Late last week, Microsoft announced something that virtually no one--myself included--saw coming. Rather than continue with its previous approach to dealing with antitrust regulators from the European Union (EU)--an approach that, frankly, was the technical equivalent of a middle finger lofted in the direction of Brussels--Microsoft said that it would simply accede to the EU's demands. It will allow Windows 7 customers in the EU to choose between competing web browsers via a so-called ballot screen. The company’s previous approach, the Windows 7 E Editions, which simply removed Internet Explorer from Windows 7, was apparently not radical enough.

What the...?

Microsoft's concession has been compared, ad nauseam, to requiring Coke to bundle a bottle of Pepsi in every six pack. And it's easy to see why such a comparison resonates with virtually everyone who reads it. There's just one problem: That comparison is completely bogus. Coke never had the kind of monopoly that Microsoft now enjoys.

Even within the context of the current economic downturn, Microsoft is pretty much printing money. Its Windows OSs are on about 95 percent of all PCs worldwide--sorry, Apple--and its dominant Office suite is used by over 500 million people every day, despite free products from Google, OpenOffice, and others.

In other more forward-leaning markets—such as cloud computing services--Microsoft, of course, has no guarantees. The software giant has taken a decidedly old-school approach to cloud computing by taking its existing software products and pushing them online, usually with a subscription fee attached. (But not always: Office Web Applications, notably, will be free.) Some, myself included, argue that Microsoft in many ways doesn't "get" cloud computing because it’s hobbled by the software delivery and licensing models of its past successes. But that has little if anything do with the antitrust action it's facing in the EU.

Microsoft faces three antitrust investigations in the EU, and if I'm reading the tea leaves correctly, this past week's revelation may completely address one of them. First, the EU is accusing it of harming web browser competitors by bundling IE with Windows. Second, the EU is accusing it of usurping open document formats in its Office suite. And third, the EU is investigating it for too closely tying Windows and Windows Server together.

Microsoft is actually addressing the second and third charges in ways that I think are effective. But its decision to cave in the face of unreasonable EU demands in the IE/Windows investigation is unprecedented. If you've ever wondered what deep government oversight of a software product we used all day every day would look like, look no further than the new version of Windows 7 that EU customers will get in the months ahead. It's a software product where viable and unviable competitors alike are given a leg up on other software created by the maker of that product. It is Bizarro World.

Fortunately, Microsoft won’t hobble the rest of the world with this stupidity. And of course, enterprises and other managed environments can continue to control which software is installed on their networks by using familiar, next-generation versions of the tools they already use today. But it's clear now that Microsoft's software development methodology can be undermined by any government powerful enough to call the company's bluff. This has enormous implications for the future, especially in countries with totalitarian regimes, such as China.

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