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Microsoft Is Facing Long-Term Adjustment


  Microsoft Chairman Bill Gates talks about Longhorn, the code name for the next generation of the Windows operating system, in Las Vegas in November. The EU decision could serve as a precedent for blocking the firm's plan to add applications to the new version. (Steve Marcus -- Las Vegas Sun via Reuters)

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EU, Microsoft Cannot Agree On Settlement (The Washington Post, Mar 19, 2004)

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EU, Microsoft Cannot Agree On Settlement (The Washington Post, Mar 19, 2004)
EU Says Microsoft Settlement Talks Fail (The Washington Post, Mar 18, 2004)
Microsoft Continues Talks in Europe (The Washington Post, Mar 18, 2004)
EU Likely to Order Microsoft to Unbundle (The Washington Post, Mar 16, 2004)
EU Considered Ordering Global Changes in Windows (The Washington Post, Feb 27, 2004)
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Europe "is an important market, a market that says doing it this way is unlawful," said Spencer Waller, director of the Institute for Consumer Antitrust Studies at the Loyola University law school in Chicago.

Waller said that as in the United States, the EU ruling will expose Microsoft to private lawsuits from firms that claim to have been damaged by Microsoft's conduct. Microsoft faces a multibillion-dollar action by Sun Microsystems Inc. and class-action lawsuits in several states.

Eleanor M. Fox, an international antitrust expert at the New York University law school, said that if the EU ruling survives appeal, it would be easier for regulators to make cases in the future. One such case, filed by rivals that accuse Microsoft of an array of anticompetitive acts beyond bundling, is under investigation by EU regulators.

The ruling also could embolden antitrust authorities in other parts of the world. Japan recently opened an investigation into the company's licensing practices.

Microsoft does not disclose how much of its business comes from Europe, although less than half of its business comes from outside the United States. But for a company seeking to maintain earnings growth, being forced to alter its software architecture for a significant market could prove costly in the long run.

"We believe that today's news calls into question whether further restrictions will impede [Microsoft's] ability to embed new functionality into the [operating system] and in turn migrate consumers and corporations to new versions of Windows," analysts at Citigroup Smith Barney wrote yesterday after the settlement talks broke down.

Even unbundling the media player, primarily a consumer product, has broader implications. Microsoft has sought to make its media player the de facto standard for protecting the digital copyrights of providers of music and videos. Although the entertainment industry has not yet migrated in that direction, ending automatic distribution of the media player would hurt Microsoft's cause.

The bundling strategy is especially important as Microsoft faces a backlash from corporate customers over the costs of its software, in the face of open-source alternatives that have far lower costs. To compensate, the Citigroup analyst wrote, Microsoft has counted on adding new features.

Even so, the challenge to Microsoft from open-source systems, most commonly based on software known as Linux, has been strong, especially overseas.

Linux has primarily been used to run corporate networks, a business Microsoft also has entered with some success.

But governments and companies are now looking at open-source alternatives for applications that run on the individual computer, including the desktop operating system and Microsoft's prized jewel, its Office suite of word-processing and spreadsheet applications.

Forrester's Schadler said his research team recently interviewed officials of 140 major North American companies about their software plans. Of those, 65 are using open-source applications, and 20 are planning to.

And 12 of the 140 are using an open-source competitor of Office, known as OpenOffice, while eight are planning to.

"Price erosion is one of the most immediate impacts," Schadler said. "Microsoft has to lower its prices," something it has not done in the past.

Microsoft also has been trying to increase revenue by pushing into new markets, such as its Xbox gaming platform, software for personal digital assistants and set-top boxes for televisions.

Some of these efforts have run withered or have been slow to take root. And while Microsoft has the resources to stay with them longer than most companies, they all depend on the core strategy of extending Microsoft's operating system into different appliances.

"It's a complex arena," said Schadler. Microsoft chief executive Steven A. Ballmer "has his work cut out for him."

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