Microsoft and the European Commission agree on one thing: the Commission's remedy for restoring competition in the market for music and video playing software has failed.

Microsoft was ordered two years ago to create a second version of Windows that does not include its Media Player program. This version of the has been on sale for nearly a year, but none of the PC manufacturers have it on their machines, Microsoft told the Court of First Instance, Europe's second-highest court. This week the court is hearing the Microsoft's appeal of Europe's 2004 anti-trust ruling against Microsoft.

No demand for edition 'N'

The Commission's top lawyer, Per Hellstrom, said Monday this could be because the Commission didn't order Microsoft to sell the unbundled version of Windows, dubbed edition N, at a discount, and he hinted that the Commission may revise the remedy to include a price differential between the two versions.

"If Microsoft now sells these versions at the same price, the Commission will have to examine this new policy in the context of the present market conditions," he said.

Microsoft has argued that edition N's failure illustrates that the market doesn't want an unbundled version of Windows, while the Commission says its lack of appeal reflects the fact that the market for media players has already tipped in favour of Microsoft's own program.

Fearing that Europe's regulator might now force it to sell edition N at a discount, Microsoft spent much of the second day in court Tuesday dismissing such a move.

"It wouldn't have made sense asking for a price differential because media players are free," said Jean-Francois Bellis, the top lawyer arguing for Microsoft on the media player side of the case.

"The Commission knew what it expected from XP edition N," he said, adding that it would be "unbelievable" if the Commission now took a separate decision imposing a price differential.

"The Commission might now be entertaining the notion that Microsoft might have to bribe consumers to buy an inferior product," said Jonathan Zuck, president of the association for competitive technology, a trade group supporting Microsoft in the week-long hearing.

Ubiquitous market control

"The Commission's ruling two years ago was an excellent first step, but as a second step it needs to set a price differential between the two versions of Windows," said Erik Simon, an executive working for software firm Video Banner, based in Los Angeles, who was in Luxembourg to assist the Commission in defending the 2004 ruling.

His firm builds video advertising and online voice-messaging services, that compete indirectly against Media Player.

"This is a big issue for small companies like us that are up against the bundled software programs that Microsoft offers with Windows," he said. "Venture capitalists are happy to invest in companies that compete with Microsoft but not ones that compete against bundled application's in its operating systems, like Media Player."

"In their view, the universal distribution that comes with being bundled into Windows always assures victory for Microsoft. Our company is not doing too well because of this," Simon said.

On Wednesday the court of first instance turns its attention to the second strand in the Commission's ruling against Microsoft. The 2004 ruling ordered the company to reveal details about Microsoft to rival makers of server software, in order to allow them to build server programs that work as smoothly with Windows as Microsoft's own server software.

Microsoft is expected to argue that this order breaches its intellectual property rights.