Europe hits Microsoft with $730M fine over browser choice ‘error’

This story was updated at 4.55am PT with a quote from Microsoft.

Well whaddya know. When you’ve been the subject of a lengthy antitrust investigation and you settle with the authorities by promising to clean up your act, then “accidentally” go back to doing what you were doing in the first place and you get caught, you might find yourself in expensive trouble.

That’s what happened with Microsoft(s msft) and its bundling of Internet Explorer (IE) with Windows in Europe, and now we see the result: a €561 million ($732 million) fine, handed down on Wednesday by Competition Commissioner Joaquin Almunia.

That’s a lot of money. What happened?

Last decade, Opera complained to the European Commission about the fact that Microsoft bundled IE with Windows, to the detriment of third-party rivals such as Opera, Mozilla Firefox, Apple(s aapl) Safari and Google(s goog) Chrome. The resulting antitrust case was dropped in 2009 when Microsoft promised to introduce a browser choice or “browser ballot” screen, so when users fire up a copy of Windows for the first time and open IE, it will ask them which of the various browsers on the market they’d like to go with.

CEO Steve BallmerAs part of the deal, Microsoft agreed to submit an annual compliance report to the European Commission. For a couple years, everything went according to plan, right up until Microsoft’s December 2011 compliance report, which assured Almunia’s office that everything was hunky-dory. Only it wasn’t: the browser choice screen (BCS) had somehow been left out of Windows 7 Service Pack 1, which came out in February 2011, and Microsoft’s report was false.

When the Commission found out in mid-2012 and opened a fresh investigation into Microsoft and its bundled browser, the company immediately confessed, blaming the BCS’s omission on a “technical error” that somehow went unnoticed for more than a year. Microsoft said it had pushed out the BCS software to the 15 million affected users as soon as it realized its error, but Almunia nonetheless put the company on notice that it could face a fine of up to 10 percent of its global annual turnover: around $7 billion.

So it could have been much worse. Why not the full amount?

According to Almunia, “such a breach is of course very serious, irrespective of when it was intentional or not, and it calls for sanctions”.

However, he said on Wednesday that he set the figure at the level he did — around one percent of turnover — because “once the breach was discovered Microsoft cooperated with us and provided information which helped the investigation”.

And that’s why this isn’t even a record for Microsoft in terms of EU antitrust fines.

Incidentally, Microsoft says it won’t appeal this time round:

“We take full responsibility for the technical error that caused this problem and have apologized for it. We provided the Commission with a complete and candid assessment of the situation, and we have taken steps to strengthen our software development and other processes to help avoid this mistake — or anything similar — in the future.”

Could Microsoft be in a similar situation again?

Tough question. The reason the European Commission came down so hard on Microsoft in the first place was that Windows was so utterly dominant in personal computing -– it really mattered if IE was bundled and the ordinary user may have been left unaware than rivals existed.

Browser ballotWe can see the results for ourselves. Chrome is now the world’s leading web browser, ahead of IE and Firefox (which also benefited greatly from the decision). And if you play around with IE10, the most recent version, you will see an iteration of the browser that reflects Microsoft’s need to keep up with those rivals: the company was forced to be competitive, which is surely one of the key points of antitrust law.

However, times change. While Windows still dominates the personal computing market by installed base, the PC sector – by which I mean the hardware, distinct from the concept of personal computing – is unarguably in decline as the world shifts to mobile. So, while in the 2000s Microsoft was the titan stomping all over OS X and Linux (by market share), today we find Windows 8 battling it out against iOS and Android across several hardware form factors.

This matters because the core concept of competition law is what is known as “significant market power” – the European Commission felt it had to crack down on Microsoft because it had such power in the established personal computing market. Now it’s losing its grip on that power, and quickly.

We are unlikely to see antitrust regulators crack down on Microsoft, or indeed Apple or Google, in the same way again – at least the way the market is shaping up now.

Windows 8 is still an unknown quantity. Someone out there may want to complain that the iPad comes with Safari preinstalled and doesn’t prompt the user to install Chrome or Opera, but, while the iPad is the dominant tablet, it isn’t so dominant that it requires that kind of regulatory intervention. Also, the tablet market is in itself immature, so early regulation could be seen as distorting the market rather than protecting the consumer.