Resolve and Fortitude : Microsoft's ''SECRET POWER BROKER'' breaks his silence (17 page)

During 1994, under the leadership of Dave Heiner and Bill, we explored new avenues to further protect our core products. A simple concept but not at all easy to implement! We always defended and indemnified OEMs against patent challenges brought against products licensed from us. Could we, in return, ask OEMs licensing our products to refrain from asserting patent infringement claims against us or anybody else distributing or using them? The desired result: patent peace for Windows distributors, commercial licensees, and end users. I immediately embraced adding such a truce-like condition to our standard agreements to protect the Windows ecosystem.

It was later called a Non-Assertion of Patent (NAP) clause and turned out to be much harder to implement than I ever imagined. Japanese companies, led by Sony, were the most outspoken opponents. Fair values for patents are hard to determine. Google, Samsung, and Apple are experiencing this today. OEMs, possessing remotely related ones, argued that we treated them unfairly by disallowing them from extracting value not only from us but also from their competitors. Their old-school patent attorneys had a marked lack of interest in patent peace. It threatened their livelihood. Sticking to our principles was extraordinarily time-consuming and made licensing each successive product harder while earning us few new friends. The idea of granting competitors immunity when licensing Windows was against the industry’s belief of fairness. The contentious NAP clause was later reviewed by several government agencies though never challenged. Its derivation was defensive in nature and protected everybody for over a decade.

By 2004, a new regime of MS patent attorneys determined that the company had acquired enough patents to drop the NAP clause from OEM contracts. In their book
Burning the Ships
, Mike Phelps and David Kline explained how they arrived at the decision. The reasons were political as well as economical. MS was still fighting the Feds in court, and her larger customers had gotten bolder, finding mischievous means thanks to industry group patent pooling arrangements to assert patents claims. One of these attacks was successfully fended off on an appeal involving the US Supreme Court. Another larger one was looming. The old idea of using patent cross-license agreements as a defense against the newest legal tricks was therefore revisited and adopted. It favors patent-rich OEMs and leaves the patent have-nots in jeopardy.

Patents will always be landmines for any technology company. Start-ups, in particular, are most vulnerable to the misfortunes of stepping on them. Until patents are abolished, no company is safe from enforcement attacks by ambitious and watchful patent attorneys. Obliterating patent protection, on the other hand, is unfair to inventors and would endanger future innovations and progress. Therefore, companies will continue chewing on patent challenges and need to strike a balance. During my time, MS successfully avoided a Windows patent war by employing the defensive NAP clause in license agreements, a harmonious approach compared the aggressive methods our competitor IBM deployed. To this day, I am proud of having done the industry a tremendous service against a lot of odds and resistance.

THE SAGA OF BIG BLUE

A SWEETHEART DEAL

Fighting IBM for domination of the OS market influenced my professional life profoundly. Now responsible for the IBM account, I soon discovered the mess I had inherited. To disallow the divorce settlement from spinning out of control, Steve’s team had made troubling concessions, and in my mind, he had given the shop away! The current version of MS-DOS had been licensed under a flat-free agreement, and IBM was therefore paid up. Compared to similar volume shippers, Windows cost her one-third of the normal royalty. For OS/2, she paid just $2 per unit and had the right to give a huge amount of copies away for free. Having performed the bulk of its development work, I found that price borderline appropriate. My particular grief was with the DOS and Windows deals. Not only were they unfair to other OEMs, but they also made IBM a nearly unnoticeable customer from a revenue aspect. I felt justified and empowered to clean up and, over time, bring her onto equal footings with my other clients. My hair was standing up! Blame it on your boss.

I still do not comprehend why IBM was fighting us so relentlessly. Bruised egos at work must have been the key reason, because PCs and software sales were only a minimal portion of Big Blue’s overall business. She was predominantly a mainframe and IT services company that experienced growing pains by ’91. After painful attacks from Japanese competitors, her mainframe market share dropped rapidly, which slowly turned a trickle into a river of red ink. Losing market share in the PC market to the likes of Compaq, Dell, and Hewlett-Packard, among others, appeared of lesser importance in the overall picture.

John Akers, a thirty-year IBM veteran who was running the company, had taken the helm when IBM’s stock price was at $32. Wall Street had originally looked favorably upon his reign. Now it seriously questioned IBM’s business model, her ability to respond to mainframe competition, and Aker’s overall leadership style. The stock price was now at $22 and supposedly warranted calls for resignation. Unthinkable for the CEO of mighty Big Blue! The proud, astute, and buttoned-down IBM culture was thrown into an absolute state of shock, having to relearn the meaning of humility.

Analysts traced IBM’s misfortunes back to former chairman and CEO John Opel, who in the early ’80s had dreamed of IBM becoming a $100 billion company. I was working for Digital Equipment Corporation (DEC) when these projections leaked out. In an interview, DEC’s CEO Ken Olson called them simply “nutsy.” IBM’s CEO, guilty of not foreseeing major IT paradigm shifts during his reign, had his work cut out. Build-up in payroll and manufacturing plants eventually created a nonsustainable cost structure, steadily eating away IBM’s substantial reserves. Struggling to turn the Big Blue tanker around in the recession of 1991/93—by then an Exxon Valdez of bloated delusions—appeared impossible even for Hercules!

Declining sales—caused by comparatively poor mainframe performance, sky-high maintenance cost, and mediocre services—and ever-increasing restructuring charges added to the worries. Until then, IBM had given the impression of being an unimpeachable empire and reliable supplier. Now, displeased IBM shareholders and Wall Street promptly dumped her shares. Watching a merry-go-round of changing plans, a carnival of confusion from within, a sharply disorientated sales force, and deteriorating development efforts, IBM customers swiftly reconsidered. At the height of what analysts called the second OS war, IBM was suffering from self-inflicted wounds and had become a structurally weakened giant. Good for us, as I thought.

But by spring of ’92, OS/2’s PC-access technology, called Workplace Shell, was at par with Windows. Additionally, running Windows apps under OS/2 had gotten easier. Against all odds and to my disgust, the hurting Goliath had managed to technically keep up with us and seemed on track to increase market share. The desire for corporations to limit the various OSs they deployed due to support costs made it an uphill battle. After Lotus and WordPerfect products became available for Windows, there was even less reason to change. Another obstacle was the growing customer uneasiness to commit one’s IT future to a shaken-up company like IBM! Adding to the misery, OS/2 was still too resource demanding to run well on low-end consumer PCs. With MS a seemingly safer bet for enterprises accompanied by more sex appeal for consumers, the resounding trajectory for Windows just continued!

To overcome these obstacles, IBM’s top management formed a personal software division under John Soyring, a Michigan Tech grad. It was fully responsible for marketing OS/2 to OEMs and enterprise customers, and its activities soon made our life harder! Giving the division an enormous amount of money, IBM’s president Jack Kuehler hoped bruised egos would work harder and guarantee a return on capital. To turn up the heat to the detriment of MS and promote PC sales, he went so far as to sanction the bundling of free Lotus SmartSuite—our Office software competitor—with OS/2-powered IBM PCs.

A declaration of war, as the furious Bill-and-Steve duo interpreted it. I sensed a serious competitive move. Lotus had never before sold her office productivity suite through OEMs. Watching diligently, and with none of my other customers entering into a similar deal, I concluded that IBM had obtained exclusivity. Her management had given us no chance to bid, obviously not wanting to feed a foe. Foolishly, all of my later inquiries for a competitive bid were turned down. IBM was not interested in a better price or a better product. Hurt was on her agenda. Our relationship had hit bottom and turned icy.

Soon IBM breakup rumors reverberated. With her stock price careening southbound toward $12, about 25 percent of what it had been five years earlier, Akers resigned. He was replaced by Louis Gerstner, former CEO of RJR Nabisco, stunning the IT industry and Wall Street! Being an outsider who was short on the type of tech background presumably required to run the world’s number one IT behemoth brought further damage to her stock price. The voices in the press demanding a breakup, on behalf of shareholders, grew louder. Aspiration over reality, but the brand of logic Wall Street adores. Gerstner took his own sweet time coming to terms with the destabilized components of IBM’s dilemma and stubbornly resisted.

For the financial press, the fight with MS was mostly on the back burner. Journalists covering the IT segment found the transition made IBM step up her anti-MS efforts, positioning OS/2 as “a better DOS than DOS and a better Windows than Windows.” Marketed in short as “OS/2 for Windows”! It read like semicohabitation, but no strategy of peaceful coexistence was ever intended. Instead, it depicted Windows running as slave under the auspices of superior OS/2.

Gimmicks as I saw it. Customers did not buy the slogans either. Windows sales increased by 50 percent yearly to 15 million copies sold—no suffering there. As IBM followed through with her strategy to install both OSs on most of her enterprise PCs, I savored the additional revenue but never believed that there was enough room for both of us.

IN THE SHADOW OF CHICAGO

To impress analysts, IBM began disclosing quarterly OS/2 shipments. A marketing ploy asserting OS/2 was alive and well, with dialed-up units fueled by shelf-ware fantasies. Let’s talk about bragging rights. Microsoft, on the other hand, made certain Windows sales numbers were correctly publicized. Creating the impression that IBM was making huge progress in the fight for OS market share. The tech journalists, always supporting the underdog, relished it. Hand-fed by IBM’s cleverly scheming marketing department, even reputable commentators got caught in the propaganda net, signaling IBM’s unmitigated success.

It fell on me to calm our by-now-famous internal paranoia. With access to IBM’s royalty reports, I knew the numbers IBM’s marketing augurs were concocting and bragging about were wildly exaggerated. I later found out that they included a healthy dose of not-completely-functional demo copies. Eventually, I won the internal arguments. There were no other possibilities. Numbers, as they say and I believed, speak for themselves.

In May of ’93, IBM’s new CEO hosted Bill in NYC. Consistent with his never-ending desire to improve our relations, Bill eagerly agreed. According to Bill, a cordial meeting ensued, though, to his great regret, became one with no concrete results. Much to my surprise, Bill shortly thereafter exhibited a glaring lack of restraint by disclosing details of their discussion. An enormous faux pas! The reaction from my contacts at IBM was not far behind. Lou was flabbergasted by the liberty of Bill’s exposé of the dialogue and questioned if he could ever trust him again. By chance, Bill met him again later in the fall on a golf course and apologized for the mishap. He was to meet Lou a third time in a colorful, clandestine meeting.
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Meanwhile, Gerstner continued to resist all calls for a breakup and, unknown to outsiders, had already begun implementing plans to transform IBM into a premier IT services company.

In his book
Who Says Elephants Can’t Dance?
, Gerstner reported that immediately after he joined, he questioned if IBM should continue the PC business—software and hardware. Calling it nonstrategic, he was the first IBM CEO to ever seriously question the plausibility of maintaining it. Yet Lee Reiswig, GM of her personal software group, contradicted his writings during an interview with
Research Board
in ’94 by indicating that Lou was fully behind the efforts to beat us with OS/2. He went on saying that IBM’s meanwhile $11 billion software business was profitable enough to support investing in OS/2. Considering Mr. Gerstner approved the budgets for IBM’s software group—including its nasty marketing efforts—and for sure cherished the stinging OS/2 ads, I have a hard time disbelieving Mr. Reiswig. This convinced me that his big boss changed his mind later in the game when it was obvious that the operating system war could be lost.

Proving this beyond any doubt is the flood of OS/2 versions that followed, using as revamped name WARP, borrowed from the popular Star Trek series. This was supposed to create the perception that WARP-driven OS/2 power would lead to an intergalactic PC universe ruled by IBM! Anybody that naive? Hearing the new name, I assumed we got leapfrogged à la
DRI. Not so, but its use heightened paranoia levels inside MS, assuming IBM had finally delivered a damaging—maybe fatal—blow. Our next countercapable version of Windows was at least a year away. We were fighting for our lives.

MS countered, announcing her next version of Windows, code-named Chicago, without setting a firm delivery date. Yet all of ’94 IBM’s public relations and marketing hoopla made us look like a sad second-place finisher. We sold hollow promises while IBM shipped a hip-named OS and annoyingly reported its ever-growing units. My group felt considerable internal pressure in our mission to keep our customers firmly seated aboard the Windows train. Fortunately, they lent scant support to a competitor whom they felt should duke it out on its own.