EU Rejects Microsoft's Offer, Sources Say

BRUSSELS, Belgium (AP) -- European Union regulators have rejected as insufficient Microsoft Corp.'s latest offer to settle long-running antitrust charges but are continuing talks, sources familiar with the discussions said Tuesday.

With a decision from the EU due this spring, the U.S. software giant has been scrambling to avert what could be a far-reaching order to change the way it packages its dominant Windows desktop operating system and reveal more of its underlying code to rival manufacturers.

Spokespeople for the European Commission and Microsoft declined to comment on a report in Tuesday's Financial Times that Microsoft had offered to include rival media player software on a CD-ROM packaged with personal computers to help resolve the case.

Microsoft said only that it "continues to work actively with the European Commission toward an amicable settlement in this case."

Sources, speaking on condition of anonymity, told The Associated Press Microsoft's offer had been dismissed by the commission as unsatisfactory but that the search continued for ways to make it acceptable to regulators.

In an echo of the landmark U.S. case involving Internet browsers, the commission's draft decision finds Microsoft abused its Windows monopoly to gain ground over rivals in the media player market.

The U.S. case was settled in 2002 without requiring Microsoft to "untie" its Internet Explorer from Windows. Microsoft argues that adding new features to Windows -- a key to its business strategy -- benefits consumers, while its competitors argue it is aimed at driving them out of business.

Microsoft is trying to avoid an order now in the EU case to remove its Media Player, which is gaining market share at the expense of rivals RealNetworks and Apple Computer. Such an order could also complicate its next planned Windows innovation: incorporating an Internet search engine to compete with Google's.

Last year, EU regulators demanded that Microsoft either sell a stripped-down version of Windows or install rival media players.

The CD-ROM offer seeks to satisfy the second option but sources said the commission, which wants all players competing on the same level, believes requiring installation from a CD-ROM would deter most users.

One source said Microsoft might agree to a folder on the computer desktop informing users of the options available on CD, although it was unclear whether Microsoft's media player would be on the CD or pre-installed.

Microsoft's offer to settle the second half of the case involving the market for low-end servers, which link desktops together in offices, was also deemed "not enough" but talks continue, one source said, declining to elaborate.

Microsoft also faces a potential fine for antitrust abuses ranging from a minimum $20 million to around $3 billion -- 10 percent of its global sales.

Unless a settlement is reached, the commission is expected to produce its decision by May, setting the stage for a challenge in European courts.