Late last week, Microsoft announced something that virtually no one--myself included--saw coming. Rather than continue with its previous approach to dealing with antitrust regulators from the EU--an approach that, frankly, was the technical equivalent of a middle finger lofted in the direction of Brussels--Microsoft said that it would simply accede to the EU's demands. (Demands that, incidentally, originated with browser also-ran Opera.) It will allow Windows 7-using customers in the EU to choose between competing web browsers via a so-called ballot screen. Their previous approach, the Windows 7 E Editions (see my preview), which simply removed Internet Explorer from Windows 7 all together, was apparently not radical enough. Not for Opera. And not for the EU.

What the...?

Microsoft's concession has been compared, ad naseum, to requiring Coke to bundle a bottle of Pepsi in every six pack. And it's easy to see why such a comparison resonates with virtually everyone who reads it. There's just one problem: that comparison is completely bogus. Coke never had the kind of monopoly that Microsoft now enjoys.

Microsoft, of course, dominates the traditional PC space in ways that are somewhat amazing. Even within the context of the current economic downturn, Microsoft is pretty much printing money. Its Windows OSes are on about 95 percent of all PCs worldwide--sorry, Apple--and its dominant Office suite is used by over 500 million people every single day, despite free competition from Google, OpenOffice, and others.

Worldwide web browser usage share, May 2009
IE currently dominates the web browser market, with 66.5 percent usage share. Meanwhile, the company dictating the terms of Microsoft's capitulation, Opera, controls just .72 percent of the market. Source: Net Applications

In other more forward-leaning markets--like the emerging market for cloud computing services--Microsoft, of course, has no guarantees. The software giant has taken a decidedly old school approach to cloud computing by taking its existing software products and pushing them online, usually with a subscription fee attached. (But not always: Office Web Applications, notably, will be free.) Some, myself included, argue that Microsoft in many ways doesn't "get" cloud computing because it is hobbled by the software delivery and licensing models of its past successes. But that has little if anything do with the antitrust action it's facing in the EU.

Microsoft faces three antitrust investigations in the EU, and if I'm reading the tea leaves correctly, this past week's revelation may completely address one of them. First, it's being accused of harming web browser competitors by bundling IE with Windows. Second, it's being accused of usurping open document formats in its Office suite. And third, its being investigated for too closely tying Windows and Windows Server together.

Microsoft is actually addressing those other two charges in ways that I think are effective. But its decision to cave in the face of unreasonable EU demands--first suggestd by Opera--in the IE/Windows investigation is unprecedented. If you've ever wondered what deep government oversight of a software product we used all day every day would look like, look no further than the new version of Windows 7 that EU customers will get in the months ahead. It's a software product where viable (Read: Firefox) and unviable (Read: Opera) competitors alike are given a leg up on other software created by the maker of that product. It is Bizarro World.

\[ It's even worse than I thought: Microsoft is also making this change to Windows XP and Vista! \]

Fortunately, Microsoft will not hobble the rest of the world with this stupidity. (Though Opera, naturally, is now asking for that as well.) And of course, enterprises and other managed environments can continue to control which software is installed on their networks, using familiar, next-generation versions of the tools they already use today. But it's clear now that Microsoft's software development methodology can be undermined by any government powerful enough to call the company's bluff. This has enormous implications for the future, especially in totalitarian regimes like China.

I've always been amazed at the ways in which Microsoft stands up to and, alternatively, pushes back against various legal actions against it. This is one case in which the software giant should have stuck to its guns. It's one thing to accede to anti-bundling demands when a dominant, monopoly product is involved. But allowing any government to convince it to bundle competing products is not tenable. It sets a bad precedent, both for the computer industry and beyond.

An edited version of this article appeared in the July 29, 2009 issue of Windows IT Pro UPDATE. --Paul