In a devastating decision fraught with implications, the Court of First Instance in Luxembourg this morning rejected Microsoft's appeal from the European Commission's 2004 antitrust order.

The court agreed with the EC's determination that Microsoft had abused its monopoly and said the Commission was right to order that Microsoft unbundle its Media Player from the Windows operating system and share its server communications protocols with its rivals. It left the unprecedented $613 million fine imposed on Microsoft standing.

The only point, the court said, on which the Commission overstepped itself was "to compel Microsoft to grant to an independent monitoring trustee powers which the Commission is not itself authorized to confer on a third party" and make "Microsoft responsible for all the costs associated with the appointment of the monitoring trustee, including his remuneration and the expenditure incurred in carrying out his functions."

It was not, as Microsoft observed, "the most important part of this case or this decision."

In the matter of its protocols the court found that Microsoft shared interoperability information "until it was sufficiently established on the workgroup server operating systems market" and then it stopped and its action "prevented its competitors from developing workgroup server operating systems capable of attaining a sufficient degree of interoperability with the Windows domain architecture, with the consequence that consumers' purchasing decisions in respect of workgroup server operating systems were channeled towards Microsoft's products."

The court dismissed the idea that the EC's decision to make Microsoft share its protocols for purposes of interoperability infringed on Microsoft's patented intellectual property. The information required, it found, dismissing Microsoft's argument, "does not extend to implementation details or other features of Microsoft's source code" and so "competitors would not be able to clone or reproduce its products solely by having access to the interoperability information covered by the contested decision."

In a grand, sweeping, potentially dangerous gesture, the court found that "It is permissible, in the public interest in maintaining effective competition on the market, to encroach upon the exclusive right of the holder of the intellectual property right by requiring him to grant licenses to third parties seeking to enter or remain on the market."

It dismissed Microsoft's argument that if it had to share technology the company would be disinclined to develop it as being "of no relevance."

The court said bundling the Windows Media Player with Windows gave it "a level of market penetration corresponding to that of the Windows client PC operating system and did so without having to compete on the merits with competing products" like RealNetworks' Real Player.

And it practically laughed its way through Microsoft argument that bungling was dictated by technical reasons. It bundled it, the court said, "to obtain an unparalleled advantage with respect to distribution of its product and to ensure the ubiquity of Windows Media Player on client PCs throughout the world, thus providing a disincentive for users to use third-party media players and for OEMs to pre-install such media players on client PCs.

Indicating its interpretation of antitrust law as favoring competitors, the court said it "concludes that the Commission was correct to find that there was significant risk that the tying would lead to a weakening of competition in such a way that the maintenance of an effective competitive structure would not be ensured in the near future."

It noted that the limited unbundling order only extends to Media Player and "did not mean any change in Microsoft's current technical practices other than the development of that [Player-less] version of Windows" that nobody wanted.

Microsoft, which has been expected to appeal any adverse decision to the European of Justice, said it was too early to say exactly what it would do.

"I think we need to read the decision before we make any decision," Microsoft's general counsel Brad Smith told the press, adding that it gives the EC "quite broad power and quite broad discretion."

He described the 248-page ruling as having "extraordinary impact" and being "the type of decision that deserves the kind of time required to understand it thoroughly." He can only appeal on errors of law, not fact. Presumably Microsoft's lawyers are right now looking for a basis for appeal.

Microsoft also has to worry - as do other big American companies - that a vindicated and emboldened EC will now try to play the part of the world's regulator and restructure markets. It's already got Intel and Rambus on its list and has been considering reopening its case against Microsoft and going after Vista and Office, a decision promised in a few weeks.

In response to the decision, antitrust chief Neelie Kroes said, "Microsoft must now comply with its legal obligations and desist from engaging in anticompetitive conduct" and indicated she wanted to see Microsoft cut down to size.

"A market level of much less than 95% would be a way of measuring success," she said. "You can't draw a line and exactly 50 is correct, but a significant drop in market is what we would like to see." Microsoft, of course, owes about 95% of the world's desktops.

Smith, while maintaining that some issues remain open, promised that "If we need to take additional steps in order to comply with today's decision, we will do so."

It is assumed that the European Commission will now go ahead a hit Microsoft with additional fines of $3 million a day since August of last year on top of the $357 million penalty Microsoft has already been accessed for not producing useable protocol documentation. The Commission is also expected to produce antitrust guidelines that it has held back on publishing ahead of this decision.

Speaking for the open source community, which is overjoyed at the decision, Red Hat CEO Matthew Szulik issued a statement saying, "In our business, interoperability information is critically important and cannot simply be withheld to exclude all competition. Given Red Hat's firm belief that competition, not questionable patent and trade secret claims, drives innovation and creates greater consumer value, we were pleased with the overall decision and look forward to examining the decision in greater detail."