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Up For A Fight

The European Union, product delays, and Linux momentum test Microsoft, but they also may drive its competitive spirit

What a month for Microsoft. The stiff fine and tough new measures imposed by the European Union last week were merely the capper in a series of setbacks to hit the company in recent weeks. Microsoft revealed that key products have fallen behind schedule, including patch-management software that's central to its security push. And its next-generation Windows operating system, code-named Longhorn, may be getting bogged down, too.

In addition, Microsoft continues to wrestle with the encroachment of Linux and other open-source products. "A lot of different forces are coming to bear on Microsoft," says Michael Cherry, an analyst with Directions On Microsoft.

Steve Ballmer -- Photo by Rudy Archuleta

Microsoft's agreement with the Justice Department should be an "adequate framework," even outside the United States, CEO Ballmer says.

Photo of Steve Ballmer by Rudy Archuleta/Redux Pictures
On March 22, only 36 hours before the European Commission's crackdown was announced, and knowing what was coming, CEO Steve Ballmer insisted that Microsoft is on the right track. "We think we have all the opportunities in the world," he said during an interview at Microsoft's headquarters.

Ballmer argues the EU has gone too far with its mandate that Microsoft create a version of Windows with its media software removed, disclose Windows server APIs, and more. Microsoft has been down this path before, and Ballmer maintains that the antitrust agreement reached 18 months ago with the Justice Department should be enough to regulate the company's actions at home and abroad. "The question is, will the standards be different outside the United States than inside the United States?" Ballmer says. "We went through a long and arduous process in the United States. We think it's quite an adequate framework."

On March 16, Ballmer flew to Brussels with Microsoft general counsel Brad Smith in an effort to reach a compromise. After two days of negotiations--and a visit to the grammar school he once attended there--Ballmer left without a deal. The talks broke down when EU negotiators insisted on guidelines that would have restricted how Microsoft packages future products.

The EU's verdict that Microsoft must pay a $613 million fine and create a Media Player-free version of Windows, while opening its closely guarded server APIs, cuts at the heart of Microsoft's ability to keep adding new features to its operating system. Microsoft plans to appeal the EU's decision. But if the sanctions stick, they could limit the company's product decisions and embolden competitors to register new complaints, says analyst Dwight Davis at Summit Strategies.

All this comes at a time when Microsoft itself is trying to figure out what features to include in future releases of Windows. In recent weeks, Microsoft product managers have begun talking about fuzzy concepts called "Windows XP Reloaded" and "Windows Server 2003 Update." The company is looking for ways to deliver new Windows features before Longhorn's release, but it's unsure how to package them.

That Microsoft is mulling these options at all is a sign that Longhorn's development is taking longer than expected, which Ballmer confirms. "We have more in our initial Longhorn conceptualization than we probably need," he says. "We've probably got more work than we wanted."

That means Microsoft may "cut back a little bit on the boldness" of Longhorn--the centerpiece in the company's future product line--to get it done more quickly. Even then, Ballmer says, "the Longhorn release that comes out will probably still be a little bit later than I would have hoped initially." Microsoft officials still aren't saying when Longhorn will ship, though some analysts estimate it will be 2007 or later.

Ballmer says there's no plan for an interim PC operating system between now and Longhorn. However, a pre-Longhorn server release remains a possibility.

Bill Gates

Voice-enabled PCs are in the works, Gates says.
Freedom to design Windows the way Microsoft wants is especially important as it builds technology into Longhorn. For example, the Speech Server 2004, introduced last week in San Francisco, could lead to future products hitched to Longhorn's development. "Eventually, we'll think of the PC and the phone as devices we can talk to," chairman Bill Gates said at the product's introduction. "The screen and speech shouldn't be separate worlds."

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