If any company could easily weather a ruling that it broke antitrust laws, it would seem to be Microsoft Corp.
Last fiscal year, its business generated a profit averaging $1.1 million every hour. It has more than $50 billion in cash. And since an antitrust settlement with the U.S. Justice Department in late 2001 imposed restrictions on Microsoft's business, it has steadily increased revenue.
So an imminent decision from the European Union that Microsoft illegally took advantage of its monopoly is unlikely to hurt the company financially in the short term -- even though the company faces fines of hundreds of millions of dollars and a requirement that it remove its media playing software from its dominant Windows operating system.
The European antitrust agency says it will formally issue its ruling next week. Microsoft has vowed to appeal, which can take years, and will seek to have the ruling put on hold in the interim.
Even if Microsoft is forced to follow the EU orders before its appeals are exhausted, several financial analysts said yesterday that the costs to the company would be a trifle.
Still, the EU ruling will come at one of the most challenging junctures in Microsoft's remarkable history, and carries long-term risks.
For the first time since it established its dominance in the 1990s, the company is battling a serious competitive wildfire, in the form of open-source software, which for many corporate and government users has proved cheaper and more flexible because they can alter its code. And although the EU's ruling is expected to be limited to the media player, it will strike at the heart of the strategy that has helped Microsoft to ubiquity: Incorporating new functions into its operating system, which powers more than 90 percent of the world's personal computers.
"This is another chink in Microsoft's armor," said Ted Schadler, a vice president of research at Forrester Research Inc. "The idea is like Gulliver and the Lilliputians."
Legally, the danger for Microsoft is that the EU decision would serve as a precedent for blocking any future moves by the company to add applications to Windows.
Microsoft has announced its intentions to do just that. Its next generation of Windows, code-named Longhorn, is expected to include applications for security and for searching the Web, which have traditionally been the province of other vendors.
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 almost 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."
