Adobe is forcing Microsoft to remove PDF support from the test versions of its updated Microsoft Office and may sue the software giant, according to reports Friday.

The two companies have been in negotiations over the use of PDF–short for Portable Document Format—in Office, but the talks came to an abrupt end this week, according to The Wall Street Journal.

Microsoft wants to allow Office users to save their documents from Word, Excel, and PowerPoint in PDF files, as users of the open-source software suite OpenOffice.org can do. Adobe fears that ability would hamper sales of its Acrobat software, which enables users to create the PDF files.

The dispute reflects ongoing concerns among some software companies that Microsoft is including parts of their software, or competing features, in the ubiquitous Office and Windows programs.

Adobe and other software publishers have accused Microsoft of bundling capabilities into Windows and Office that effectively shrink the market for their software. That charge has formed the basis of some of the antitrust actions Microsoft has faced both in the United States and Europe.

Microsoft General Counsel Brad Smith told the Journal that Adobe has threatened to sue Microsoft on antitrust grounds unless it removes the software and charges customers extra for PDF support. Adobe spokesperson Holly Campbell said the company had discussed its concerns with Microsoft and various regulatory agencies, but wouldn’t confirm a pending lawsuit.

Microsoft shares fell $0.12 to $22.79 in recent trading, while Adobe shares rose $0.31 to $29.03.

Surprised by Adobe

Rob Helm, director of research at Directions on Microsoft, an independent analyst firm based in Kirkland, Washington, admitted he was surprised by Adobe’s move.

“I thought Microsoft’s plan for Office would build the base for the PDF format, but Adobe has apparently come to the opposite conclusion,” he said. “They believe Office output to PDF will dig into their Acrobat business too much.”

To be sure, Microsoft’s proprietary DOC format has effectively become a standard for many documents. The company is attempting to establish its own rival to the PDF format known as XPS (XML paper specification), but it has not yet caught on with many users or other software developers.

The Redmond-based software king also introduced a competitor to Adobe Acrobat Reader called Microsoft Reader, but it too failed to catch on.

“We have taken a number of significant steps to accommodate Adobe, and offered many proposals in an effort to avoid a dispute, but we have now reached a point where we feel what they are asking for is not in the best interest of our customers,” Microsoft spokeswoman Stacey Drake said in a statement.

“In an effort to accommodate Adobe’s concerns with Office 2007 and Windows Vista, we have offered to make changes to our products and even to ship their products with Windows,” she added. “We are planning to remove ‘Save as PDF’ from Office, as well as ‘Save as XPS,’ and make both available only as a separate download.”

Charging Extra for PDF

Ms. Drake said Microsoft has offered to ship San Jose, California-based Adobe’s Flash and Shockwave software with every copy of Windows Vista and to give computer makers the option to remove XPS from Windows. However, Adobe was not satisfied with these offers.

“Unfortunately, the changes we are planning to make are not enough for Adobe and they are pressuring us to do even more,” said Ms. Drake. “Adobe is asking us to charge our customers a price for using what everyone else in the world can use for free.”

Adobe did not respond to requests for comment.

Microsoft complains that PDF has effectively become a standard and it should not have to charge extra for PDF support.

“Adobe has long claimed that PDF is an open standard and dozens of companies, including a number of our competitors, have implemented that standard, but Adobe insists we need to charge a price,” said Ms. Drake.

Mr. Helm of Directions on Microsoft believes Adobe may have a point that users would be willing to pay extra for PDF support.

“Adobe has a product called Adobe Elements which is a paid-for plug-in to Office for outputting PDF files,” he pointed out. “But when Adobe [CEO] Bruce Chizen was asked about Adobe Elements, he implied it was a pretty small part of Adobe’s business, like 1 percent. It’s surprising Adobe would go to the mat for that 1 percent, but they may see a larger picture.”

Contact the writer:MCohn@RedHerring.com