The European Commission has launched an in-depth investigation of Microsoft and Time Warner's plans to take over US digital rights management (DRM) company ContentGuard.

The transaction might create or strengthen a dominant position by Microsoft in the digital rights management market, the Commission said. As part of the investigation the Commission will also investigate further competitive concerns related to the vertical integration of Microsoft in other markets, it said.

Microsoft had no comment on the decision early Wednesday. Time Warner, based in New York, was not immediately available to comment.

In April, Microsoft announced that it was increasing its investment in ContentGuard, while Time Warner said that it was adding a new cash injection. Together the companies purchased substantially all the ownership previously held by ContentGuard's original technology provider Xerox. The value of their investments has not been disclosed.

They sought clearance for the deal from Europe in July, when the Commission opened a first-phase investigation. The in-depth second phase investigation could take up to four months, the Commission said.

Business behemoths battle for artists?

Both Microsoft and Time Warner are keen to invest in DRM, which is used to protect digital content against illegal uses. Concerns have been raised, however, that Microsoft and Time Warner could wield their combined power in the software and media markets, respectively, to dominate the DRM market.

The in-depth probe will evaluate whether the ContentGuard deal will put Microsoft's rivals in the DRM market at a disadvantage or whether the joint acquisition will slow development of open interoperability standards, the Commission said Wednesday.

Such outcomes could tip the DRM market toward the current leading provider, Microsoft, the Commission said.

Free market

The ContentGuard probe follows the EU's scrutiny of Microsoft's dominance in the PC operating systems market. The Commission wrapped up its five-year investigation into the software maker earlier this year when it levied a fine of €497.2 million, or around $600 million, and ordered Microsoft to offer a version of its Windows operating system without the Windows Media Player software for abusing its dominance in the market. Microsoft has appealed the decision.

The worldwide DRM market is expected to grow quickly over the next few years, generating revenue of around $563 million by 2007, according to IDC. Furthermore, the researcher predicted that over 70 per cent of DRM revenue in 2007 would be derived from the Windows operating environment.