EU slaps Microsoft with $1.35 billion fine

This post was updated several times, most recently at 7:40 a.m. PST, with additional reporting provided by CNET News.com's Dawn Kawamoto.

European Union regulators on Wednesday fined Microsoft a record 899 million euros, or $1.35 billion, for failing to comply with sanctions.

The fine specifically addresses sanctions over the pricing structure Microsoft had set for licensing of its interoperability protocols and patents.

The pricing issue is the last of three parts of the European Commission's historic March 2004 antitrust order, which called for the software giant to provide complete and accurate interoperability information to rivals so their software could work with the Windows operating system, as well as to license the information "under reasonable and nondiscriminatory" terms.

"We always knew the possibility of a fine (over the licensing fee structure) was...there, but no one knew when it would come or how big it would be," said a source familiar with Microsoft's thinking. "Now the other boot has dropped."

In July 2006, the Commission fined Microsoft 280.5 million euros, or $424 million, for failing to comply with the other two parts of its sanctions related to providing complete and accurate interoperability protocol information to rivals. The original decision from 2004 was upheld by the European Court of First Instance last fall.

In addition to the two fines for failure to comply, Microsoft was originally hit with a 497 million euro levy by the Commission for having abused its dominant market position at the time of that order. (The 497 million euros originally was worth $613 million. Today it converts to $752 million.)

The newest fine, announced Wednesday, is the largest ever imposed by the EU upon a single company. In total, the European regulators have fined Microsoft roughly $2.5 billion in the long-running antitrust dispute.

Neelie Kroes

(Credit: European Community)

"Microsoft was the first company in 50 years of EU competition policy that the Commission has had to fine for failure to comply with an antitrust decision. I hope that today's decision closes a dark chapter in Microsoft's record of noncompliance with the Commission's March 2004 decision," EU Competition Commissioner Neelie Kroes said in a statement.

The ruling comes just one week after Microsoft announced a broad interoperability strategy, which included a pledge to not sue open-source developers.

"As we demonstrated last week with our new interoperability principles and specific actions to increase the openness of our products, we are focusing on steps that will improve things for the future," Microsoft said in a statement.

Although Microsoft's announcement and the Commission's fine come within days of each other, one source said the two were not related. Microsoft's announcement last week addressed how the software maker would apply the Court of First Instance's ruling to the rest of its business, according to the source.

In its new order, the Commission specifically said that Microsoft had charged "unreasonable prices for access to interface documentation for work group servers."

According to the EU's ruling, Microsoft initially had demanded a royalty rate of 3.87 percent of a licensee's product revenues for a patent license and a rate of 2.98 percent for a license giving access to the secret interoperability information. In May 2007, following complaints by the Commission, Microsoft reduced its royalty rates to 0.7 percent for a patent license and 0.5 percent for an information license within the EU. Worldwide rates remained unchanged.

On October 22, 2007, Microsoft began providing a license that gives access to the interoperability information for a flat fee of 10,000 euros and an optional worldwide patent license for a reduced royalty of 0.4 percent of licensees' product revenues, the Commission said.

The view from the competition
Microsoft's competitors and adversaries wasted no time in weighing in.

The European Committee for Interoperable Systems applauded the Commission's move.

"Commissioner Kroes is to be commended for her perseverance over the last three years in the face of Microsoft's foot dragging and appeals to the Court of First Instance," Thomas Vinje, ECIS legal counsel, said in a statement.

ECIS, which comprises Microsoft rivals Oracle, RealNetworks, Sun Microsystems, IBM, and others, further characterized Redmond as preferring to pay antitrust fines rather than allowing "merit-based competition" to occur in the marketplace.

Last month, the Commission announced it was initiating a formal investigation into Microsoft, focusing on potential antitrust violations regarding bundling of its products with its dominant operating system.

Browser maker Opera Software had initiated a complaint to the Commission, alleging that Microsoft was violating antitrust laws by tying its Internet Explorer browser to its Windows operating system. Opera highlighted concerns that Microsoft was adding new proprietary technologies into its browser that diminished interoperability with open Internet standards.

As part of its investigation, the Commission said it would also look into a complaint by ECIS. That complaint alleges that Microsoft refused to disclose interoperability information for a broad range of its products, including its Office suite, server-related products, and .Net framework.