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Correction to This Article
An Aug. 26 Business article incorrectly said that ContentGuard Inc. of Bethesda cannot legally deny its software to potential licensees. The company has agreed to make its software as widely available as possible as part of its effort to develop digital rights standards, but it has no legal obligation to license it to all potential clients.

Venture by Time Warner And Microsoft Unsettles E.U.

Their Bethesda Firm Holds Copyright Key

By Frank Ahrens
Washington Post Staff Writer
Thursday, August 26, 2004; Page E01

A Bethesda company owned by Microsoft Corp. and Time Warner Inc. is the subject of a European Union investigation into whether the company's software will give the two media giants a monopoly in copyright protection.

ContentGuard Inc., which employs 35 people, develops technology used for digital rights management -- software that record companies can use to prevent illegal copying and ensure that performers receive royalties, for instance.

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The company was a research unit of Xerox Corp. until it was spun off in January 2000 as a separate business with the goal of championing digital rights standards and making money by licensing its technology to media and electronics companies, according to chief executive Michael Miron. During the spinoff, a minority interest in the new company was sold to Microsoft, with Xerox holding the majority share.

The deal drawing E.U. scrutiny, however, is the sale of the bulk of Xerox's stake to entertainment giant Time Warner in April. The sale, which did not require U.S. regulatory approval, creates a company in which Time Warner and Microsoft have equal ownership stakes (and each have two board members) and Xerox retains a small equity share. The private company does not release financial information.

In announcing its investigation yesterday, the E.U. said: "After a preliminary review, it appears to the commission that the transaction might possibly create or strengthen a dominant position by Microsoft in the market for digital right management (DRM) solutions."

The E.U., under outgoing antitrust chief Mario Monti, must conclude its investigation and reach a decision by Jan. 6. Both Microsoft and Time Warner say they are cooperating with the E.U. investigation.

If the E.U. rules against the deal, it would close the European market to ContentGuard.

Entertainment giant Time Warner creates and sells content through its America Online unit; Warner Bros. movie and television studios; Time Warner Cable; Time Inc. publications; and its television divisions, including HBO and the WB network. It -- like Microsoft, which is moving into music and video distribution -- wants to protect its content from illegal copying and sell it across as many platforms as possible.

Rivals of Microsoft fear that the software giant will create a digital rights management technology and, thanks to the company's size and reach, will force it on other companies or jack up licensing fees.

"Under Microsoft's and Time Warner's joint ownership," the E.U. said, "ContentGuard may have both the incentives and the ability to use its [intellectual property rights] portfolio to put Microsoft's rivals in the [digital rights management] solutions market at a competitive disadvantage."

In March, the E.U. fined Microsoft nearly $600 million, the largest antitrust sanction in history, and ordered it to produce two versions of its popular Windows software for sale in Europe, one with its Media Player software and one without. The E.U. said the automatic inclusion of the media software -- which allows users to listen to music and watch video on their computers -- could create a Microsoft monopoly. Microsoft is appealing the ruling.

Though ContentGuard's fifth board member -- Miron, a former Xerox and wireless telecommunications executive -- would not comment on the substance of the investigation, he said yesterday, "Until you're free and clear, it's in the back of your mind, wondering, 'Could they do something?' "

Miron said his company cannot legally deny its software to potential licensees and counts as a customer Sony Corp., a Microsoft rival.

"Any move Microsoft makes, I'm sure people will scrutinize," he said.

Protecting digital rights -- for instance, preventing digital songs from being endlessly copied once they've been purchased from an Internet store such as Apple Computer Inc.'s iTunes -- is only part of what ContentGuard's technology does, Miron said.

"You or your device has the right to do something with a particular digital asset -- a song, an article . . . a movie -- subject to certain conditions," he said. Such as, "Have you made a payment? Is a fee appropriately channeled somewhere? Is it between a next Monday and next Friday time window? Is it for less than 15 plays? Any of thousands of conditions you could dream up."

© 2004 The Washington Post Company