The European Commission could fine Microsoft up to 10% of its global annual sales for monopoly offences.
Microsoft is still committing the monopoly abuses it was first accused of in 1998, the commission said in a preliminary ruling in its long-running antitrust case against the company.
The commission has sent an updated statement of objections to Microsoft, reiterating previous accusations that the software giant has exploited its dominance in the market for computer operating systems into the markets for server systems and media-player software.
The latest statement also outlines the remedies the commission wants to impose on Microsoft to ensure that competition in these markets is freed up. It comes after extensive research was conducted by the European competition regulator earlier this year to strengthen its legal arguments.
"We now have a very strong case. The issue as it stands now is too strong to ignore for the company at issue," said commission spokesman Tilman Lüder.
Commissioner for competition issues Mario Monti said in a statement that the commission is giving Microsoft "a last opportunity to comment before the commission concludes the case".
In addition to forcing changes in the way Microsoft does business, a fine of up to a tenth of Microsoft's annual global sales may be levied, but the size of the fine will not be decided until the weeks before a final ruling.
Lüder said the final decision is "months rather than years away now".
On 17 July Microsoft reported $32.19bn in revenue for its 2003 financial year, which ended on 30 June.
The fact that the commission believes the monopoly abuse is still going on makes a large fine likely. Under European Union law the gravity of an antitrust offence is determined partly by how long it lasted. However, it has never fined a company the maximum 10% of sales.
Microsoft spokesman Jim Desler said his company is studying the latest statement of objections, although he added that Microsoft was not informed in advance that the commission would issue a new statement.
The statement will prolong the case, according to Horatio Guttierez, Microsoft's chief lawyer for Europe, Middle East and Africa. Issuing a statement of objections now means "there is no short-term culmination of the official process", he said, declining to comment on details of the statement.
This is the third statement of objections from the commission; the first two were in August 2000 and August 2001.
The commission wants Microsoft to reveal all the software code that competitors would need to make their server systems as compatible with Windows as Microsoft's own server software.
It has proposed two solutions: Either Microsoft must stop selling its Media Player as a package with its Windows OS, or Windows should be forced to carry a competing product as well.
"It's an extremely positive outcome," said Thomas Vinje, a lawyer in the Brussels office of Morrison & Foerster, which represents several Microsoft competitors. "It indicates that the commission is serious about pursuing the company,"
However, Vinje expressed doubt about the must-carry solution for media software.
"If Microsoft is allowed to keep bundling Media Player into Windows with another rival product it will find ways of giving an advantage to Media Player," he said, adding that it will be hard to choose the rival that will benefit from having must-carry status on Windows, and that it would be complicated to enforce the rule.
The commission's action to restore competition in the media playing software may be too late.
"The game is up," said one content provider who asked not to be named. "It's expensive to tailor content for different media players. If we know that Microsoft's Media Player is in Windows then there isn't much incentive to adapt our products for other players."
The two best-known rivals to Media Player are RealNetworks' Real Player and Quicktime, a system designed to run on Apple computers.
The media player battle is far from over and the commission's efforts demonstrate that, said Dave Stewart, deputy general counsel for RealNetworks. The great majority of media companies use both Microsoft's and RealNetworks' technologies today, he added.
"This game ain't up and if the game is kept legal, we know we'll win," he said. "I think the commission's statement reflects that this is a very important market. They would not be putting all those resources into this if they thought competition was over in digital media. We view this as the commission ensuring there will be a level playing field in the future."
As one of Microsoft's main rivals, RealNetworks has provided information to the commission when asked to do so, Stewart said.
According to Richard Doherty, research director at The Envisioneering Group, more than three-quarters of the world's PCs today have Real or Apple or any other media player installed besides Microsoft's player.
"RealNetworks and Apple have done fairly well despite the home-team advantage Microsoft has with bundling Media Player. Consumers have voted to download the RealPlayer and QuickTime software to get the kind of content they want and the quality they want," he said.
If a final ruling follows the latest position of the Commission, Microsoft will have a chance to appeal at the European Court of First Instance in Luxembourg, which hears disputes involving commission rulings. Microsoft can also request that the commission's remedy in the case be stayed - or put on hold - pending an appeal.
Paul Meller and Joris Evers write for IDG News Service