How the EC's ruling will affect Longhorn

The decision, handed down by European Competition Commissioner Mario Monti on Wednesday, requires Microsoft to offer two versions of its Windows operating system: one with Media Player, the company's audio and video software; and one without it.

The ruling is intended to prevent Microsoft from shutting out rivals in the media software market, including RealNetworks and Apple Computer, by bundling its Media Player software with an operating system that is used on more than 90 percent of the world's PCs.

While analysts expect that the ruling will have minimal immediate impact, the decision may call into question new features that Microsoft plans to integrate into the next version of Windows, code-named Longhorn.

"That's exactly what they are worried about -- that precedent. They don't want to have to think about, 'Well can we improve Windows in this way, or will this trample a third party?'" said Matt Rosoff, an analyst at Directions on Microsoft.

The EU has sought to establish a general rule that governs how Microsoft uses Windows to deliver new technologies against competitors. Failure to agree on that common formula led, in part, to the dissolution of settlement talks last week, according to a Microsoft representative.

Microsoft, which famously argued in an earlier antitrust case that it had the right to bundle a "ham sandwich" or anything else into Windows, says it should be free to integrate new features as it sees fit and that those features benefit consumers and the industry at large.

If the EU ultimately forces Microsoft to reconfigure Windows, it could undermine that stance. "If -- following appeal -- Microsoft is required to unbundle components, Media Player in this case, it does set a few precedents. One, that Microsoft can be forced to deliver its operating system in a more granular fashion, and two, that it can in fact be done," said Steven O'Grady, an analyst at RedMonk.

Even if the EU's ruling is overturned on appeal, Microsoft won't completely be in the clear. "While Microsoft can and will appeal, its competitors will be ready to wield the preliminary findings against them at each and every opportunity," O'Grady said.

The software giant has made no secret that the next major version of Windows is expected to include new technology for home entertainment, Internet search, instant messaging, mobile technologies and other areas.

The Longhorn release of Windows builds on a strategy chief executive Steve Ballmer calls "integrated innovation," shaping virtually all Microsoft's product plans for the next several years. "We see and deliver unique customer value because of integration," Ballmer wrote in a corporate strategy memo last summer.

So just what effect will the ruling have on Longhorn?