EU accuses Microsoft of 'paternalistic' view in fight over digital media market

Thursday, September 30th 2004, 8:30 pm

By: News On 6

LUXEMBOURG (AP) _ Microsoft Corp. said Friday that small companies and their customers would suffer most if it is forced to remove its digital media software from Windows, while the European Union accused it of being ``paternalistic'' in trying to decide what is best for everyone.

The arguments came in the second day of hearings at the European Court of First Instance, which featured dueling economists, slide shows, a demonstration from Microsoft's video game ``Age of Empires'' and a clip from the latest James Bond film.

Microsoft is trying to get the EU's landmark antitrust ruling against it suspended pending appeal. If court president Bo Vesterdorf grants Microsoft's request, that would delay implementation of the order for years _ and could provide impetus for renewed settlement talks.

The EU also fined the company a record $600 million.

Thursday's opening session focused on the EU's demand for Microsoft to release more technical specifications to rivals in the server market _ something Microsoft conceded it had been willing to do during aborted settlement talks early this year.

Friday's hearing cut closer to the heart of Microsoft's core strategy of adding new features to existing products to maintain its lead and expand its business. It also went much further than Microsoft's 2002 settlement of similar charges with the U.S. Justice Department.

Accusing Microsoft of trying to extend the dominance of its Windows operating system into the growing market for digital audio and video software, the EU ordered it to sell a version of Windows without its own Media Player to allow rivals a greater shot at landing on desktops.

That also would provide greater incentive for content providers to encode their products in more than just Microsoft's media format, argued Per Hellstrom, representing the EU's executive commission.

Microsoft and its allies argued that stripping Media Player out of Windows would mean thousands of independent software developers and Web site designers _ many of them in Europe _ would not be able to guarantee their products will work as intended.

``Fragmentation of the Windows platform is bad for third-party developers,'' Microsoft lawyer Jean-Francois Bellis said. ``There is a public interest in preserving the unity of the Windows platform.''

He noted that a U.S. court decided against ordering such code removed from Windows during hearings on the U.S. settlement, citing potential harm to third parties.

Hellstrom agreed that a de facto standard can be ``beneficial'' but said it should be allowed to emerge naturally or through agreement by all parties concerned.

``It should not be imposed unilaterally by a dominant company,'' he said. ``Microsoft's approach amounts to substituting ... market forces with its own paternalistic view that it knows better what is good for customers.''

The two sides battled over whether the digital media market, which all agree is crucial to the industry's future, is full of healthy competition or in danger of ``tipping'' to Microsoft.

Bellis cited the ``overnight success'' of Apple Inc.'s iTunes music store _ and the fact that the EU's own Web site provides media content only in RealNetworks format _ as evidence there was ``no danger of tipping.''

He also warned that the EU's order ``has an impact on all producers of technologically complex products'' who want to integrate new features.

Antoine Winckler, representing RealNetworks, noted that Microsoft made similar market predictions during the Internet browser wars of the 1990s, when it incorporated its Internet Explorer into Windows to catch up with rival Netscape.

``Today Microsoft has more than 90 percent of the browser market and more importantly, over 60 percent of the media player market,'' he said.

The two sides were to undergo questioning from the judge after lunch. Vesterdorf has signaled he may call them back Saturday if needed. A decision on a stay of the EU ruling is expected within a couple of months.

On Thursday, Vesterdorf seemed at times to be pushing the two sides to resume settlement talks that collapsed days before the EU issued its March 24 ruling, largely over the media player issue.

EU officials say there is no precedent for agreeing to a settlement after a decision has been issued. But it also is relatively rare for the EU to issue orders meant to address monopoly abuses that it says are continuing.

Having warned that urgent measures were needed to protect consumers and competition in the industry, the EU could come under increased pressure to come back to the table should Microsoft win a suspension.