browser market, Lie said. Opera would very much like to see the Commission pursue a case that would prohibit Microsoft from shipping Explorer with Windows, he said.

"I'd say this [decision] strengthens the power of the Commission, and I hope they will use that power to further improve the software industry," Lie said.

The appeals decision could help strengthen the weight of a complaint in Europe from Google over Vista's search feature. After complaints by Google to U.S. regulators, Microsoft agreed in June to modify some aspects of Vista's built-in search feature.

Likewise, Mozilla, which develops the Firefox browser, would have an interest in any case related to a Commission investigation of the bundling of Explorer with Windows.

Both companies declined to comment. But the bundling decision could mean other companies besides Microsoft could be targeted, one analyst said.

Companies that expand beyond their core expertise, whether it is chips, operating systems, application or services, have to wonder whether they may draw fire for creating a product that functions on top of a piece of technology that dominates the market, said David Mitchell, senior vice president of IT research at Ovum.

For example, a chip maker could conceivably attract complaints if the company creates a compiler application that closely leverages their knowledge and intimacy with chip architectures, he said.

"This judgement could apply to places where there is a discontinuity in that value chain," Mitchell said.

(Paul Meller in Brussels contributed to this report.)

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