Resolve and Fortitude : Microsoft's ''SECRET POWER BROKER'' breaks his silence (16 page)

We had earned our position with considerable sweat and successful products, converting first-time customers into happy loyalists. Improving our product line constantly, we kept them hooked. Fair-minded economists normally would admire the way we played the game, remaining in the lead thanks to fabulous work ethics, great products, superior marketing, and contented clientele. Sounds legal to me!

Not so fast! Evaluating whether or not a company had obtained or maintained monopolistic power, legally, leaves a tremendous amount of room for judicial interpretation. The laws and the applied standards and tests are by no means ironclad, leaving for plenty of subjectivity. At stake are egos, reputations, careers, and future earnings. Most companies accused of becoming or maintaining an illegal monopoly will be convicted in the public mind and by the press long before judgment is passed, branding the accused with an unjustified and unearned reputation and leaving a sitting judge with at least a hypothetical pretrial bias. Good reasons to avoid any such trial altogether and make a dedicated effort to settle all allegations out of court—exactly what the two Bills were now engaged in.

Weighing the above carefully, government attorneys knew they had a weak case against us but could not drop it for political reasons. Three issues caught their eyes: our minimum commitment clause, allowing processor-based license consolidations, and the duration of our contracts.

I had made the CPU-based licensing option available to make customer reporting easier without removing any other existing choices. I was in full agreement with the government: variety makes happy customers. Why, then, was introducing this option even an issue? Customers were never coerced to commit to this variety, and actually only 40 percent selected it for Windows and around 60 percent for MS-DOS. The DOJ had this on record. The minimum commitment clause making OEMs pay for systems they sometimes did not ship while enjoying larger discounts cannot be considered anticompetitive either. A more realistic commitment schedule translated into paying one to two dollars extra per unit and left no money in limbo. Customers had that choice! Offering longer term contracts benefitted them through locking in prices. Customers demanded them; I hated them. They allowed me less flexibility in adjusting terms, conditions, and prices. Did the Feds really ever tried to understand my customers’ motives?

If these contractual terms had to go to placate the Feds, luring them into a settlement, only the minimum commitment option needed analytical attention. It was the basis for the volume discounts we extended for firm purchases. One option was to do away with it; higher-volume customers would feel cheated. Not a valid path to pursue. I needed to find a clever and government-acceptable replacement system. After sleeping on it, though, the mathematician in me took up the challenge. Any new discount system I came up with had to be simple, pragmatic, and based on mutually-agreed-upon forecasts. It had to allow for real-time adjustments and treat performing OEMs better than laggards. Using these principles, I developed a model using past revenue data. I soon discovered that my envisioned scheme would hypothetically provide increased revenues per unit without jeopardizing my overall business. Let the Feds have their cake!

After probing my assumptions carefully with my team and accountant, I informed Bill, who ferociously challenged my ostensibly arrogant-sounding assertions and my conviction of not losing customers or any business to competition. Hearing me project more dollars per unit as result of the adjudicated changes made him come around, and he conceded, agreeing that the DOJ’s demands would do us no harm whatsoever. As long as the company continued to produce winning products, used her profits to blaze the trail deeper into the dizzying universe of tech advancements, and created higher standards, she would emerge out of the current mess not only unscathed, but with increased profit.

The two Bills meanwhile had succeeded in easing the DOJ’s concerns about exclusive dealings, tying products together, and any form of customer coercion we were suspected of. As they inched closer to settling the matter, the Feds insisted on including an exhaustive list of forbidden activities into the final settlement agreement. With zero proof in their hands, they wrote us the equivalent of an unwarranted speeding ticket, making us, for political reasons, appear as villainous as possible.

I was in Bill’s office when the last remaining objections were overcome, Anne Bingaman on the other end of the phone line, all-ears Janet quietly listening. By agreeing to cease and desist demanding minimum commitments in the future, the deal was sealed—both sides exhausted and relieved. I was all smiles after reading a clause the two Bills had been allowed to sneak into the covenant. It allowed the future integration of unlimited consumer-benefitting functionality into Windows as we saw fit. Or at least we believed so!

After the two parties finalized their agreement five years after the ordeal had started in July of ’94, a judge needed to sign off on what was now labeled a consent decree. This was a step in the legal process designed to ensure no collusion existed between the Feds as plaintiffs and us, the defendant. Laugh as much as you want! When the DOJ announced that the two parties had settled the matter, the headline read “Microsoft Agrees to End Unfair Monopolistic Practices.” A catchy phrase meant to impress the public but grotesquely distorting and patently untrue! The DOJ had never proven—in any way, shape, or form—that we had a monopoly, yet we stood condemned. The agreement itself stated that the parties “having consented to the entry of this final judgment without trial or adjudication of any issues of fact or law; and without this final judgment constituting any evidence or admission by any party with respect to any issue of fact or law.”

Anne Bingaman proudly sucked the following out of her thumb: “MS has used its monopoly power in effect to levy a ‘tax’ on PC manufacturers who would otherwise like to offer an alternative system.” So spoke a public servant whose education and career was allegedly derived from a command of the facts, details, language, and integrity. Microsoft the “IRS” of the PC world OEMs could not escape from—how ridiculous! With me as the chief tax collector, oh my, oh my, where had I landed?

The fastidious and insightful Janet Reno patted herself on the back with the following stupid comment: “Today’s settlement levels the playing field and opens the door for competition.” Her leveling bulldozer at work! Protesting the ill-worded DOJ press release did little to revise the projected image. The government had the larger megaphone. Politicians applauded, and the press, having condemned us long ago, fell in line. The ladies from the DOJ celebrated on Capitol Hill. Politicians believed they had served the public well. In reality, they had extracted meaningless concessions from us.

Embarrassingly for the DOJ, Judge Stanley Sporkin—appointed by the DC district court to sign off on the decree—shared my opinion, arriving at it from a much different angle. Garry Reback, an outside attorney, reinforced his belief by submitting an amicus curiae
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brief. He had been hired by several competitors with the goal to stir the pot against us; to me his activities in themselves appeared conspiracy driven, with him as the mouthpiece.

In February of ’95, after an unusually lengthy hearing, the judge ruled that the decree was not in the public interest. First round lost! Disagreeing, MS and the DOJ immediately filed a joint appeal. To our delight, the appellate court overruled the judge three months later and removed him from the case. He had read a book called
Hard Drive
, adopting the opinion of its authors, James Wallace and Jim Erickson—avowed MS opponent—as his own. Justice by bedside reading?

The DC district court then assigned Judge Thomas Penfield Jackson to the case. Late in ’95, he finally rubber-stamped the decree. Signing it had consequences for him. As long as he stayed on the bench, he was deemed its legal guardian, enforcer, and babysitter if you will. If any person, company, or government agency believed that the consent decree had been violated, a petition could be filed, and he would determine what action to take.

Voluntarily, we implemented and followed the agreed-upon rules two years before his court formally approved them. Returning to business as usual, we soon discovered that the new rules were causing no harm whatsoever. The struggle with DRI continued unabated. The battle with IBM’s OS/2 intensified. Apple persisted in luring away PC buyers. We continued to live, as now and ever shall be, in a competitive world. Justice sighted, or justice blind. MS trusted the government fulfilling her part of the deal, expecting the matter was settled once and for all. Dream on trusting one’s government!

PATENT HORRORS

Against MS tradition, the good news first: In ’93 we won the Apple patent infringement lawsuit. For Bill, this was a wake-up call and a reason to educate executive staff on the deceptive threats patents constituted. Particularly wary how OEMs could make use of them, Bill personally set out on a crusade to find ways to reduce the risk for MS and the industry as a whole. Violating just one inadvertently could result in a lawsuit and an injunction, freezing OS shipments and leaving the whole industry out in the cold.

Releasing the next DOS version in ’93 was again a race against DRI. Her mother ship, Novell, had finally succeeded in giving us the long-anticipated trouble. To remain competitive, we were required to include a hard drive (disk) compression program. Today’s affordable hard drives storing terabytes of information have made these programs basically obsolete. Back then, most PCs came with hard drives having a hundred thousand times less capacity. No wonder compression programs enabling users to store up to twice the data on a hard drive were popular. A math algorithm was used to condense the data and later reversed to recover it, a process technically somewhat comparable to encrypting/decrypting information.

Novell had licensed and used a compression algorithm derived by Stac Electronics, a small and rapidly growing software company located in California. Since 1990, this had been her livelihood. Attempting to license the same software, we soon ran into difficulties dealing with Stac’s execs. Unable to negotiate a reasonable deal, we eventually bought a comparable algorithm from another company. During the initial negotiations, two of our programmers inspected Stac’s algorithm for due diligence reasons. It left them impure and impugned. To remain on the safe side, they should never have been part of the team that would eventually develop our own version. Not following these sterility safeguards left the door open for infringement accusations.

After we released prototype copies of our new DOS version, Stac immediately asserted that we had stolen portions of her meanwhile-patented algorithm. After careful study of Stac’s claim, we initially ignored the allegations and then made several attempts to settle the dispute. When that failed, Stac’s CEO, Garry Clow, took us to court. With both parties stubbornly entrenched, the case ended up in jury trial while our product was already installed on millions of PCs. The technically challenged jury with an inadequate grasp of the salient facts found us guilty and convicted us to pay $120 million in punitive damages. To make matters worse, Stac succeeded in obtaining an injunction from a disgruntled judge, preventing us from shipping the malingering products until we paid up. The industry trembled under a doomsday scenario.

The product group scrambled, removing the compression code from the product. Until a new version was ready, OEMs were stuck. Bill’s darkest prediction in regard to potential patent impairments had come true. When an internal investigation discovered MS Word also included the infringing code, our Office application suite could no longer be sold either. Wall Street got the message, and our stock began abruptly trekking southward.

We stubbornly maintained our innocence. I honestly didn’t know what to believe. My problem was of a different kind. OEMs had stopped shipping PCs. Millions of systems were sitting in warehouses and at retailers around the world, unable to be legally sold until thoroughly reworked. The injunction would inevitably cause a tsunami of damage to the PC industry in general and to MS earnings in particular. Inside the company, denial was rampant. A bury-your-head-in-the-sand attitude dominated. I was convinced OEMs and retailers would hold us responsible for huge monetary damages. We were in deep shit!

Calling our chief financial officer, Mike Brown, I alerted him to the grave potential the injunction imposed. We agreed that speed was of outmost importance in settling the matter. A short time later, we walked into Bill Neukom’s office and proposed to resolve the matter amicably and urgently. He encouraged us, and my boss concurred at once. I didn’t inform the product group; entangled individuals were still licking their wounds and might sabotage our mission. Stac’s CEO, hoping we were serious, agreed to a meeting and offered to pick us up the next day at San Diego Airport. Upon arrival, we lunched with Stac’s execs and found them amenable to avoid further escalations. Against considerable odds, we soon agreed upon a balanced and reasonable compromise. I had to leave to attend my annual OEM meeting that Sunday. By then, Mike Brown’s second in command had joined us with one of our attorneys, and by Tuesday I received a call in the wilderness informing me we were out of the woods. Our settlement saved the company $40 million and spared my customers incalculable heartaches. The industry sighed with relief.

The incident rang the alarm bells, prompting us to take a harder look at how to avoid similar situations. During the summer, Bill and our patent attorneys convened and decided on a plan to approach large computer manufacturers with the goal of mutual patent exchanges. I reluctantly became involved in these negotiations. Our patent attorneys were far better suited for these engagements. Over time, they succeeded in buying selected patent portfolios as well as closing patent exchange deals. As additional defense, MS aggressively stepped up her filings for patents. Over time, I got several patents co-awarded for work I had done previously protecting our software from being pirated.