The European Commission has rejected an offer from Microsoft to settle its long-running antitrust case.
In what was described by one source as "a half-hearted" effort to meet the commission's concerns, Microsoft offered to attach rivals' software in the form of CD-Roms to new PCs running Windows.
The commission believes that by incorporating Media Player - Microsoft's audio and video-playing software - into the Windows operating system, the company is putting rival players such as RealNetworks' RealOne Player at a competitive disadvantage.
Microsoft was given the choice of unbundling Media Player and sell it as a standalone product, or embedding a rival player inside Windows to sit alongside Media Player on PC desktops.
The commission decided that including rival software on CD-Roms inside the box of a new PC driven by Windows would not redress the competitive balance.
Microsoft's rivals argued that record and film companies and other firms offering content that can be played on media players will, increasingly, tailor their products exclusively for Microsoft's Media Player, because it will be the only software player they are sure that people will have on their PCs.
"The CD-Roms won't be installed by a large proportion of PC users," the source said.
Microsoft declined to comment on the substance of the offer and its rejection.
Microsoft has argued that unbundling Media Player from Windows would prevent the operating system from working properly. It also feared the precedent that would be set if it did agree to separate Media Player from Windows.
Future product development, such as a search engine which Microsoft plans to launch to compete with Google, count on the bundling business model Microsoft has employed with all its most successful software products including Internet Explorer, Word and Outlook Express.
One antitrust lawyer with experience in representing firms accused of antitrust abuses said Microsoft is likely to come back with another offer. "Although the end of the case is very near now, I think it's too early to fire off your final offer," he added.
Paul Meller writes for IDG News Service