MarketWatch

LOS ANGELES – The European Commission on Wednesday fined Microsoft Corp. 280.5 million euros, or $357 million, saying that the No. 1 software maker has failed to live up to a 2004 agreement to make its Windows operating system work more easily with rivals’ software products.

Additionally, the commission said Microsoft has until July 31 to comply with the ruling or regulators would double the daily fine against the company to 3 million euros, or $3.8 million.

Microsoft said it would appeal the decision.

The fines are the latest setback for Redmond, Wash.-based Microsoft in its long-running antitrust dispute with European regulators. In 2004 the European Commission fined Microsoft 497 million euros for antitrust violations and ordered the company to sell a version of Windows without digital music and video capabilities.

Microsoft shares lost 46 cents, or 2 percent, to close at $22.64 as investors assessed the regulators’ action.

At issue is Microsoft’s dominance in the market for personal computers, and how it has squeezed its rivals’ abilities to build software that works with the Windows operating system. For example, the commission said Microsoft hasn’t disclosed complete and accurate information that would allow non-Microsoft servers to work properly with Windows PCs and servers.

The company’s ubiquitous operating system is used to power over 90 percent of the world’s computers.

EU Competition Commissioner Neelie Kroes said issuing the fine was necessary to show that “no company is above the law.”

“I regret that, more than two years after the decision, and despite an order from the president of the Court of First Instance that the Microsoft appeal to the court does not suspend Microsoft’s obligation to comply, Microsoft has still not put an end to its illegal conduct,” Kroes said in a statement.

Analysts on Wall Street said it was unlikely the fines would damage Microsoft’s financial health, though they come at an unwelcome time as the company is busily working on new products that include overhauled versions of its two flagship products.

Adam Holt, a J.P. Morgan analyst, agreed the fine shouldn’t have a materially negative financial impact on Microsoft, but “the continued feud with the EC is a distraction for the company and is resulting in bad publicity for Microsoft – something Microsoft can do without especially with the company on the cusp of two of its biggest product launches, Vista and Office 2007,” he asserted.

The 280.5 million euro fine imposed Wednesday was less than the regulator could have fined the world’s largest software maker. It amounts to 1.5 million euros a day starting from a Dec. 16 deadline regulators had given Microsoft to comply with a ruling to make source code more readily available.

Holt, the analyst, said that the fine largely had been priced into the value of Microsoft’s stock already and, importantly, shouldn’t hamper the company’s ability to announce soon another buyback of its own shares.

Microsoft General Counsel Brad Smith called the latest ruling “unjustified” and said that the company would appeal, turning to the courts to determine if its compliance was sufficient and the fine appropriate.

The fine is larger than the E.C. has imposed for price-fixing cartels, Microsoft said.

“When you consider Microsoft’s massive efforts to comply with this ruling, and the fact that more than a dozen companies are already using similar documentation provided in the U.S. to ship actual products, we do not believe this fine is justified,” Smith said in a statement.

Microsoft delivered thousands of pages of technical documents, offered unlimited technical assistance and made source code available to competitors, he said.

During a conference call, Smith said that the company has had 300 employees working full-time since April to meet the EC’s demands.

He also questioned why Europe wanted to fine Microsoft ahead of a July 24 deadline to provide the documentation.

“Why are they rushing to grade homework before the date we’ve agreed upon?” he asked.

Smith also said the company is working to head off conflicts over its next-generation Vista operating system, which will include Internet search and a PDF-file document reader that could compete with existing services from Google Inc. and Adobe Systems Inc.

Smith said he has proposed four alternatives to the EC on Vista, but the regulator has yet to respond. He didn’t detail what those alternatives were.