Resolve and Fortitude : Microsoft's ''SECRET POWER BROKER'' breaks his silence (40 page)

I visited India a couple of weeks after Bill Clinton had toured the country in a formal head-of-state visit. My local team had planned the visit following his route, including some of the same hotels and restaurants. You do live well as president of the United States. By contrast, the country’s poverty rate was staggering. The other much-too-apparent observation I’m compelled to mention was the tremendous pollution I observed. Mexico City was bad, and Beijing may be close behind, but nearly any large Indian city tops them in spades.

I found the business climate in India a touch aggressive and tense, though the people I met were sharp and highly educated with advanced business experience. As a result of my visit, we teamed up with several OEMs, incenting them to promote genuine software bundles. It helped move the needle in the right direction for a while, but not as much as in the People’s Republic of China. The main reasons as I saw it: the government had no stakes in these companies and was not supportive of anybody who wanted people to pay for software.

South Africa (SA) was my next stop. I had first visited the country in ’94, shortly after the apartheid regime had been removed from power. I had gotten to love its wild primal aspects, which still existed in an ethereal and natural state as long as you were willing to travel into the veld. Unfortunately, her poverty rate had remained way too high even as her new government had made long strides in easing some of that pain.

The local PC market was dominated by a company called MUSTEK, with 40 percent market share. Ran by her founder, the Taiwan-born and Pittsburg State–educated David Kan, her huge share was a result of the apartheid boycott, which had prevented overseas PC manufacturers from branching out into SA. David arrived there from Taiwan, incorporating in ’89 and later floating his company on the local stock market. His Taiwanese connections enabled him to import enough PC components to make an impressive run. I had met this brilliant and energetic businessman several times in the past, and we developed a close friendship. David had no ambitions to compete on a global scale, but he had cleverly branched out into other parts of Africa proper. To shore up his core business, he established a profitable component-distribution business including Windows, helping us to reduce piracy in this remote part of the world.

One reason for my current visit was to review the progress of a special project we had launched exclusively in SA. The idea was the brainchild of our MBA whiz kids. I had predicted failure but was interested enough—along with a skeptical Steve—to let the experiment proceed. Despite of only a slim chance for success, we opted for gaining valuable experience in exploring an alternative way of selling MS Office.

Priced at about $300 down there, a lot of buyers in this developing country were hesitant to shell out that much money for personal productivity software. Instead of requiring the full price up front, the whiz kids proposed to allow customers to pay in monthly installments. Their plan called for OEMs to conveniently preinstall the product like an OS, and if end users agreed to purchase it permanently, a low monthly fee would be charged to their credit cards. To limit our risk and exposure, the small and remote SA market had been selected for a test run. My reason to be skeptical about the idea was twofold. First and foremost, credit card ownership was not exactly widespread in SA, the Internet usage was low, and last but not least, how would we police the customer’s failure to pay up?

David Kan, together with other locals, had agreed to participate in the trial. The initial sales had been slow but promising. The OEMs had gotten a small sales bounty, and as predicted, payments beyond the initial ones had been hard to obtain. Not being eager to deal with public outcries when cutting off people’s right to use MS Office, local management was weary. Still in SA, I sent e-mails back home, asking to abandon the project and extend amnesty to current participants. In retrospect, we were ahead of our times; most likely we’d simply chosen the wrong country to launch the experiment.

For quite some time Bill and I had been talking about trying something similar with Windows. Exploring the concept in detail, we soon discovered how hard it was to implement and enforce payments. In theory, we could have charged OEMs zero dollars for preinstalling Windows and given PC purchasers thirty days of free usage. Agreeing to pay us an annual fee would have kept their PCs functioning. Once modeling such an annuity concept, I discovered, despite an obvious first-year revenue shortfall, the gain derived from no longer having to extend volume discounts to OEMs, and adding a small finance charge could boost per-unit revenue.

What spoke against the idea? Not every end user had Internet access, and any other way of implementation would have been awkward, inefficient, and probably impossible. Nor did all Windows customers possess a credit card. The final issue breaking the camel’s back concerned enforcing the annuity deal. Windows, like any OS, remained essential to keep a computer running, unlike an antivirus program, for example. Would we put our money where our mouth was and enforce nonpayments by making PCs dysfunctional? Instead of disabling them completely, implementing an automatic slowdown and reducing the number of applications to run simultaneously
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were other technical possibilities. Undoubtedly, any of these measures meant creating a lot of unhappy PC owners. Last but not least, hackers could go to work and repair the inflicted damages; in the end, it was just software, and even if encrypted, it could have been cracked. We even considered selling an encrypted hardware dangle with every Windows copy, which turned out to be too expensive to manufacture but might be a way to implement a stronger protection and enforcement scheme today. Our final conclusion then: wrong thing to do, dream on about OS annuities, end of discussion!

Back home I had to attend to an unexpected crisis stemming from the antitrust trial. Documents the Feds had confiscated during their investigation had been posted on the Internet for public perusal. Naturally, they were a treasure trove for people trying to gain insights into our internal discourses. Best compared to WikiLeaks. The ones published had been scrutinized by our attorneys, ensuring confidentiality. Redacting three million documents, nevertheless, was prone to errors.

One occurred when a report from a negotiation with Compaq was not well-enough guarded. The lowball Windows price mentioned in the erroneously published document immediately caught the eyes of Kelly Guest, Dell’s corporate counsel. Freely but mistakenly assuming it reflected Compaq’s actual royalty, he immediately apprised Michael Dell and Kevin Rolling, Dell’s president, of his findings, which at once raised a howl of despair and disfavor. Constituting about half of what Dell was actually paying, the news made the execs understandably furious, signaling a de facto huge disadvantage.

Welcome to the world of most favored nation clauses where trouble is sure to abound. Their origins stemmed from treaties between nations in which signatories agreed to grant each other the same favorable terms as offered to others. Similar clauses had found their way into commercial contracts. I hated them with all my heart and soul. Yet in supertough negotiations, we had deigned to extend them but so far to only three customers. (Proving we had way less pricing power than the judge was made to believe.)

Under a most favored nation clause, we guaranteed customers the absolute best royalty. Guaranteeing this to Compaq, the top volume shipper had for now no apparent risk. Making sure we could honor such a promise, I instructed my attorneys that anytime a similar clause was headed toward another agreement, they needed to obtain my advanced approval. A couple of years later, Dell got wind of her neighbor’s favorable contract term, and Kelly Guest—why not?—asked for reciprocal treatment. With Steve trying to climb into bed with Dell’s execs, there was no denying.

With Compaq outselling Dell by 30 percent, I was adamantly against extending her prices to Dell and asked our attorneys to find a way to soften the absolutely-best-price guarantee. Under the modified clause, Dell could only obtain Compaq’s price when she bought the same number of Windows copies. Dell understood the finesse but nevertheless called us on the carpet. A painful meeting with Steve commenced. Between Kelly Guest arguing eloquently, Michael Dell playing hurt, and Kevin Rollins seeming pissed, we were in a grand and dramatic pickle. Wanting their cooperation, Steve had no desire to stand up to them. I passionately wanted our contract language to prevail. In the end, none of my arguments got through. I got plainly overruled. We left with me sporting bruises and bad feelings but nevertheless agreeing to apply the reduced royalty rate going forward. Kelly Guest’s political gamesmanship triumphed, having judged the situation correctly. I had met him several times before, got to know him quite well, and had a great deal of respect for him. He had pulled a fast one. I swallowed my pride.

When Steve and I recapped the situation shortly thereafter, I angrily told him to consider himself from now on Dell’s chief account manager. The sales reps were better off dealing with him directly when micromanaging this account. He laughed it off.

Steve’s behavior was in stark contrast to Bill’s. Both had a difficult time saying no to customers. Right after I got the OEM job, I watched Bill struggling through price negotiations though managing to stay involved, if obliquely. After we’d had a chance to chat at length about how to avoid putting him on the spot in the future, he changed his tune. From then on, whenever customers asked him directly for price concessions, he redirected them point-blank: “You’ll have to work that one out with Joachim.” A decision he hopefully never regretted, allowing him to remain firmly in the driver’s seat while empowering me to obtain the best possible deals.
Auftragstaktik
at work!

SEARCHING FOR A SUCCESSOR

All these little incidents added up. Having to endure Steve’s emboldened management style and observing the command philosophy drift away from Auftragstaktik with iceberg resolution, a tactical standard which had served MS so well, I longed, at last, to leave. My favorite successor was still Richard Fade, who was by now back in my group, working diligently and hard as ever despite the unresolved drama in his family. Steve agreed with my judgment, but as we seriously approached our preferred candidate, he remained unwilling to commit long-term. A concern to me and a much larger one to Steve, desiring to build a lasting team. In the fall of ’00, after a visit to Europe, Steve had made up his mind, telling me he would like to see Richard Roy, the current German country manager, to succeed me. Another German, what was so great about them? I asked Steve to allow me an opportunity to contact my friends in Germany before giving an opinion. Their feedback left me unimpressed, ranging from “The guy is too political and not decisive enough” to “He’s not well liked by a number of customers and employees alike.” Respecting my well-placed informants, I advised Steve not to appoint him. Reluctantly, I offered to remain on board in the event we failed locating a suitable long-term replacement.

Steve wouldn’t change his mind. I was unsure why. Not trusting my judgment any longer, being totally convinced of his own, honoring an already-made commitment, or was he just plain playing boss? The next step for me was to invite the chosen one to my—actually his—fiscal year ’02 planning meeting. A good test for the candidate. We prepared well, and as he showed up, I told my direct reports what Steve’s intent was. The meeting went well, but my guys were not impressed by the newcomer’s attention to detail or by his general business sense, echoing my German sources. Back in Redmond, I reported our collective observations. There was still time to reconsider, but after a couple days, with rumors now flying, my boss announced him as the next leader of the OEM division. I promised a smooth transition. Richard Fade, sidelined, did not mind remaining steadfast and cooperative.

Steve then had made the decision to split the OEM personnel, selling to system builders off from the main group, and integrate them into the retail sales organization. To make the transition an easier one, he planned giving my successor control over a large part of that organization. In a follow-up meeting with all area managers—one of the fabled monster marathon sessions—the new organization was being hacked out from whole cloth. Introducing the new concept caused consternation. The major opposition was derived from the fact of a less proven man having oversight of such a diverse sales group and the reluctance of regional managers to release control of more sovereignty to the center. After Richard Roy returned to Germany, now fully comprehending the weighty and labyrinthine task, he flabbergasted us. He simply resigned. I found an enraged Steve and, after discussing the situation, convinced him to reconsider Richard Fade. So it happened; the most capable guy got the job. I felt providence.

The two of us immediately started working together super closely, preparing the transition. All decisions impacting the group beyond my departure we made jointly. We started visiting customers together. Fortunately, a lot of them knew him already, and as the clock was running out on my reign, I could relax and confidently detach myself from my job. My people would be in good hands, and the business should continue to prosper.

APPELLATE COURT RESPONSE

In June of ’01, the appellate court had at last arrived at a conclusion. By then, I was just a scant few weeks away from leaving OEM. Like most employees, I was plenty happy with what I read. But the ruling was by no means the home run our legal team had been gunning for.

The good results first: Jackson, like Sporkin before him, got removed from the case. We were not guilty of unlawfully tying IE to Windows—Jackson lost his favorite argument a second time—and we did not illegally attempt to monopolize the Web-browser market. The court vacated all remedies of Jackson’s final judgment—meaning no break-up of the company was imminent.

But here the good news ended. The appeals court upheld most of Jackson’s finding of facts despite the “seriously tainted proceedings” and said it found “no evidence of bias,” effectively opening the floodgates for a stampede of lawsuits. The court confirmed Jackson’s opinion on all Sherman Act violations, except the ones mentioned above. The case was ordered to go into a liability phase in front of a newly appointed judge. After four years, the case would drag on. And on! Studying the appeals court’s ruling, it looked like our legal team—in the hectic whirl of the moment—hoping Jackson’s finding of facts, together with his verdict, would be kicked out, altogether had missed the mark. The old hand had beaten us handsomely. The magazine
Slate
described the outcome correctly: “If Microsoft won the day, the Justice Department won some moments.” Real costly ones!