Microsoft Ditches Media Player Licensing Strategy

Updated: The software giant tells the DOJ that it has pulled a set of contracts asking portable device makers to give its Windows Media Player software exclusive domain on their products.

Microsoft Corp. reported in a quarterly antitrust update to the U.S. government that it recently scrapped an exclusive licensing proposal for its Windows Media Player that asked device makers to snub competing multimedia applications.

In its quarterly report, filed with the Department of Justice on Thursday, Microsoft said it quickly withdrew the draft licensing agreements after receiving at least one complaint regarding the exclusive deals that the company had forwarded to an unspecified number of portable hardware makers. Microsoft reported that it replaced the exclusive contracts with another version of the agreement that allows device makers to consider use of other multimedia applications, such as Apple Inc.s iTunes, RealNetworks RealPlayer, Napster To Go and other platforms.

/zimages/1/28571.gifThe newest Vista build provides a first glimpse of Windows Media Player 11. Click here to read more.

The Redmond, Wash., company submitted that it moved quickly to nix the contract provision, which would have affected companies seeking to distribute a CD containing Windows Media Player and other software along with their audio devices. Ten days after replacing the controversial draft proposal, Microsoft reported that it finalized a draft of the contract for its partners that explicitly states that participants in the CD program are free to include any other software they wish.

A source close to the company said that the proposal was sent to a handful of hardware makers for feedback as part of a marketing development effort, and indicated that the offer didnt constitute a contractual offer, as it had not been reviewed by Microsofts legal team. Once Microsoft received the complaint from a partner, it moved to withdraw the proposal and even notified the Department of Justice about the situation of its own accord.

The Department of Justice labeled the incident as "unfortunate" and said that it didnt plan to pursue any further action regarding the complaint.

"This was only a draft description of a marketing plan sent to device manufacturers for the purpose of getting feedback," said Stacy Drake, a Microsoft spokesman. "Once the legal team reviewed the plan it quickly reassured all parties that the actual licensing agreements would expressly state that they were non-exclusive."

Since reaching a settlement with the government in 2002, Microsoft has given quarterly updates on its progress in addressing alleged antitrust issues around its Windows operating system and Media Player.

In other legal matters, the software giant recently reached a settlement worth approximately $761 million with rival multimedia software maker RealNetworks, which had filed suit against the company in 2003 charging anti-competitive behavior.

As part of its deal with RealNetworks, of Seattle, Microsoft agreed to a number of cross-marketing programs through which it will develop multimedia services with its competitor, and announced that it will begin offering Reals Rhapsody digital music subscription service on its MSN Web network properties. Microsoft also promised to share an increasing amount of the software source code for Media Player with its partners in an effort to open its systems to other developers.

/zimages/1/28571.gifClick here to read what David Coursey thinks of the Microsoft/Real settlement.

In addition to its U.S. suit, Real was also the only opponent left in Microsofts antitrust case with the European Union, which in 2004 ordered the software giant to begin offering a version of its Windows operating system that did not include Windows Media Player.

In its ruling, the European Union hit Microsoft with $597 million in related fines and ordered the company to share some of its Windows source code. Microsoft has said previously that it plans to appeal the ruling, but the European Unions Court of First Instance has yet to set a date for those hearings.

At least one industry watcher said that it seemed unlikely that Microsoft would take such an aggressive stance with Media Player in light of its previous antitrust dealings but observed that the consent decree the company signed with the Department of Justice doesnt explicitly cover mobile media software.

"The final decision in the DoJ case was applied much more narrowly than many people expected, and something as this wouldnt necessarily violate the consent decree," said Matt Rosoff, analyst with researcher firm Directions on Microsoft, Kirkland, Wash. "But, Media Player is also only a piece of the companys consumer multimedia plans, and Microsoft needs device makers to support it, so, I cant see what the business benefit might have been if they were to make such a requirement."

Rosoff said that Microsoft appears to be making a concerted effort to avoid upsetting its partners, even those with whom it competes closely, such as America Online Inc. and Sun Microsystems Inc., with whom it has also signed settlements.

"Microsoft is still allowed, post DoJ settlement, to pursue very competitive business agreements," said Rosoff. "But they are attempting to improve perceptions about how they work with other companies to keep the partners, the judges and customers satisfied about the way they do business. Thats part of the lesson that Microsoft has learned."

Editors Note: This story has been updated to add comment from Microsoft and an analyst.

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