Resolve and Fortitude : Microsoft's ''SECRET POWER BROKER'' breaks his silence (19 page)

START ME UP

“Disconnecting people from the Internet is a human rights violation.”
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MICROSOFT NEARLY MISSED IT

While I was entangled with IBM’s stubborn hierarchy about contract compliance, MS’s development group struggled with the fledging Internet. The desire of the academic research community and some government agencies to exchange data and ideas beyond the bounds of existing networks brought it to light. Its realization nevertheless needed a protocol so WW messages could be properly directed and received and a wiring and signal standard to enable physical connections. The first was invented in the ’70s and the latter in the ’80s. The government seized the opportunity and funded the implementation of a worldwide-spanning Net but initially restricted its use to the academic community and government agencies. It took until ’91 and an act of US Congress
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to finally open it for individual and commercial use.

Another technological breakthrough was needed to make this network popular with unsophisticated users. It arrived when Tim Berners-Lee
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invented a software protocol and combined it with a programming language allowing software programmers to access files and data over this emerging communication vehicle. His effort led to a software program called a browser, which enabled any computer users to easily surf files and data over the Internet. A polished and user-friendly version, sponsored by the National Center for Supercomputing Applications (NSCA), saw the daylight in ’93 and was surnamed Mosaic. Limited in functionality, it was nevertheless an immediate hit within the superfast-growing Internet community, signaling a communication revolution that was about to erupt.

At about the same time, our gurus spiritedly debated how to include Internet connectivity into Chicago. Boldly predicting: an advanced version of the Mosaic browser would one day become the next killer application for PCs! OSs that supported Internet protocols best were UNIX and the Apple’s Mac OS.

The gurus proposed three steps to propel Windows ahead and keep it ultracompetitive:

1. Offer basic Internet services in Chicago.

2. Integrate a sophisticated Internet browser into the product.

3. Make the integration tight so end users enjoy Internet surfing as a seamless extension of Windows-powered PCs.

They labeled this go-to-market strategy: embrace, extend, and innovate. In absence of a hard-to-write business plan,
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the gurus pleaded with management. When our fanatics defined the once-in-a-lifetime opportunity as the most effective way imaginable to “deliver an enormous blow to our OS competitors,” they finally captured management’s attention.

Intellectually, Bill comprehended full well that this opportunity constituted an inflection point as expressed in a later document headlined the “Internet tidal wave.” The missing links for him were the business model and how to time our entry. Insufficient and costly Internet access for consumers was another hindrance he had to weigh. Worse yet, would this cause Chicago to slip, and how much would a delay set us back in beating OS/2? The company’s top development executives, including Bill, were still vacillating when an emerging competitor forced their hands. Thank you forever for that!

In April of ’94, Kleiner Perkins Caufield & Byers invested in a start-up later to be called Netscape. Jim Clark—her brainchild, CEO, and cofounder—at once recruited members from the NCSA Mosaic team to develop an advanced commercial version of that browser. Within an instant, the Internet-development community, ever connected and closely knit, leaked the news. Get used to that speed!

MS moved up her timetable and immediately obtained browser code as foundation for her own development. The ticking clock for Chicago determined that a bare-bones browser version would have to do. Additional bells and whistles and tighter integration would be added later. Hedging our bets, we embarked on this alluring adventure with a from-the-hip product plan for a me-too browser. Would this be enough to stop a well-funded start-up and turn Chicago into an attractive-enough Windows to the world product? I had my doubts.

Jim Clark’s company had her browser in the market for IBM PCs and Macs by December of ’94, calling it Navigator. Using the software became popular overnight, and being the only game in town, the company swiftly achieved a de facto 100 percent market penetration. MS echelons, still on the road to the finish line and unable to compete, became nervous—sorry, extremely paranoid. As our own gurus had predicted, the Internet had indeed caught on, and Netscape’s browser was causing a killer application like firestorm.

Despite relatively high monthly interconnect fees, users opened their wallets, connecting in waves and exploring the new frontier. In a short time, and notwithstanding the initially relatively slow connection via phone lines, millions got addicted. The rest, as we know, is history. Netscape’s clever use of the Net, bypassing traditional retail channels and providing instant user gratification and real-time update services, made the start-up look extremely cool! This sizzling consumer entity left MS in the dust and made her Wall Street debut as the new tech darling. Bill was fuming.

What bugged him most was the potential computing paradigm shift he immediately spotted. Thanks to Berners-Lee’s invention, programmers writing Internet applications were able to do so completely in disregard to any OS running a computer system. In his view, a competitive platform and a core threat to our livelihood had been created. In typical fearmongering fashion, he prophesied that the end was near for Windows because ISVs could now create fully cross-platform portable Internet applications and abandon Windows altogether. I did not share his belief in that much doom and gloom; he rallied the company around it.

Welcome to the world of “Information at Your Fingertips,” as Bill titled his November ’94 COMDEX keynote speech. I was in the audience that fated day. All of us were impressed by his futuristic-sounding Internet vision. Sadly, ironically, shockingly: it was only a foretelling. A paper tiger was talking. MS’s CEO possessed no marketable product. Netscape was kicking the holy hell out of us! The audience nevertheless applauded him for a well-delivered speech. MS, since forever ago—as long as collective entrepreneur memory stretched—was in grave and immediate danger of losing her lead once and for all.

HURDLES BEFORE LAUNCH

How to finally christen Chicago spawned an intense internal discussion. Initially favored was Chicago or Windows 4.0. I introduced calling it Windows 95. That name would put a time stamp on the product and make it look obsolete one year later—the major reason my name of choice was so robustly disputed. In the end, though, it stuck. Labeling our integrated browser Internet Explorer was most explanatory. Its inclusion had meanwhile become a dire necessity.

Before my group started the Windows 95 licensing drive in November of ’94, my management team and I held a strategy session. We defined objectives by region and customer. I insisted on attending several regional meetings over the next couple of months to personally instruct my people around the world. I wanted the sales reps to go all the way and report any obstacles to licensing 95 immediately. In return I promised my personal attention and a lightning response. I didn’t have to consult with Steve or Bill about our objectives. Nothing short of 100 percent customer penetration would do. This was the photon torpedo I needed to get WARP off its trajectory!

With the next WW OEM team meeting scheduled for Alaska, we christened the 95 penetration campaign “Gold Rush.” Soon, my conference room got converted into an information hub, referred to as a war room. Well put! The admins were made responsible for keeping its info up-to-date. Like tenacious bulldogs, the brave women circulated daily among sales reps, reminding them to get their licenses done. Never letting go, they managed progress better than their bosses. To the dismay of my personal rep and against corporate policy, I included them in the sales bonus pool. One of the best decisions I ever made—they earned and deserved all of it! Signing up customers early was in true gold rush spirit, rewarded with a plaque containing a quarter ounce of an American eagle gold coin. Most of my crew got one, and mine still decorates my desk.

Our contracts had been restructured to make customers’ lives easier. At least I thought so. First we asked them to sign a so-called master agreement defining how to do business with us for the next decade. While it would make negotiations easier in the future, it made them harder for near term. All parties wanted to make sure that they could live with its content for a seemingly infinite time span. The second contract they signed was product specific and contained a one-year license for a chosen product. Separating the two agreements enabled us to comply with the consent decree and allowed us to change licensing conditions for individual products on shorter notice.

Three fresh challenges laid ahead for my group. Let me start with pricing. I had come up with a new price list for 95. The normal price for OEM customers for the MS-DOS/Windows combo had been in the $35–$55 range. My goal was to charge an additional of $10 per unit for this superior product. Bill and Steve predicted that this would jeopardize our success when they finally learned about my decision three to four months before launch. I disagreed and promised to deliver. They let me try. Convinced of our seemingly invincible momentum and supported by product management, I felt emboldened and found only minimal resistance except from IBM.

The patent peace clause was another tough pill for customers to swallow. For Dell, Compaq, DEC, Acer, and most of the Japanese manufacturers, it was nothing short of a red herring. It took months to overcome counterarguments and settle upon reasonable compromises.

We had proactively implemented all rules of the consent decree voluntarily. Therefore, we no longer had any purchase guarantees; the so-called minimum commitments were gone. This left us with the dilemma of how to fix volume discounts. To do so, our sales reps were instructed to agree with their customers on a realistic sales forecast for year number one to determine royalty rates due. For year number two, we would then adjust these based on achieved sales results. Up or down!

We applied a similar principle to the market development agreements (MDA). Remember, they enabled customers to gain extra discounts when participating in certain quality, product design, marketing, and promotional activities. During the first year, we trustingly assumed that customers would do all proposed activities and therefore applied all available discounts. Next year’s rewards would then be adjusted based on actual participation. Pretty fair and pragmatic as I believed! In case customers disputed the revisions, a review board handled their complaints as leniently as possible. Hardly ever did I get personally involved.

My group showed excellent sales progress. As usual, our friend Theo Lieven in Germany had publically gone ballistic about the new pricing and MDA details, again trying to negotiate terms and conditions through the press. With no one paying much attention any longer, he signed the proposed deal late but unchanged. Approximately eight weeks before the planned launch event, the press figured out that we had two major holdouts—Compaq and IBM. With Compaq we were tangled up over the patent peace issue. She had taken several companies—one of them being Packard Bell—to court over hardware and software patent infringements. With ambitious patent attorneys working for her, stirring the pot, it became most difficult even between partners in arms to settle a dispute like this. A long phone call between Bill and Eckhard eventually ironed out the wrinkles, resulting in a partial cross-patent agreement. One down, one to go!

The hardest nut to crack was IBM. I was still hopeful we could finish this nasty marathon audit and get paid what was due well ahead of the launch. The longest any OEM audit had ever taken was six and a half months. Could IBM’s be resolved in eleven, or were we overzealous, insisting on such a timetable? I had no idea what Bruce Claflin had set in motion after agreeing to my request for acceleration. I refused to believe he had only paid lip service; he just wasn’t that type of a guy, and he knew me well enough. I would follow through and refuse to sign a 95 license until this was settled. For reasons unclear to me then, either the Big Blue ministry declined to help him or our friends over there believed I would budge.

Complicating the 95 negotiations with IBM further were the sweetheart deals she had been accustomed to in the past. Windows pricing was going to rise, and as for any other customer, it would only be based on projected sales volume. Compared to the old agreement, she faced a $37.50 increase per unit for year one, which could increase further in year two if she did not participate sufficiently in MDA activities. Still convinced that OS/2 would prevail, her negotiating team nevertheless swallowed its pride.

Nine weeks before the launch, Bruce called and told me IBM would not be able to complete the audit in time. He begged me to let it slide—me swallowing hard. It was inconceivable to me to not have the company who had accelerated the acceptance of PC technology at that launch event. And I would for sure land in hot water if that ever happened. I am still convinced that with some goodwill from that exalted monster data-processing company, the requested info could have easily been supplied. IBM’s management certainly had the means. In its place, her team chose to engage in a childish and costly power play.

I relented again despite me growing sick and tired of the delaying tactics and of another refusal to square up with us. During a tête-à-tête with Bruce and Tony in July, I proposed the following deal: let’s move forward by agreeing to settle the audit for $25 million—a middle-of-the-road estimate according to my auditors. Let’s further concur to complete the audit, and regardless of its outcome, no money will change hands later. MS will assume the risk in case the audit will come in higher, and IBM will do the same in case the sum to pay will be lower. My message: send us the check, and we will sign the meanwhile completed 95 agreement. Both gentlemen tried to dicker by offering a ten-million-dollar guarantee—without advanced payment. Lacking trust in them any longer, I insisted in my proposed amount with cash up front. In the end, they both nodded.