Quotes of the Day

If Mario Monti's resolve to punish Microsoft wavered last week, he showed no sign of it. For more than four arduous years, Europe's antitrust czar and his staff have toiled to build a watertight case against the computer software giant, filing three formal complaints alleging that the company abused its monopolistic position and harmed competitors and consumers. But last Tuesday, just a day after E.U. member states approved tough sanctions against the Redmond powerhouse, Microsoft's chief executive Steve Ballmer flew to Brussels with an eleventh-hour settlement offer that directly addressed many of the European complaints.

Some of Monti's staff argued forcefully that it would be smarter to settle now rather than risk a potentially lengthy court battle, according to people familiar with the internal deliberations. But Monti was unfazed, and less than 48 hours later told Ballmer: No deal. "I would just like to inform you that a settlement on the Microsoft case has not been possible," Monti told reporters at a surprise appearance at one of the European Commission's regular noon briefings. "In the end, I had to decide what was best for competition and consumers in Europe."

The details of that decision will be announced this week, after the European Commission signs off on it, but the terms have already been widely telegraphed. It promises to be the fiercest regulatory sanction Microsoft has received, far exceeding the settlement the company made with the U.S. Justice Department and several states two years ago. In that deal, it agreed to license some of its software code to competitors and let dealers and others remove icons for Microsoft products from computer desktops.

This week the Commission will order Microsoft to make its Windows PC operating system available to manufacturers and consumers in two versions: one with Media Player — Microsoft's proprietary video and music software — built in as at present, and one without it. The company is likely to be handed a hefty fine as well, probably in the billions of euros. Most significantly, Monti is expected to try to use the ruling to prevent Microsoft from pushing future products on consumers by "bundling" them together with its dominant operating system.

Microsoft can easily pay the fine — its stock was not overly perturbed by Monti's announcement, it has a whopping $50 bill-ion in cash, and it earns an average of $1 billion before tax every month. But the crackdown comes at a difficult time for the firm. Some argue that it has not had a major commercial product breakthrough in years, despite extensive R and D investments. It has yet to crack the coveted goal of getting a version of Windows into Europe's hundreds of millions of mobile phones. And at a time when the company is looking to break into new markets and catch up with the Internet search firm Google, any restrictions on including software with its operating systems could really hurt. The bundling issue proved to be the sticking point in the last-minute negotiations. "We were unable to agree on principles for new issues that could arise in the future," Ballmer said in a statement.

But is Monti's posture worth the risk of a protracted court fight? The tough stance on Microsoft marks a rebound after some big setbacks in 2002, when the European Court of First Instance threw out three antitrust rulings in succession. Monti countered by reorganizing the competition directorate, bringing in a new chief of staff and chief economist and insisting on tougher internal scrutiny before issuing decisions. In the Microsoft case, a special peer review panel was set up to play devil's advocate, picking holes in the arguments, before Monti was satisfied he could win.

Still, Microsoft is almost certain to file an appeal in the European courts, which could drag the case out for years and limit the impact, even if it ultimately loses. Some antitrust experts say a settlement that imposed some restrictions might have been a better course of action. "A deal was possible but the Commission wanted a bit too much," says Jacques Bourgeois, an attorney at Akin Gump in Brussels. Yet Monti has set a powerful precedent. "It's all about ensuring that a cycle of behavior is not allowed to repeat itself," says David Wood, a Brussels-based attorney for Howrey Simon Arnold & White, who previously worked in Monti's competition directorate.

Microsoft's rivals, at least for now, are jubilant. Executives at Real Networks, which makes the leading rival to Microsoft's Media Player and recently filed a broad antitrust lawsuit against Microsoft in the U.S., say there's value in the E.U. precedent. Ed Black, president of the Computer and Communications Industry Association, says that Monti "played his hand superbly" but adds: "It's just a shame it has taken so long. In five years a lot of damage has been done to industry and competitors." Given the slow pace at which European appeal courts work, Microsoft's foes — and Monti — may have another five years to wait.

• PETER GUMBEL
• The E.U. gets tough with Microsoft