EU anti-trust ruling may decide future of software business, writes Jamie Smyth in Luxembourg

When Judge John Cooke walks out of the European Court of First Instance this evening, he will have a lot on his mind. As rapporteur in the longest hearing to come before Europe's second-highest court, the Irish judge will draw up the draft judgment on Microsoft's appeal against the European Commission's ruling that the firm abused its dominant position.

His judgment will be scrutinised and amended by his colleagues on the 13-judge panel in the hearing, which has run for the past four days at the court.

The stakes could not be higher for either party. For Microsoft, the world's biggest software company, losing the appeal could force it to abandon its highly successful business model of tying new software applications into its Windows operating system, which runs on 95 per cent of the world's computers.

A negative result would undermine the commission's credibility in anti-trust cases and make it more difficult to keep a check on Microsoft's and other dominant companies' conduct.

"This is a battle in a war that will set a precedent," says Philip Nolan, a partner at Mason Hayes & Curran. "That's why Microsoft are putting so much emphasis on this case. They know the commission will expand its focus if bundling is declared illegal."

The commission's initial decision in March 2004 had two separate stands. It ruled that Microsoft abused its dominant position by bundling its own media player - a software applications that plays video and audio content on computers - into its ubiquitous operating system, Windows, to the detriment of rival players.

It found Microsoft's decision to tie its player into Windows had the effect of crushing competition because consumers did not download rival players on to their machines and content providers saw little benefit in investing in extra formats that would make their video and audio compatible with non-Microsoft media players.

"How can you compete with ubiquity?" asked commission lawyer Per Hellstrom, who drew attention this week to internal Microsoft memos that appeared to show the firm was employing the same bundling tactic that destroyed the search engine Netscape Navigator, a key rival to Microsoft's Internet Explorer.

Microsoft lawyer Jean-Francois Bellis dismissed the memos, saying it was easy to interpret "just a few lines taken from a few isolated documents". He also argued competition in the market for media players had improved since 1999, citing the success of Apple's iTunes.

This part of the hearing is crucial for Microsoft's ability to bundle new software applications into its dominant Windows system. Last month, competition commissioner Neelie Kroes expressed concerns to Microsoft that its new operating system Vista might bundle in new features in the security and search field, a practice that could hurt rivals like Symantec. If the commission prevails in this case, it is expected to crack down harder on Microsoft and Windows.

The second strand of the hearing deals with the commission's ruling that Microsoft's refusal to supply rivals with information to enable them to design server software that is fully "interoperable" with Windows is an abuse. At the hearing this week, the Irish lawyer representing the commission, Anthony Whelan, accused Microsoft of confining competitors to using "last-century technology" that led them to suffer "a gradual erosion of customers" in the workgroup server market (computers that enable systems to talk to one another).

Microsoft's legal counsel for this part of the hearing, Ian Forrester, rejected this accusation, describing the commission's 2004 ruling, which asks Microsoft to supply this interoperability data to rivals, as the "biggest encroachment on intellectual property rights in European competition law history". Forcing Microsoft to hand over its valuable software protocols would give a free ride to rivals and could lead to the "cloning" of Windows, said Forrester, asking the court to overturn the commission's 2004 ruling, which forced changes in behaviour and levied a €497 million fine. Assessing Microsoft's chance of overturning the ruling is difficult due to complex technical and legal issues. But statistics show that the European Court of First Instance, which will rule on the appeal in several months time, rarely overturns decisions in anti-trust cases, although it regularly reduces the level of fines.

It is also possible the court could rule in favour of Microsoft on one strand of its appeal while favouring the commission on the other, an outcome neither side wants after a six-year investigation and legal battle.

"For a company built on the basis of intellectual property, the question is would you rather die by electrocution or hanging?" says Microsoft's associate general counsel, Horacio Gutierrez.

"Both strands relate to our ability to improve our products and innovate." The hearings highlighted the enmity between the sides. Commission officials slate Microsoft for allegedly failing to comply with its 2004 ruling to supply rivals with "interoperability" data.

The EU executive has been levying a €2 million daily fine on the firm since mid-December 2005 on this count. But the commission has also been embarrassed by the failure of its remedy that forced Microsoft to supply a version of Windows without its media player. Less than 2000 "unbundled models" have been sold so far, illustrating that consumers favour operating systems with extra bundled software.

At times the atmosphere at the court has reached boiling point. There have been a series of tetchy interventions by both sides during the hearing over access to documents. Outside the courtroom, there was also a brief shouting match between rival interveners - the technology firms and associations that join the case to support either party.

There is also evidence of rising transatlantic tensions. This week, the Wall Street Journal published an opinion piece critical of the EU executive, asking if the commission would pursue an European firm as vigorously as it had Microsoft? Dick Armey, a former majority leader of the US house of representatives, also accused the EU of wielding regulatory policy as a form of protectionism.

In Europe, the media has focused on Microsoft's limitless resources, noting that its two principal legal counsel, Bellis and Forrester, are acknowledged as the best in the business. "They have almost unlimited resources while we have less than 10 people working on the case," says one commission official, who alleged that Microsoft's legal team runs to hundreds of people.

Microsoft even took the unprecedented step of hiring three former European Court of Justice judges to help it prepare its appeal, says the official, who does not want to be named.

Microsoft admits to having 35 legal experts working on the appeal but dismisses the "David versus Goliath" analogies. "The notion that there are just a handful of people working for the commission on this case is just not right," says Gutierrez, who highlights the vast legal powers available to the EU regulator.

A Microsoft victory could dent these powers significantly. "We would obviously have to review our procedures if we lost," admits one commission source, who refers to the shake-up of procedures at the DG competition directorate following a number of negative court decisions in merger cases, such as the high-profile Airtours case.

For Judge Cooke, such matters have little concern. He will focus purely on matters of competition law. But for Microsoft, the commission and billions of Microsoft users, the ruling , due later this year or early next year, will be eagerly anticipated.