The European Commission has given Microsoft two weeks to come up with better licensing terms for its workgroup server protocols or face the possibility of financial penalties of about $5m (£3.3m) a day.
The Commission said last week that it was not satisfied with the terms Microsoft proposed for allowing programmers to license protocols that allow them to develop products that interoperate well with Windows.
If Microsoft fails to come up with more acceptable terms by the end of the two-week period the Commission will consider further steps, including the possibility of fining Microsoft 5 percent of its worldwide daily sales, equal to about $5m, each day until it comes into compliance.
Dirk Delmartino, a spokesman for Microsoft Europe, said the company would comply with the Commission's ruling and continue to work constructively with it to resolve its concerns.
The Commission's threat follows criticism of the terms proposed by Microsoft to comply with the ruling by European regulators that the company had abused its dominant position in the PC operating system market to gain an unfair advantage in related product areas.
Following concerns that competitors may be unfairly shut out of the workgroup server market, Microsoft was ordered to make its communications protocols available under "fair and non-discriminatory" licensing terms.
The Free Software Foundation Europe (FSFE) criticized the terms proposed by Microsoft's and asked the Commission to impose fines on the company if it fails to amend its offer.
The FSFE argued that aspects of its licensing terms discriminate against open source developers. For example, Microsoft is proposing a per server license arrangement, and the FSFE says that the way open source products are distributed makes it impossible to say how many servers would be using Microsoft's protocols. Open source developers have also protested conditions Microsoft is imposing on viewing the protocols, including offering access to them for a limited time and to a limited number of persons.
In a statement Monday, the FSFE said it would continue to do what it could to ensure that Microsoft complied with the EU ruling fairly.
"(Microsoft) should come into compliance or compensate for the damage they cause. Given their behaviour during the past years and their extraordinarily deep pockets, to which Europe contributed no little amount, 5 percent seems indeed adequate," Georg Greve, FSFE's president, said in the statement.
In its ruling in March 2004, the Commission also ordered Microsoft to offer a version of Windows without its own Windows Media Player. Microsoft has prepared a version of the unbundled product but has not yet received the all clear from the Commission on what to call this new version. The company suggested "Windows XP B" or "N" after it was told by the Commission that calling it "Windows Reduced Media Edition" was not acceptable.
The Commission has received input from computer retailers, manufacturers and makers of rival media players on the name, but has not yet indicated whether it finds Microsoft's latest suggestions acceptable.
As part of last year's ruling, the Commission also imposed its biggest ever fine of €497million (£345m) on the company.
Microsoft has appealed the Commission's ruling. The case is expected to be referred to the European Court of Justice in 2006, following internal legal procedures and could last two or three years beyond then.