Adobe has been in discussions with Microsoft for the past four months over alleged tying and predatory pricing concerns that Adobe has regarding Microsoft XML Paper Specification (XPS) and "Save to PDF" technologies that Microsoft was planning to integrate into Windows Vista and Office 2007, said David Heiner, vice president and deputy general counsel in Microsoft's legal department.

When asked whether Microsoft is expecting Adobe to launch an antitrust suit against the company or simply go to U.S. or European Union regulators with their concerns, Heiner said "they (Adobe) are threatening legal action," but would offer no further specifics.

Adobe is looking to make a case that Microsoft is violating tying and predatory-pricing regulations with XPS and Save to PDF, Heiner said.

Adobe is claiming that PDF export technology constitutes a separate product and that Microsoft is tying both Save to PDF and Save to XPS to Vista and Office 2007 and is making them available for free, thus undercutting Adobe's ability to charge for these kinds of plug-ins.

"I couldn't say, legally, how this would play out," said Directions on Microsoft analyst Robert Helm. "In the U.S., Adobe would need to show that Microsoft is leveraging a monopoly in one market to monopolize a second market. They will have to convince a judge that the second market exists, and that it might be possible to monopolize it. The U.S. Department of Justice was never able to pull that off. The European Commission is a different matter altogether."

Adobe first raised its concerns about XPS and Save to PDF via a letter sent by Adobe CEO Bruce Chizen to Microsoft CEO Steve Ballmer in February, according to sources close to Microsoft.

As a result of its ensuing discussions, Microsoft has agreed to remove from Office 2007 the Save as PDF functionality it had been touting since last fall. While Save as PDF is part of Office 2007 Beta 2, which Microsoft began distributing to thousands of testers the week of May 22, at the behest of Adobe, it will not be part of future releases, Heiner confirmed. Instead, Microsoft will make that feature a separate, free, downloadable plug in.

Microsoft is not cutting out of Vista XPS – the technology code-named "Metro" that many consider to be an alternative to PDF and Postscript, -- Heiner said. Nor is Microsoft removing the "Save as XPS" capability from Office 2007, he said.

Microsoft has offered Adobe the opportunity to have its Acrobat PDF reader bundled into Vista, Heiner said. Microsoft also has extended to Adobe an offer to include in Windows Vista their own "Save as PDF" plug-in. Adobe is still considering the PDF reader integration, but is not interested in the Save as PDF deal, Heiner said.

"We wanted to address every concern they have. We want them to be a happy ISV (independent software vendor)," Heiner said.

Adobe officials declined to offer as many details on the company's negotiations with Microsoft.

"Microsoft is an extremely important partner -- we are one of the largest commercial developers of Windows software outside of Microsoft and we share millions of customers around the world," said an Adobe corporate spokeswoman. "That said, as our CEO Bruce Chizen has stated publicly numerous times in the past, Microsoft has a monopoly and we are always concerned about the possibility that they might abuse that monopoly.

"We've discussed our concerns openly both with Microsoft as well as with a number of regulatory agencies around the world. We decline to comment on the substance of any of our discussions with Microsoft," the spokeswoman added.

Read the full story on Microsoft-Watch.com: Microsoft to Adobe: Let's Make a Deal

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