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As EU verdict looms, Microsoft more distracted than ever
Updated: 2004-03-20 14:10

Microsoft Corp. is facing a world of troubles.

The European Union is on the verge of imposing burdensome sanctions against the company, as antitrust challenges nag the software titan at home and in Asia. Plus, stiffer competition looms from open-source products led by the Linux operating system.

Amid all that, analysts wonder what the next big revenue stream will be for a company whose next major software launch may be two years away - and which has turned considerable attention to shoring up the security of its existing products.

``The company has a substantial amount of distraction, probably more distraction than they've ever had in their history,'' said Rob Enderle, principal analyst with The Enderle Group.

No one is suggesting that the distractions pose a serious, immediate threat to the Redmond, Washington, technology giant. After all, its Windows software still controls about 90 percent of the world's desktop computers, and it boasts nearly $53 billion in cash reserves.

``I think they're a pretty resilient company and they tend to rise to the occasion,'' said David Smith, an analyst with Gartner. But, Smith says, serious issues exist that could end up hurting Microsoft's business.

Microsoft's inability to reach a settlement this week in its long-running antitrust case with the European Union sets the stage for what is expected to be a major ruling against the company. In addition to a fine that could be hundreds of millions of dollars, the ruling could force the company to sell a version of Windows without its multimedia-player software, at least in Europe.

Microsoft has vowed to appeal, meaning the case could be tied up in legal wrangling for years.

And there are other legal challenges"In Minneapolis, Microsoft just went to trial over allegations that it overcharged Minnesota consumers for software licenses. That case is expected to take several months. And a divided Nebraska Supreme Court has just revived a class-action lawsuit alleging the company violated the state's consumer-protection laws.

Seattle-based RealNetworks Inc., which makes a rival music and video player, has sued Microsoft for anticompetitive behavior.

Microsoft's Japanese division, meantime, was raided last month over concerns about anticompetitive behavior.

And the company still awaits a US appeals court ruling to decide whether sanctions in its landmark US antitrust settlement were adequate. One state, Massachusetts, is pressing for tougher penalties.

The legal battles are not unexpected given Microsoft's dominance - and the fact that it was found guilty of monopolistic behavior in the US antitrust case - said Matt Rosoff, an analyst with independent researchers Directions on Microsoft.

They are simply ``a condition of doing business for Microsoft,'' he said.
Microsoft argues that its legal woes have diminished. For one, the EU case - unlike the US case settled in 2002 - is not seeking to break up the company, said Microsoft general counsel Brad Smith.

``Obviously, we had a far greater number of lawsuits two years ago, and those lawsuits put the continued existence of the company at stake,'' Smith said. ``These issues are significant, but they don't rise to the same magnitude as what we had encountered before.''
Still, facing antitrust allegations on several continents is taking time and attention from the company's top executives, Enderle said. Chief executive Steve Ballmer canceled a Las Vegas appearance this week because he had to fly to Brussels, Belgium, to try to broker a settlement deal with EU regulators.
That's sometimes left decision-making to the next level of executives - who Enderle said are still consumed with a companywide initiative to make Microsoft products more secure against viruses and hackers.
The upshot is that Microsoft has sometimes been ``unable to focus on the issues that are really pertinent to them,'' Enderle said.
The distraction comes as Microsoft has to make important decisions about its next-generation operating system. That includes how to compete with companies like Google Inc. on search engine capabilities, and how to create a strong presence in the market for mobile computing software.
Meanwhile, analysts say Microsoft is in a valley between updates of some of its most popular products, which could stifle growth. A new version of Windows is not expected until at least 2006.
That could upset customers who have signed long-term agreements with Microsoft expecting more frequent Windows versions.
Another challenge is Linux, the open-source operating system whose blueprints are freely distributed on the Internet. Analysts say Microsoft is losing server business to Linux systems, and open source could someday threaten its Windows desktop dominance.
Hewlett-Packard Co. announced this week that it would begin shipping Linux-based computers within several months to nearly a dozen Asian countries, including China and India. Another big Linux backer, IBM Corp., is using it to replace Windows on thousands of its employees' PCs.
Microsoft is embroiled in an embarrassing back-and-forth over a venture fund group's investment in SCO Group, a company that is suing users of Linux, claiming they owe SCO royalties. Both BayStar Capital and SCO say Microsoft executives introduced them. Microsoft, which has purchased a license to SCO's intellectual property, says it has no financial relationship with BayStar. It has declined to comment further.
Rosoff and other analysts don't believe there is any immediate threat to Microsoft's dominance on the desktop, saying that Linux systems aren't not yet consumer-friendly enough for mainstream use.
Rosoff believes the biggest short-term problem for Microsoft's Windows sales is Windows itself. Many of the older Windows versions are good enough that users don't see any reason to buy updates.
```Good enough' is the biggest threat that hurts growth,'' Rosoff said.

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