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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.



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).






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.



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.




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.




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.



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.