EU knocks Microsoft with $357 million fine

The European Commission issued the 280.5 million euro fine for the period between Dec. 16 and June 20. That figure amounts to a daily fine of 1.5 million euros, which the Commission is prepared to increase to up to 3 million euros per day if the software giant does not come into full compliance beginning July 31.

"I don't buy Microsoft's line that they didn't know what was being asked of them because the March 2004 order is absolutely crystal clear," Neelie Kroes, who heads the Commission's antitrust bureau as its competition commissioner, said Wednesday at a press conference in Brussels. "And in order to increase the incentive for Microsoft to comply, the Commission has decided the ceiling for potential fines will be raised."

While the fine is steep, Microsoft would have no trouble paying it. For the first three months of 2006, the company pocketed profits of nearly $3 billion on sales of $11 billion, meaning the proposed fine amounts to about 10 days' worth of profits.

The fine was based on the landmark 2004 ruling, which, among other requirements, ordered Microsoft to share complete and accurate interoperability information with rival companies that develop workgroup server operating systems, as well as license those protocols at a reasonable cost.

Frustrated with Microsoft's progress, or the lack thereof, the Commission last year issued a Dec. 15 deadline and threatened to fine the software maker up to 2 million euros a day until it achieved full compliance.

"I regret that, more than two years after the decision, and despite an order from the president of the Court of First Instance that the Microsoft appeal to the court does not suspend Microsoft's obligation to comply, Microsoft has still not put an end to its illegal conduct," Kroes said in a statement issued before the press conference.

Microsoft plans to appeal the new fine to the Court of First Instance.

"We have great respect for the Commission and this process, but we do not believe any fine, let alone a fine of this magnitude, is appropriate given the lack of clarity in the Commission's original decision and our good-faith efforts over the past two years," Brad Smith, Microsoft general counsel, said during Microsoft's separate press conference early Wednesday in Redmond, Wash.

Although Microsoft disagrees with the Commission's characterization of its efforts over the past two years, Smith added he is encouraged by recent events.

In April, the Commission's monitoring trustee, Neil Barrett, met with Microsoft. They developed a template for the software maker to enter batches of protocols and created a schedule of deadlines. The templates call for each protocol to start the same way, with a glossary, section on reference works, description of the protocol and how it relates to other protocols, Smith said.

Seven milestone dates were established, with six batches of protocols to be delivered by June 30 and the seventh on the interim date of July 18, with a hard deadline of July 24.

Video: EU fines Microsoft again
Neelie Kroes, Europe's competition commissioner, announces the ruling against Microsoft.

Under this system, Microsoft received feedback from the trustee's team on each batch of protocols submitted, as to whether it was sufficient or needed more changes, said Tom Brookes, a Microsoft spokesman.

Barrett initially found the batches of protocols below par. But since June 20--which is end date for the new fine--Barrett that found Microsoft has been doing an "extremely good job, and 50 percent of the documents are there," Kroes said. The six batches of protocols already due have all been turned in.

Barrett's team has approved the final stage of one protocol, Smith noted, and an additional 16 revised drafts have been accepted by his team.

"We are encouraged by the Commission's comment that our recent work is 'extremely good,'" Smith said. "In our view, the issue has never been about compliance but clarity. Having gotten clarity from the Commission in April, we have met every deadline since then. And our top priority is to meet the final deadline in two weeks."

Within the next two weeks, Barrett and his team will also begin testing the remaining documents for their accuracy and completeness, a process that is expected to last at least a month.

"Microsoft has told me they are now devoting substantial resources to compliance," Kroes said. "It is a great pity they didn't do this two years ago...If they had begun in earnest (then), the burden on Microsoft's staff would have been much lighter."

Microsoft contends that it is willing to abide by the order but did not receive clarification on the documentation requirements until April. After that, with the aid of the trustee's template, the software giant threw more than 300 employees onto the project to meet the final deadline for the seventh milestone, Smith said.

Once all the information has been checked for accuracy and completeness by the Commission, Microsoft will calculate the licensing fees. The Commission will review those terms for "reasonableness."

As a result, the Commission's new fine focuses only on the interoperability issue and not on another part of the 2004 order that called for "reasonable" licensing terms.

Neelie Kroes

The Commission is allowed to fine companies up to 5 percent of their average daily return based on their performance for the previous year, which for Microsoft would be 4.28 million euros. But the Commission has opted to stay below that threshold.

The 2004 order affects not only Microsoft's actions in relation to workgroup servers, Kroes noted, but also its other areas of business. She added that she informed Microsoft a couple of months ago that the general principles of the 2004 order apply to the upcoming Vista operating system, for example.

"The launch of Vista next year will hopefully take all this into account," Kroes said.