EU plans sanction of Microsoft Corp.

BRUSSELS, Belgium -- The European Union announced its intention Thursday to sanction Microsoft Corp. after the software giant balked at demands that could have prevented it from adding new features to future versions of Windows -- a restriction it avoided in the landmark U.S. antitrust case.

Frenzied settlement talks that accelerated this week with the arrival of Microsoft chief executive Steve Ballmer in Brussels collapsed over the EU's insistence on a broad deal in exchange for allowing Microsoft to avoid being found guilty of monopolistic behavior.

EU competition commissioner Mario Monti said he would now proceed with a precedent-setting ruling against the world's largest software company on Wednesday. The EU also plans to hit Microsoft with a fine expected to reach hundreds of millions of dollars.

"We made substantial progress toward resolving the problems that had arisen in the past, but we were unable to agree on commitments for future conduct," Monti said. "It was impossible to achieve a satisfactory result in terms of setting a precedent."

Hours later, Ballmer said he believed the issues in the current case -- involving digital media players and the server software market -- had been resolved.

"But we were unable to agree on principles for new issues that could arise in the future," he said in a statement.

Microsoft attorneys said the company would appeal any negative decision to European courts.

An EU order could force Microsoft to make costly changes in its software -- potentially on a global scale -- in a matter of months unless it wins a suspension from the court pending appeal, which can take years.

In afternoon trading on the Nasdaq Stock Market, Microsoft shares were down 44 cents, 1.75 percent, at $24.69.

Monti will present the proposed fine Monday to an advisory committee of national regulators before going to the full European Commission, the EU's executive branch, on Wednesday for a final decision.

After winning unanimous backing from the 15 EU governments last week, the ruling is expected to pass easily.

Microsoft is accused of unfairly grabbing market share from rival companies by bundling its own Media Player with Windows -- the operating system in nearly every personal computer worldwide.

Microsoft contends that benefits consumers, but rivals claim it is unfair competition that stifles innovation and aims to drive them out of business.

The charge was similar to the 1990s Internet browser war in the United States, where Microsoft was found guilty of using illegal means to protect its Windows monopoly. But a 2001 settlement with the Bush administration allowed it to continue integrating its Internet Explorer with Windows.

Sources familiar with the case say the EU's draft ruling finds Microsoft guilty of monopolistic behavior -- setting a precedent in Europe -- and goes beyond the U.S. remedies.

The EU is demanding that Microsoft offer computer makers in Europe a discounted version of Windows without Media Player so that rivals like RealNetworks Inc. and Apple Computer Inc. have a better shot at reaching consumers.

In addition, the draft is expected to require the company to release more underlying Windows code so rival server software companies including Sun Microsystems Inc. can operate better with computers running Windows.

In exchange for a settlement, Monti was seeking commitments that could have affected Microsoft's business not just in Europe but globally -- and helped to resolve other EU antitrust cases pending against the company, the sources said on condition of anonymity.

The EU last year began investigating new charges from Microsoft competitors that its latest desktop operating system, Windows XP, is designed to help extend Microsoft's dominance into new markets such as instant messaging and mobile phones.

In this week's settlement talks, the EU was anticipating that the next edition of Windows, which isn't expected until at least 2006, will include search engine capabilities and other features that could compete with rival products.

Sources said Microsoft had made a last-minute offer to include rival media programs with Windows, along with its own, in hopes of avoiding an "unbundling" order that could interfere with its business strategy.