The EU's antitrust authority said that "because the illegal behavior is still ongoing," it was also demanding changes in the way Microsoft operates in Europe, with the aim of improving competition globally. The sanctions go well beyond the 2001 U.S. antitrust settlement, but Microsoft promises to appeal.
"We'll seek legal review of this decision in the European courts," Microsoft general counsel Brad Smith told CBS radio affiliate KIRO-AM. "We are optimistic about our prospects there, and we are hoping that the courts will affirm that companies do have the ability to improve products and deliver better services for consumers."
The regulators gave Microsoft 90 days to offer European computer manufacturers a version of Windows without the company's digital media player, which lets computer users watch video and listen to music and is expected to gain importance as multimedia content becomes more pervasive.
"The commission is, in effect, requiring us to produce a second version of our software. It won't have all the features of Windows, yet they're requiring us to call it Windows," said Smith. "We don't want to take a step that would create confusion for users."
The European Commission also chastised Microsoft for trying to "shut competitors out of the market" in software for office servers, by hoarding code that would help competing programs work smoothly with Windows computers. Microsoft now has 120 days to provide rivals in the server market with such code.
EU Competition Commissioner Mario Monti said the ruling was "proportionate," noting that "dominant companies have a special responsibility to ensure that the way they do business doesn't prevent competition."
"We are simply ensuring that anyone who develops new software has a fair opportunity to compete in the marketplace," he told a news conference.
Monti said the EU could have imposed worldwide restrictions on Microsoft but limited the order to Europe in deference to regulators in the United States and other countries.
He said doing so "will not unduly undermine the effectiveness of the remedies," given the size of the European market. Microsoft, which had $32 billion in revenue last year, does about 30 percent of its business in Europe, according to Microsoft spokesman Tom Brookes in Brussels.
Microsoft executives said that while the decision is appealed to Europe's Court of First Instance, the company most likely will ask that much of the ruling — though not the fine — be stayed.
"If this case continues on the litigation path, we can all expect that it will last another four or five years. That's one of the reasons that we thought it would be better to reach a settlement last week," said Smith.
"We offered a settlement proposal that would have ensured that 300 million competing media players get distributed along with Windows each and every year, and that result would have taken effect immediately."
Settlement talks with Microsoft broke down last week over the EU's insistence that a deal also restrict which features could be added to future versions of Windows, such as an embedded search engine. The Commission is already investigating a complaint filed by competitors against the latest version, Windows XP.
Microsoft was also found guilty of monopolistic behavior in the U.S. case, which involved its Internet Explorer Web browser, but the EU order strikes deeper, at the heart of Microsoft's business strategy — regularly adding new features to Windows to help sell upgrades.
The Redmond, Wash.-based company argues such "bundling" benefits consumers. But rivals call it unfair competition, given that Windows runs more than 90 percent of personal computers worldwide.
The EU regulators were concerned that bundling "deters innovation and reduces consumer choice in any technologies which Microsoft could conceivably take an interest in and tie with Windows in the future."
The EU said it was concerned that a stranglehold on media players could let Microsoft dictate future standards for how digital music and video files are encoded, distributed and played.
Under the EU order, Microsoft can continue selling a version of Windows with its media player software installed, but it must refrain from making the stripped-down version less attractive or a poorer performer.
The ruling could boost rival makers of media software, led by RealNetworks Inc. and Apple Computer Inc.
Bob Kimball, RealNetworks' general counsel, said the EU decision "confirms the merit" of his company's private antitrust lawsuit against Microsoft.
The other half of the EU case involved low-end servers that tie desktop computers together in offices.
Silicon Valley-based Sun Microsystems Inc. complained to the EU in 1998 that Microsoft refused to provide details needed for Sun programs to "talk" to Windows computers as efficiently as Microsoft's own server software could.
The Commission said Microsoft's refusals to disclose server software code "were part of a broader strategy designed to shut competitors out of the market."
The ruling said Microsoft could get "reasonable remuneration" for disclosing its proprietary code, and added that the Windows source code itself would remain untouched.
The EU also said it would appoint a trustee to monitor Microsoft's compliance with the ruling, which might not be publicly released for weeks, as Microsoft has an opportunity to ask that business secrets be redacted. The EU described the decision in a three-page news release.
The fine, 497 million euros, surpassed the EU's 2001 penalty of 462 million euros against Hoffman-La Roche AG for acting in a cartel. The money would be redistributed to the EU member states.