By Jennifer Lai
October 21, 2009

By Peter Gumbel

Microsoft’s titanic struggle with Europe’s trust busters appears to be finally drawing to a close — thanks in part to Windows 7, the new operating system the U.S. software giant is releasing worldwide this week.

The two sides have been at loggerheads for a decade over the European Union’s allegations that Microsoft has abused its dominant market position to push its own products such as Windows Media Player and the Internet Explorer web browser on consumers by bundling them with Windows — to the detriment of rival companies. It’s a battle Microsoft (MSFT) has fought vigorously, but largely lost; it has been dragged into European courts and hit three times with fines that, together, total well over $1.5 billion.

But as it has geared up to launch Windows 7, Microsoft has changed tune — and so have the Europeans. “There’s been a lot of progress in the past few months,” Jean-Philippe Courtois, the Paris-based president of Microsoft’s international operations, told Fortune. The atmosphere, he says, “is more serene.”

It’s a sign of the growing détente that Courtois himself, a 25-year Microsoft veteran, is currently serving as an official “ambassador” for a jamboree called the “Year of Creativity and Innovation” organized by the E.U.’s executive commission — the same body that has been taking Microsoft to task over its business practices. He will be sharing a podium in Brussels in early November with the commission’s president, José-Manuel Barroso, and the other 14 ambassadors. “We’re trying to be a partner with Europe,” Courtois says, pointing out that Microsoft spends about $600 million on research and development in Europe, and provides thousands of jobs in the region.

This is not just mood music. The deadlock between the two sides appeared to have loosened earlier this month when the E.U. welcomed new proposals by Microsoft to end the fighting. Responding to yet another formal E.U. objection to its practices, this time aimed at the way it bundles its web browser, Microsoft had proposed adding a pop-up screen to Windows 7 that would ask European consumers to pick a browser from a list of options that include Explorer. Under the proposal, which Microsoft had first made in July and then sweetened over the summer, the offer would last for five years, and would also include older versions of Windows, including Windows XP and Vista. Among other features, it would give consumers information about the different browsers and enable PC manufacturers to disable Internet Explorer if they so chose.

At the same time, Microsoft addressed another concern of the Europeans by proposing to improve the interoperability of its software — the way it interacts with products developed by other companies. This too was an improvement over an earlier offer made in July.

Europe’s antitrust commissioner, Neelie Kroes, reacted with uncharacteristic warmth. She announced that the E.U. would begin formal market testing of Microsoft’s proposed solution, and invited comments from consumers, software companies, and computer manufacturers. Kroes has also suggested the two sides might be close to burying the hatchet. “I have good grounds for thinking that we are moving towards a very satisfactory resolution of some serious competition problems in the computer software sector,” she told a news conference, “and more particularly web browsers and interoperability information.”

In reaction to those surprisingly upbeat comments, Microsoft’s general counsel Brad Smith, the man who has been waging the legal battle on behalf of the company, said the E.U.’s decision to begin market testing was “a significant step toward closing a decade-long chapter of competition law concerns in Europe.”

The emerging truce could still fall apart, of course; Microsoft still has lots of enemies in Europe, and some of them may use the market testing to air fresh grievances. But Microsoft clearly has no interest in continuing legal disputes that could cloud the launch of Windows 7. It expects that market testing of the new “browser ballot” will be completed by the end of this year.

Courtois has been coordinating the international roll-out of the new operating system, which is happening simultaneously with the U.S. The marketing blitz is already underway: Microsoft has even opened a temporary “Windows Café” on the boulevard Sebastopol in central Paris, where geeks and regular shoppers will be able to come and play with the new software over a cup of coffee. Courtois says he’s expecting a substantial bounce in business worldwide from Windows 7, not just in the U.S., as companies and individuals who spurned Vista, its bug-prone predecessor, finally update their systems.

The company doesn’t break out regional financial details, but about 60% of its business comes from outside the U.S. Europe accounts for a substantial proportion of that.

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