By Peter Gumbel

Microsoft's titanic struggle with Europe's trust busters appears to be finally drawing to a close — thanks in part to Windows 7, the new operating system the U.S. software giant is releasing worldwide this week.

The two sides have been at loggerheads for a decade over the European Union's allegations that Microsoft has abused its dominant market position to push its own products such as Windows Media Player and the Internet Explorer web browser on consumers by bundling them with Windows — to the detriment of rival companies. It's a battle Microsoft (MSFT) has fought vigorously, but largely lost; it has been dragged into European courts and hit three times with fines that, together, total well over $1.5 billion.

But as it has geared up to launch Windows 7, Microsoft has changed tune — and so have the Europeans. "There's been a lot of progress in the past few months," Jean-Philippe Courtois, the Paris-based president of Microsoft's international operations, told Fortune. The atmosphere, he says, "is more serene."

It's a sign of the growing détente that Courtois himself, a 25-year Microsoft veteran, is currently serving as an official "ambassador" for a jamboree called the "Year of Creativity and Innovation" organized by the E.U.'s executive commission — the same body that has been taking Microsoft to task over its business practices. He will be sharing a podium in Brussels in early November with the commission's president, José-Manuel Barroso, and the other 14 ambassadors. "We're trying to be a partner with Europe," Courtois says, pointing out that Microsoft spends about $600 million on research and development in Europe, and provides thousands of jobs in the region.

This is not just mood music. The deadlock between the two sides appeared to have loosened earlier this month when the E.U. welcomed new proposals by Microsoft to end the fighting. Responding to yet another formal E.U. objection to its practices, this time aimed at the way it bundles its web browser, Microsoft had proposed adding a pop-up screen to Windows 7 that would ask European consumers to pick a browser from a list of options that include Explorer. Under the proposal, which Microsoft had first made in July and then sweetened over the summer, the offer would last for five years, and would also include older versions of Windows, including Windows XP and Vista. Among other features, it would give consumers information about the different browsers and enable PC manufacturers to disable Internet Explorer if they so chose.

At the same time, Microsoft addressed another concern of the Europeans by proposing to improve the interoperability of its software — the way it interacts with products developed by other companies. This too was an improvement over an earlier offer made in July.

Europe's antitrust commissioner, Neelie Kroes, reacted with uncharacteristic warmth. She announced that the E.U. would begin formal market testing of Microsoft's proposed solution, and invited comments from consumers, software companies, and computer manufacturers. Kroes has also suggested the two sides might be close to burying the hatchet. "I have good grounds for thinking that we are moving towards a very satisfactory resolution of some serious competition problems in the computer software sector," she told a news conference, "and more particularly web browsers and interoperability information."

In reaction to those surprisingly upbeat comments, Microsoft's general counsel Brad Smith, the man who has been waging the legal battle on behalf of the company, said the E.U.'s decision to begin market testing was "a significant step toward closing a decade-long chapter of competition law concerns in Europe."

The emerging truce could still fall apart, of course; Microsoft still has lots of enemies in Europe, and some of them may use the market testing to air fresh grievances. But Microsoft clearly has no interest in continuing legal disputes that could cloud the launch of Windows 7. It expects that market testing of the new "browser ballot" will be completed by the end of this year.

Courtois has been coordinating the international roll-out of the new operating system, which is happening simultaneously with the U.S. The marketing blitz is already underway: Microsoft has even opened a temporary "Windows Café" on the boulevard Sebastopol in central Paris, where geeks and regular shoppers will be able to come and play with the new software over a cup of coffee. Courtois says he's expecting a substantial bounce in business worldwide from Windows 7, not just in the U.S., as companies and individuals who spurned Vista, its bug-prone predecessor, finally update their systems.

The company doesn't break out regional financial details, but about 60% of its business comes from outside the U.S. Europe accounts for a substantial proportion of that.

Jon Rubinstein. Photo: Palm, Inc.

"We must do whatever we can to stop this."

That's how Apple (AAPL) CEO Steve Jobs is reported to have asked then Palm (PALM) CEO Ed Colligan to enter into a possibly illegal agreement to stop trying to hire away each others' top engineering talent.

If accurate, it may be one of the most stilted attempts to collude ever recorded.

Colligan's answer, according to Bloomberg's Connie Guglielmo, who says she has reviewed the two-year-old communications:

"Your proposal that we agree that neither company will hire the other’s employees, regardless of the individual’s desires, is not only wrong, it is likely illegal."

Is this really how conspirators talk?

Apparently so in Silicon Valley, where hiring practices long overlooked have come under increased scrutiny by the Obama administration.

In June the New York Times reported that the U.S. Department of Justice had begun an antitrust investigation into whether Apple and Google (GOOG) had a written agreement not to go fishing in each others' talent pool — a deal that could be considered a collusive restraint on trade.

Google's anti-poaching smoking gun

Such an agreement between Apple and Palm could be even more problematic, since at the time the two were gearing up to compete head on in the smartphone market. In his Aug. 2007 communication, Colligan claimed that Apple had hired away 2% of Palm's workforce to help develop the iPhone.

Palm, meanwhile, had hired Jon Rubinstein, the former Apple engineering VP who headed the team that built the original iPod. Rubinstein, in turn, had begun recruiting Apple engineers and marketing experts to work on the Palm Pre.

That's what Jobs was allegedly trying to stop.

Apple vs. Palm: Geeks with grudges

According to Bloomberg, the exact details of what Jobs proposed to Colligan aren’t known; Jobs didn’t mention a proposal in the communications reviewed by Guglielmo. He did say that Apple had a lot of patents and more money than Palm if the companies ended up in a legal battle.

According to Bloomberg, the Justice Department may investigate the exchange between the companies even though Palm rejected Apple’s proposal.  “If I were at DOJ, I would definitely be interested,” Daniel Rubinfeld, a former deputy assistant attorney general for antitrust, told Guglielmo.

Apple has declined to comment. And Jobs, according to Guglielmo, has not returned her e-mail.

Back in June, before the ties that bound the two companies unraveled and Google's (GOOG) Eric Schmidt resigned from Apple's (AAPL) board of directors, the New York Times reported that the U.S. Department of Justice had begun an antitrust investigation into the two companies' hiring practices.

The issue was whether Apple and Google had made an anti-poaching deal — an agreement not to go fishing each others' talent pool — that could be considered a collusive restraint on trade.

The Times had obtained an e-mail from a Google recruiter that was very suggestive. It asked one job candidate to reach out to another potential candidate.

"It is a bit touchy since he works for Apple,” the recruiter wrote, adding that Google had “a nonsolicit agreement with them.”

But the authenticity of the e-mail could not be verified and the recruiter, who has since left Google, said she didn't recall sending it.

Now we have what looks like a smoking gun.

It comes from TechCrunch's MG Siegler, who published an item Friday speculating that any deal they had may be off now that Schmidt has left the board.

After Siegler posted the piece, a source forwarded him the following e-mail, which Siegler has stripped of identifying details:

From: XXXXX XXXXX <XXXXX@google.com>
Date: XXXXXXX XX, 2008 X:XX:XX AM PDT
Subject: Re: Google Opportunities- Follow up email…

Thanks for getting back to me.  I don’t believe that we have been in
contact previously – apologies if I am wrong about this.

From your reference to the [APPLE DIVISION], I take it that you are
currently working there.  If this is the case, we will not be able to
proceed with your application.  Google has an agreement with Apple
that we will not cold call their staff.  If you are not currently
working at Apple and are interested in learning more about [A GOOGLE DIVISION]
please let me know and I would be happy to chat with you.

Thank you again for returning my email.

The e-mail not only states explicitly that Apple and Google had such an arrangement, but it spells out the rules: an Apple employee could call Google looking for employment, but Google couldn't initiate the call.

According to Gary Reback, a lawyer who helped persuade the Justice Department to pursue its 1998 antitrust case against Microsoft (MSFT), companies are generally free to choose not to recruit from their business partners. But a written agreement between two firms to steer clear of each others’ employees could raise questions.

“It is not the off-limits part that I suspect they are looking into,” Mr. Reback told the Times back in June. “I suspect they think there is a quid pro quo of some kind. Antitrust counselors would advise clients not to do this kind of thing.”

See also:

• Why Google’s CEO had to leave Apple’s board
• The FCC is asking Apple and AT&T all the right questions
• Antitrust inquiry: How Apple and Google compete

The U.S. government agencies in charge of policing antitrust violations — long dormant under the Bush administration and newly revitalized under Barack Obama's — seem to be circling closer to Cupertino.

According to a report Monday in the Wall Street Journal's online edition, the Department of Justice has begun an initial review of the U.S. telecommunications industry to determine whether the two dominant players — AT&T (T) and Verizon (VZ), which together control 90 million U.S. landlines and 60% of the country's 270 million wireless subscribers — are abusing the market power they have amassed in recent years.

Although not a primary target of the probe, Apple (AAPL) could get ensnared in it, according to the Journal's report.

"Among the areas the Justice Department could explore," writes the WSJ's Amol Sharma, "is whether wireless carriers are hurting smaller competitors by locking up popular phones through exclusive agreements with handset makers, according to [people familiar with the matter.] In recent weeks lawmakers and regulators have raised questions about deals such as AT&T's exclusive right to provide service for Apple Inc.'s popular iPhone in the U.S."

The same sources suggest that the DOJ could also review whether telecom carriers are unduly restricting the types of services other companies can offer on their network. The features provided by the iPhone's 50,000 apps are a key competitive advantage over its rivals.

"Antitrust problems with telecom consolidation have been evident for a while — it's not just wireless," says Gary Reback, an antitrust attorney at Carr & Ferrell in Palo Alto, Calif., and author of the famous "white paper" that laid out the antitrust case against Microsoft (MSFT) in the 1990s.  "There has been a lot of public opposition to the consolidation, but the Bush Administration just shrugged it off."

This is the second time this spring that Apple's name has come up in a federal antitrust probe. In May the New York Times reported that the Federal Trade Commission had begun an inquiry into whether the ties between the boards of directors at Apple and Google (GOOG) could violate antitrust laws.

The companies share two directors — Eric E. Schmidt, chief executive of Google, and Arthur Levinson, former chief executive of Genentech.

Apple has also caught the eye of the Securities and Exchange Commission, which investigated — and ultimately exonerated — Steve Jobs for his role in the options backdating case. The SEC is also reported to be looking into whether Apple was sufficiently forthcoming earlier this year about the severity of Jobs' health problems.

Asked for comment on the report of a DOJ probe, an AT&T spokesman wrote:

"We are not aware of any formal investigation by the Department of Justice, nor have they asked us to provide any information. The U.S. wireless industry is highly competitive and, as a result, delivers terrific innovation, many choices and attractive pricing for all customer segments."

Given the looming presence of Microsoft (MSFT) on the PC desktop, we tend to think of Apple (AAPL) and Google (GOOG) as corporate best friends united by a common enemy.

But the news Monday night that the U.S. government has opened an inquiry into the two companies' "interlocking directorates" under the Clayton Antitrust Act has prompted a fresh look at the extent to which Apple and Google are, in fact, competitors.

We assume, by the way, that the red flag that caught the attention of the Federal Trade Commission is Google CEO Eric Schmidt's seat on Apple's board, since the only other overlap is Arthur Levinson, former chief executive of Genentech (DNA), a gene-splicing company.

Schmidt is known to recuse himself from Apple board meetings when the iPhone is discussed. That makes sense. It wouldn't be fair for Google's team Android to get inside information about Apple's plans for future mobile devices.

But does Schmidt leave the room when Safari comes up? Or iTunes? Or MobileMe?

When you start to look at the hundreds of software products Apple and Google make — especially on the Web — things quickly get pretty complicated. Here's a partial list of the areas in which we know Apple and Google compete:

• Smartphone operating systems: iPhone vs. Android
• Web browsers: Safari vs. Chrome
• Music and video: iTunes vs. YouTube
• Cloud computing: MobileMe vs. iGoogle
• e-mail services: Mail vs. Gmail
• Address lists: Address Book vs. Contacts
• Calendars: iCal vs. Google Calendar
• Chat: iChat vs. Google Talk
• Photos: iPhoto vs. Picasa
• File storage: iDisk vs. Google Docs

There could be many more. If you spot any we've missed, put them in the comment stream and we'll add them here.

By the way, according to the New York Times, which broke this story, interlocking directorates rarely lead to major confrontations between companies and the government. It's easier just to ask the director or directors in question to resign from one board or the other.

Arthur Levinson's seats are probably safe.

In a case rich in irony, an antitrust suit has been filed against Apple (AAPL) accusing the company of illegally maintaining a monopoly in the digital music market by failing to support Microsoft's (MSFT) Windows Media Audio format.

The suit was filed Dec. 31 in San Jose and brought to light Thursday afternoon by InformationWeek. The plaintiff is Stacie Somers, a San Diego-based attorney represented in this case by a gaggle of class-action specialists: Craig Briskin and Steven Skalet of Mehri & Skalet, Alreen Haeggquist of Haeggquist Law Group, and Helen Zeldes. See filing here (subscription required).

Microsoft, of course, is the company usually associated with charges of antitrust behavior, most famously for tying Windows to Internet Explorer in United States v. Microsoft. Apple was named in that case, along with Netscape and Java, as one of the threats to its monopoly that Microsoft tried to crush.

But now the New Balance 991s are on the other foot, according to Somers' lawsuit, which quotes Steve Jobs as bragging that Apple's iTunes store is now "the Microsoft of music stores."

According to the complaint, Apple controls 75 percent of the online video market, 83 percent of the online music market, more than 90 percent of the hard-drive based music player market, and 70 percent of the Flash-based music player market.

Yet among the major digital music vendors, Apple is alone in not supporting Windows Media Audio. The suit estimates that Apple could license WMA from Microsoft for less than $1 million — or about 3 cents for each iPod sold in 2005.

According to InformationWeek:

… the complaint goes beyond software licensing politics and charges Apple with deliberately designing its iPod hardware to be incompatible with WMA. One of the third-party components in iPods, the Portal Player System-On-A-Chip, supports WMA, according to the complaint. "Apple, however, deliberately designed the iPod's software so that it would only play a single protected digital format, Apple's FairPlay-modified AAC format," the complaint states. "Deliberately disabling a desirable feature of a computer product is known as 'crippling' a product, and software that does this is known as 'crippleware.' " (link)

Apple has faced other antitrust charges over its dominant position in digital music. See for example here. Most of these cases, however, complain that Apple maintains its grip by tying the iPod to the iTunes store. This is the first time Apple has been charged with trying to muscle Microsoft out of the market.

Apple, as usual, is declining to comment on pending litigation.