In an unfortunate turn of events, Adobe (Nasdaq: ADBE) has threatened an antitrust lawsuit against Microsoft (Nasdaq: MSFT) in Europe. That two American companies may have their fate decided by European bureaucrats is bad enough, but the underlying assumptions make it even worse.

The dispute centers on two issues. First, Microsoft announced that it was adding a "save as PDF" option to its Office 2007 offering, but Adobe doesn't want that to happen. If Microsoft does offer the functionality, Adobe has demanded that it be a separate download for which Microsoft charges its customers.

A Sticky Position
Adobe's insistence that Microsoft inconvenience and gouge its customers is odd given that PDF is billed as an "open standard" and, according to Adobe's own Web site, 1,800 vendors including Apple (Nasdaq: AAPL) and Sun Microsystems (Nasdaq: SUNW) offer the PDF functionality at no cost. One could view Adobe's actions in this case as a plan to force Microsoft into acting like a monopolist that is unresponsive and expensive. That's a sticky position for Adobe if it plans to argue that Microsoft is a monopoly.

Second, Microsoft created a new fixed-format document technology called XPS that can work on any computing platform and be licensed for no charge. Adobe, probably feeling that XPS was competition for its near-monopolistic PDF document standard, demanded that Microsoft remove support for XPS from Office 2007 and operating system Windows Vista. Oh yes, and Adobe wanted Microsoft to charge for that new functionality as well.

What is going on when one company seriously demands that its competitor raise prices and inconvenience customers? The answer is bad policies that tempt competitors to intrude government choices in the place of consumer choices. It is truly incredible to see how previous bad government decisions have distorted executive outlooks so that it's now possible to argue that offering consumers more innovation at a good price is a crime.

Of course, most Americans will scoff at Adobe's demands, which is precisely why Adobe is looking to Europe. As anyone who has been watching the European Commission's (EC) implementation of "competition policy" knows, the EC likes getting involved to help companies sock it to stronger competitors. The problem is, this also hurts consumers and economic growth in the long run. That leaves the question of exactly how strong Microsoft is, anyway.

Fair Competition
One of the reasons Microsoft doesn't act like a monopolist is that it isn't. While the company holds significant market power, Microsoft still faces serious competition on a number of fronts.

The most recent threat is from Google (Nasdaq: GOOG) , which just released a free Web-based word processor and spreadsheet to compete with Microsoft's Word and Excel.

"Microsoft's market power comes from their installed base, and that's where they could be vulnerable through their own mistakes and the competitive pressure from Google," said Michael Kim, partner at Rustic Canyon Partners. He's right, and the fact that Microsoft has traditionally done so well on the desktop rather than on the Web may pose problems for the company.

"It might be hard for Microsoft to change because, as with most big companies, there's incentives to keep pumping money into the well-established products which also continually need to be backwards-compatible," said Aydin Senkut, president of Felicis Ventures.

Clearly, Silicon Valley leaders don't expect Microsoft to rule the consumer desktop forever. That is one more sign that regulators should back off and let the marketplace find the best solutions to computing issues.

Don't Litigate, Innovate
Beating up on Microsoft just because it's big is not acceptable, but it appears that's what Adobe is hoping European regulators will do. What Adobe should realize is that innovating rather than litigating would take it a lot farther.

In an early reaction to Microsoft's implementation of the PDF standard, Adobe vice president Eugene Lee said that Adobe is "pleased that Microsoft finally 'gets it,' and we welcome them to the PDF party." Microsoft has since been uninvited from the festivities, but it doesn't have to be that way.