Microsoft, Time Warner investigated by EU for DRM domination

European antitrust regulators are set to launch a thorough investigation into a plan by Microsoft and Time Warner to acquire digital rights management company ContentGuard, a development that's seen as a setback for the deal.

The European Commission, which recently wrapped up its preliminary review of the proposed buy, had the option of either allowing the deal to proceed or conducting an in-depth, second-phase investigation. The Commission announced its plans on Wednesday, which was its deadline for making a decision.

The agency said in a statement: "After a preliminary review, it appears to the Commission that the transaction might possibly create or strengthen a dominant position by Microsoft in the market for digital rights management solutions. In the course of the investigation, the Commission will also investigate further competition concerns related to the vertical integration of Microsoft in other markets."

A representative for Time Warner said that the company and Microsoft have no specific comment other than that the parties are cooperating fully with the Commission. "This is a complex area," the representative said.

The Commission's decision is its second ruling against Microsoft in recent months. In March, it imposed a historic fine of €497m against the software giant, ruling that it had failed to provide competitors with the technical information they needed to compete fairly in the market for server software.

The antitrust regulators at that time also cited Microsoft for offering Windows on the condition that it come bundled with the Windows Media Player, alleging the software giant was stifling competition.

Microsoft is contesting the Commission's findings in the Media Player case and in September will head to the Court of First Instance. It plans to ask the European court to suspend the Commission's remedies, which include requiring Microsoft to offer a version of Windows without Media Player.

While the ContentGuard case has no direct bearing on the Commission's case against Microsoft in the Court of First Instance, European antitrust attorneys say it will likely shed light on the views of incoming Competition Commissioner Neelie Kroes.

Kroes, who will replace controversial Competition Commissioner Mario Monti when his term expires on 31 October, is viewed by many as pro-business. Kroes serves as a board member on a number of multinational companies.

Because Monti is leaving the Commission in late October and the agency's deadline to make a decision in the ContentGuard case is not until early January, Kroes will be the one to determine whether the joint acquisition is allowed to move forward.

Frank Fine, an antitrust attorney based in Brussels, said: "Kroes has a reputation of being pro-business. But no one knows what she'll do. The question will be - once she steps in - will there be a softening in antitrust enforcement?"

And while there is a great deal of difference between the two Microsoft cases, Thomas Vinje, an antitrust lawyer with the firm Clifford Chance in Brussels, said the common threads are Windows Media Player and digital rights management technology.

"DRM is bundled in with the Windows Media Player, and that is bundled in with the operating system," Vinje said. "The concern with DRM and the Media Player is that Microsoft will obtain a monopoly."

Microsoft, which has been a longtime investor in Bethesda, Md.-based ContentGuard, increased its investment in the company in April, when it announced Time Warner would join it in acquiring virtually all of ContentGuard from Xerox.

Microsoft and Time Warner view the ContentGuard deal as a means of establishing a stronger stake in the growing market for digital rights management. That technology prevents the illegal copying of content such as songs and videos.

The Commission now has until 6 January 2005 to render a final decision on the buy. If the government body ultimately determines the acquisition would violate European antitrust laws, that ruling could be a deal-killer for the companies because ContentGuard would be prohibited from operating in Europe, a major market.

The Commission noted that digital rights management technology is expected to be increasingly used for confidentiality purposes, especially in securing the transmission of corporate documents.

European antitrust regulators also decided to investigate whether the deal might create or strengthen Microsoft's "already leading position in the [digital rights] solutions market", the Commission said in a statement.

The Commission is concerned that, under joint ownership, ContentGuard may have both the "incentives and the ability" to use its portfolio of intellectual-property rights to put Microsoft's rivals in that area at a competitive disadvantage.

"This joint acquisition could also slow down the development of open interoperability standards. As such, this would allow the [digital rights management] solutions market to 'tip' towards the current leading provider, Microsoft," the Commission said in its statement.

And because the digital rights technology is expected to become pervasive throughout the IT industry, the Commission said it is concerned Microsoft's position in the market "may have spill-over effects on a number of related markets, ranging from mobile telephone to word processors".

Dawn Kawamoto writes for CNET News.com