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UNCLAS SECTION 01 OF 03 BRUSSELS 001310 
 
SENSITIVE 
SIPDIS 
 
DOJ FOR CALDWELL HARROP 
DOC FOR DAVID DEFALCO 
STATE FOR EUR/ERA, EEB/TPP/MTA, EEB/OIA 
STATE PLEASE PASS TO USTR/DAVID WEINER AND FTC/JOHN PARISI 
 
NOT FOR INTERNET DISTRIBUTION 
 
E.O. 12958:  N/A 
TAGS: ECIN ECON EINT ECPS ETRD EUN
SUBJECT: MICROSOFT: CLOSE TO FINAL DEAL WITH EU TO END COMPETITION 
CASES 
 
¶1. (SBU) SUMMARY.  John Vassallo, Microsoft (MS) VP for EU Affairs, 
told Charge Sept. 24 that the company "is very close" to concluding 
an overarching deal with the European Commission on three antitrust 
issues: 1) the Commission's case against Microsoft's tying of 
Internet Explorer to Windows; 2) a five-year deal on sharing 
interoperability information with rival firms; and 3) a 10-year 
agreement to support PDF and other file format compatibility with 
Microsoft's own file format.  Vassallo said there are only a few 
small issues to resolve over the tying case, which will involve MS 
agreeing to provide within the EU all new Windows computer buyers, 
and all customers upgrading Windows versions, a "ballot screen" 
whereby customers can select from 12 internet browsers to use as 
their default browser.  Customers would also be able to deactivate 
Internet Explorer completely.  This element of the deal will require 
a four-week EU market test and formal approval by the College of 
Commissioners, which MS hopes for by October 28. 
 
¶2. (SBU) Vassallo said the whole package represents a historic 
opportunity for the Commission and Microsoft to resolve past 
disputes and move into a new era of cooperative relations. 
Commissioner Neelie Kroes has been publicly advertising her interest 
in concluding the total deal (as part of her legacy before she 
leaves the Commission), increasing its likelihood of success. 
Charge asked if MS requested U.S. engagement; Vassallo said not 
directly, but stressed the value of emphasizing that reaching a deal 
would be good for all parties concerned.  After an 11-year battle 
involving nearly $2.5 billion in Commission fines against Microsoft, 
both sides of this epic competition battle may be ready to end 
confrontation and resolve their differences.  END SUMMARY. 
 
MICROSOFT SEES OVERALL AGREEMENT NEAR 
------------------------------------- 
 
¶3. (SBU) John Vassallo, Microsoft (MS) VP for EU Affairs, told 
Charge d'Affaires and Acting EconCouns September 24 that press 
statements by Competition Commissioner Neelie Kroes and Director 
General Philip Lowe, in the U.S. for conferences, that an overall 
Commission-Microsoft deal is close are correct.  He explained that 
Microsoft and the Commission have been in intensive negotiations 
since July that have brought the two parties close to an overarching 
package agreement on three outstanding antitrust issues (one formal 
and two informal). 
 
THREE ELEMENTS OF PACKAGE DEAL 
------------------------------ 
 
¶I. FORMAL AGREEMENT ON REMEDIES FOR IE-WINDOWS TYING CASE 
--------------------------------------------- ------- 
 
¶4. (SBU) The major element of the proposed deal, Vassallo said, is 
Microsoft's proposed remedy for the Commission antitrust case 
against MS tying of Internet Explorer to its Windows operating 
system.  Vassallo briefly recounted the history of the Commission 
case against MS for tying Media Player to Windows, which resulted in 
a 2004 Commission decision and massive (497 million euro) fine 
against Microsoft, which was upheld in 2007 by the EU Court of First 
Instance.  The remedy required by the Commission, that of MS 
offering a version of Windows without Media Player, failed to 
resolve concerns since it was commercially unsuccessful. 
 
¶5. (SBU) In 2006, Vassallo said, Opera, a small Norwegian browser 
company, filed a similar antitrust complaint over MS tying of IE to 
Windows.  The Commission took up the case, and MS began negotiations 
with the Commission over a solution.  In December, 2008, the two 
sides were close to informal agreement, Vassallo said, but the 
Commission stuck to its desire to have computer makers (OEMs) 
include all major browsers in software bundles for new computers, 
with customers able to choose one as a default browser. 
 
¶6. (SBU) This agreement was not acceptable to MS, and the Commission 
filed a formal antitrust charge (Statement of Objections) in January 
¶2009.  The Commission then offered a hearing date that MS could not 
take due to scheduling conflicts, Vassallo said.  Faced with an 
enormous potential Commission fine (2-6 billion euros, retroactive 
to 1996), MS began new informal negotiations with the Commission 
towards a solution. 
 
¶7. (SBU) In July MS and the Commission came to initial agreement on 
a remedy that would resolve the complaint.  MS agreed to direct all 
new computer buyers within the EU, upon their first connection to 
the Internet, to a "ballot screen" that would allow them to download 
any of12 competing browsers, make it their default browser, and 
deactivate IE if desired.  This would only be true for OEMs who 
include IE as the initial default browser; if OEMs reach a better 
financial deal with another browser maker (e.g. Google) to make that 
browser the default, the customer would not get the ballot screen 
option.  Vassallo added that existing Windows computer users would 
get the same ballot screen and IE deactivation option when upgrading 
their version of Windows. 
 
¶8. (SBU) This formal agreement to resolve the tying case is subject 
to approval by the College of Commissioners, Vassallo continued, 
which is only possible after a four-week mandatory market test of 
the proposed remedy.  MS hopes to begin this test extremely soon, he 
said, to allow time for formal Commission approval by October 28. 
 
¶9. (SBU) Vassallo said there are a few very minor issues to resolve 
over this part of the deal, including such points as: required 
security awareness messages for ballot screen users, the order in 
which browser options might be displayed, and the size of different 
logos.  He hoped to resolve these within days and thought none are 
likely to upset a final deal. 
 
¶10. (SBU) Vassallo clarified that MS will launch Windows 7 in Europe 
on October 22, in advance of likely final approval of the agreement. 
 This would not include a ballot screen option, but if a deal is in 
fact concluded within the following weeks, MS would link Windows 7 
computers automatically back to the ballot screen webpage, so the 
launch timing should not disrupt conclusion of a deal. 
 
II. INFORMAL AGREEMENT ON INTEROPERABILITY 
------------------------------------------ 
 
¶11. (SBU) Vassallo said that a second part of the deal would resolve 
a Commission investigation, based on a complaint by anti-MS lobby 
group ECIS (which counts Sun, IBM and other U.S. and EU firms as 
members) of MS alleged failure to share adequate code or information 
on understanding MS code to allow MS competitors and develop and run 
products that would work properly with MS operating systems and 
other software.  This agreement will involve MS offering licenses on 
certain code for a nominal fee, posting 75,000 pages on its code on 
the web and establishing labs where competitors' software developers 
can come for instruction on how to develop products to work with MS 
code.  There will also be a rapid arbitration procedure for 
disputes, Vassallo added, and MS will agree to pay 135,000 euros/day 
to operators who cannot get their system to work with MS products 
after recourse to the above. 
 
III. INFORMAL AGREEMENT ON PDF AND OTHER FILE SUPPORT 
--------------------------------------------- -------- 
 
¶12. (SBU) The third and final part of the package is an agreement 
under which MS will be obliged to support for 10 years compatibility 
of Adobe PDF files and other similar document files with Microsoft's 
Open XML proprietary format.  The support will be 
backwards-compatible, allowing billions of documents in older 
formats to be accessible.  Vassallo noted here the Commission's 
positive July statement on MS efforts to promote interoperability, 
which he said was without precedent. 
 
¶13. (SBU) Both informal agreements will only come into effect once 
the formal agreement is concluded, Vassallo added. 
 
MICROSOFT: DEAL REPRESENTS "HISTORIC OPPORTUNITY" FOR COMMISSION 
--------------------------------------------- -------- 
 
¶14. (SBU) Vassallo underscored that the whole package represents a 
historic opportunity for the Commission and Microsoft to resolve 
past disputes and move into a new era of cooperative relations.  If 
the small pending issues for the formal agreement on tying are 
resolved quickly, the Commission can move to the market test. 
Vassallo said that MS had seen a remarkable turnaround in the 
willingness of the Commission to deal directly and openly with 
Microsoft, which he attributed to Commissioner Kroes' strong, 
publicly-stated interest in resolving the Microsoft cases as part of 
her legacy before she leaves the Commission in the next few months. 
 
¶15. (SBU) Vassallo said his only major fear was that the Commission 
might use the results of the ballot screen market test to come back 
to MS and ask for more concessions/changes before final Commission 
approval.  This could scotch a final deal.  If the deal falls apart, 
the Commission would face the choice of proceeding with a fine and 
forced remedy, which Microsoft would challenge in court. Vassallo 
said he understood that Kroes and DOJ AAG Varney have been in close 
touch on the overall deal. 
 
¶16. (SBU) The Charge asked about MS outreach to USG officials in 
Washington; Vassallo noted that Microsoft has briefed DOJ on the 
impending settlement.  Charge then asked if MS is requesting direct 
USEU engagement; Vassallo said no, but , but added that if senior 
USEU or visiting USG officials happen to meet with relevant EU 
decisionmakers, they could stress the value of reaching a deal for 
all parties concerned.  The proposed deal is good for the EU, the 
market and consumers, Vassallo concluded. 
 
COMMENT 
------- 
 
¶17. (SBU) Vassallo's story reflects Microsoft's point of view, and 
it is unclear how the Commission sees prospects and potential 
obstacles involved in an overarching package deal on Microsoft's 
competition cases.  Microsoft does have other potential issues in 
Europe, with the possibility of a Commission review of its 
advertising alliance with Yahoo, and with browser competition with 
Google turning increasingly nasty.  Nevertheless, after an 11-year 
battle involving nearly $2.5 billion in Commission fines against 
Microsoft, both sides of this epic competition policy battle may be 
ready to end confrontation and resolve their differences, for now. 
END COMMENT. 
 
MURRAY