Microsoft Corp said it would be forced to offer European consumers a substandard version of Windows if the European Union makes it re-write its operating system, sources close to the case said on Thursday.

Microsoft issued the warning to EU regulators, they said, during a three-day closed-door hearing to consider charges the software giant abused the power that Windows gives it over the personal computer market.

The European Commission has proposed forcing Microsoft to remove its Media Player software from the Windows operating system and imposing a hefty fine, as part of a remedy for allegedly muscling competitors out of the market.

After the company finished its presentation at the hearing, Microsoft General Counsel Brad Smith told reporters he hoped for a settlement in the case.

"We have come to Brussels not only to discuss the issues, but to work things out,'' Smith said. He added the company would "explore every possible way to come to solutions to the (European Commission's) questions and concerns.''

The Commission wants computer makers, rather than Microsoft, to choose which software to install for capturing Web-streaming audio and video on their personal computers.

But from Microsoft's presentatation at the hearing, both orally and through a videotaped presentation, it was clear the company ruled out removing Media Player from Windows as part of any settlement, the sources familiar with the case said.

Arguing semantics
The Commission said Windows Media Player's market share had jumped since Microsoft began putting an improved version in Windows in 1999, helping it grow at a much faster pace than rival RealNetworks' RealPlayer.

The Commission, relying on its own corporate survey, argued that once Microsoft's Media Player is on every desktop, companies will no longer spend the extra money to offer data that can also run on rival media players, in particular RealPlayer and Apple Computer's Quicktime.

Microsoft dismissed the Commission's survey as anecdotal and not statistically valid, adding that companies could afford the cost of offering more than one format.

The two sides also locked horns over how to define Media Player.

The Commission calls it a product but Microsoft considers it one function of Windows -- re-enacting an argument in the software titan's battle with the U.S. Department of Justice in the late 1990s over its Web browser, Internet Explorer.

A judge ordered Microsoft to remove Internet Explorer and Microsoft responded by offering a broken version of Windows.

Later, experts hired by the Justice Department testified that Microsoft had chosen to write its software so that other functions would not work if the Web browser were removed. They added Microsoft could choose to write the software any way it wanted.

Microsoft's presentation on Thursday was to be followed by a rival-funded trade group, the Computer and Communications Industry Association, as well as competitor Novell and others.

"We believe there is a strong case that Microsoft violated competition law in the European Union and grew to the detriment of consumers and innovation,'' said Ed Black, president of the CCIA, told reporters before Thursday's session started.

An EU ruling is expected by June, 2004, after which the case could go to court.

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