Resolve and Fortitude : Microsoft's ''SECRET POWER BROKER'' breaks his silence (7 page)

People working in the newly formed OEM division appreciated the clarity provided by the new structure. Several GMs and Area VPs still regarded the newly centralized organization with skepticism, yet business benefitted from streamlined communications and timely executions. Over time, the nonbelievers came around. The new org allowed me at last to add a small nucleus of marketing people to the team. It eliminated an Achilles’s heel and created a vital and effective weapon for the division, keenly focused and decisively driven to increase share and defeat competitors.

With the new organization in place, I addressed some lingering customer issues. Customers were complaining that reporting royalties on a per-system basis was too burdensome, time-consuming, and costly. The sheer number of new systems rolled out had exploded, and they recommended bunching the ones carrying the same central processor together instead of listing every model separately. My key managers agreed in principle but warned me that losing these details would make our forecasting less precise. I acknowledged their concern but sided with the customers. From then on, we allowed them to license and report on a “per processor” basis.

Next, customers were asking for extended contract terms. Demanding these beyond our customary two-year term meant long-term price guarantees for them. If I had run a PC manufacturer, I’d have been challenged to commit beyond two years, however tempting. For a number of customers, price stability trumped the uncertainty of turbocharged market transformations. So we gave them the option to lock-in prices for up to five years.

Revising our licensing options presented a golden opportunity to reduce the number of pages in our contracts. I loathed the ever-ballooning page count, and so did my customers. So I challenged my attorneys, and they astoundingly reduced them by 40 percent. Encouraged, I made it a habit throughout my tenure to keep agreements as tight as possible, saving negotiation time and legal expense for all involved.

To discuss next year’s objectives and to personally get to know my top managers, I invited them to attend a conference in the USA. For the first time, they all sat as one team in one room and listened to the self-same messages in unity. I opened the event with a key note, which I started by playing a video clip containing Patton’s monologue from the movie named after him. Watching George C. Scott reenact this passage, calling the Germans Huns and listening to the gory descriptions of how to kill Krauts had its effect. The audience loved it and took notice of this German fellow who had the guts to use such a drastic animation as introduction. After I finished, they all understood why I had opened with Patton’s monologue. A brutal fight was looming with DRI. That company wasn’t taking prisoners, and our job was to be smarter and win against them all over the world. Our key weapon as I postulated and demanded then: significantly improve customer relationships. The expected result: increased Windows sales and zero losses to DRI and beyond!

The message got across to my sales reps, who found the newly created per-processor variety easiest to sell. Customers liked its reporting convenience and the longer terms we now offered. Consequently, my new team secured a ton of new business as it gave DRI a run for her money. This prompted her to march—hat in hand—to the Department of Justice screaming for intervention. Unable to beat us with winning products, she and other competitors lobbied the Feds to regulate us. Proving once again what the Prussian general Clausewitz once advocated that the “defeated feel their setbacks more than the victors enjoy their triumphs.” The Feds lent an ear, and by the end of ’89, the Federal Trade Commission launched a secret investigation. OEM practices were not the only issues of their interest. As its commissioners began scrutinizing our dealings, a few of our joint OS/2 announcements with IBM smelled of collusions. Eventually, the latter was dropped, and the simple customer accommodations we had extended were given foremost attention. Unbeknownst to me, dark thunderclouds loomed on the horizon.

The following year, I made all OEM personnel attend the gathering and utilized it annually from then on to propagate next year’s business objectives. The event became legendary and instrumental in making my group wickedly effective. Mixing business instructions with team sports, fun, and recreational activities fostered a notably energized sales and marketing force. People talked for years about our adventures in the wilds of nature and the great team spirit they engendered. Creating such a driven and high-spirited crew was extremely rewarding. Someone used the nom de plume Marines for the OEM group. I was visibly proud and felt privileged to be their commandant!

HISTORICAL CUSTOMER VISITS

A visit to Europe opened my eyes to DRI’s successful counters. My first stop was to the UK to meet with London-born Alan Sugar, founder of Amstrad, which had roots in the consumer electronics business. Performing as a highly efficient copycat, his company caused disruptions in the retail landscape by undercutting brand-name pricing through reduced production costs. Her entry into the PC business came in the fall of ’86 with her legendary PC model 1512. Aggressively priced with a low-end CPU, it cost roughly half of what comparable PCs were going for.

Amstrad’s OS vendor of choice was DRI, instantly catching the eyes of Bill Gates, who was adamant about gaining a piece of Amstrad’s business. Winning any deal with such a cost-conscious supplier meant major pricing concessions. At first, Amstrad did not budge. Unexpected help arrived from a German consumer electronic company named Schneider. Their management’s ultimatum: if Amstrad wanted to be the supplier of Schneider PCs, it had to deliver them with MS-DOS. This ultimatum prompted Scott Oki to make a cold call and cut a shocking rock-bottom deal with Alan. Since Schneider was located in Germany, he gave me, then the German country manager, a courtesy call. Being under Bill’s gun had translated into lowering his pants in order to win. My request: “Keep the deal quiet.” To my utmost surprise, Alan Sugar kept his word. After all these years, thank you!

Over the next couple of years, Amstrad captured nearly 20 percent market share in Europe. As I prepared for my visit, the luster was fading from Sugar’s company. Struggling with quality issues and reputation, he was considering returning to his consumer roots. I had been briefed to expect a flat-out arrogant and unfriendly CEO. His played-up animosity was used to pry up a better deal and was reserved for suppliers who did not dance to his tune. When we met, I found a depressed and not-exactly-overloquacious executive. Rather than work hard to regain his reputation and get his PC business back on track, his overall interest had wandered off. This did not prevent him from attempting to wheedle lower prices out of me and threaten me with going back to DRI.

In Sir Alan’s mind, software was an unnecessary evil. It just added cost and questionable value to his PCs. Fortunately, he was no longer speaking from a position of strength. I certainly didn’t relish a direct confrontation with him, but I nevertheless told him straight-out that another sweetheart deal was most likely not forthcoming. At that time, we achieved somewhat of a truce, but after our current contract expired, I expected renewed fireworks and pricing pressure. I was frankly delighted when the short meeting concluded.

The meetings in Germany were civilized and friendly. Siemens, the gigantic industrial engineering conglomerate, was a loyal MS customer. I knew most of her executives from my days in Germany. The only time we truly disappointed them was in ’86 after they licensed Xenix together with Windows, Word, and Excel tailored for this OS. This was a unique deal personally approved by Bill and Steve, which was never repeated anywhere in the world! Before I left Germany, MS changed direction, and we had to undo the agreement. The relationship setback was severe, but we managed to keep Siemens close.

The leading German PC manufacturer by volume was a much smaller company called Vobis. Her PCs, mostly manufactured in Germany, were sold through company-run PC stores. While mainly focused on the German market, Vobis had expanded into other European countries. This included opening a store in Paris on the famous Avenue des Champs-Élysées. Talk about an expensive ego!

The marketing campaigns Vobis concocted to increase showroom traffic were legendary. Her energetic CEO and co-owner, Theo Lieven, deserves credit for their success. Easily approachable, Theo was nevertheless a supertough and shrewd negotiator and quite a piece of work. In private he was an accomplished concert piano player and would later go on to found a piano institute from a Lake Como palazzo in Italy. The local press liked his outspoken and eccentric style. MS’s business with his company was dismal. He was DRI’s best customer and sold some PCs without any OS. MS Windows had wound up in his stores as a stand-alone product, but there was no chance to conclude an OEM deal for it. Our first meeting was uneventful beyond receiving yet another request for cheaper MS-DOS prices as a prerequisite to gain his business. He wanted me to slash our price to meet DRI’s offer. Not needing another Amstrad deal, I said “Thanks but no thanks” and departed.

My next conference with Manfred Schmitt from Escom was more productive. He had started a kind of Vobis clone company by opening his own PC stores. He had flirted with DRI a couple of times but was reconsidering his decision to better differentiate from Vobis and contemplated bundling Windows. We established a good rapport, but I came away with an uneasy sense of his integrity. The rivalry between the two companies and their vying owners nevertheless offered up an opportunity to play them against each other. I left Germany comfortable with having a solid team in place capable of handling the local situation well. A bit too optimistic as we will come to find out!

The concept of PC manufacturers opening company-run stores was unique. I questioned the profit model the two companies were using to justify what I considered a pretty bold adventure. Even after eliminating traditional distributors and retailers, they still had storefront and staffing costs. The generous margins in the early years supported this. But none of these stores was designed as destination stores or had unique merchandise like the ones Apple has built recently. In the end, hits to the German market from direct marketers like Dell and Gateway made profitability and, finally, survival tough. Vobis and Escom stayed alive longer than I had expected. The reason can be found in the Germanic reluctance to buy PCs by phone! Laugh all you like. Few Germans possessed credit cards and could not pay with check over the phone. Preferring to pay cash at retail, they enjoyed the instant gratification when taking their merchandise home then and there. The German soul ticked differently then and now.

Visiting a smaller company called Groupe Bull in France was blessedly without controversy. Her executives had long been Windows fans and supporters, but like other licensees, they were waiting for a better-performing version. Bull’s main sales went through large warehouse-type retailers like Carrefour. Like any other PC manufacturer in France, Bull’s team considered Apple the main competitor. French PC buyers with their entrenched avant-garde intellectualism were indeed superloyal Apple customers. Their way of life had blossomed with the appearance of the Mac. The French regarded themselves as artistic, just plain different, or more sophisticated than other Europeans. Snob appeal or not! Apple had successfully stroked their intellectual complexity, flattering their egos. Jean-Louis Gassée, Apple’s first French country manager, gets kudos for recognizing and rewarding the French souls’ artful and esoteric aspirations. IBM PC popularity therefore took longer in France than anywhere else to take hold and dislodge Apple from the top spot. Bull needed an improved version of MS Windows ASAP, to compete and win! As usual, we were working on one.

Visiting the Far East for the first time was enlightening, with a little culture shock thrown in. Ron Hosogi, who managed my Far East (FE) group, had planned our trip thoughtfully. A Japanese American who spoke the language fluently, Ron knew his crew well and was well respected, having been MS’s first Japanese subsidiary manager. Ron was analytical, understood technology well, and had a good memory for the different political vagaries of each subsidiary. I quickly learned that office politics were a way of life in Asia.

The first stop was Tokyo, where we showed up at Nippon Electric Company (NEC), Toshiba, Hitachi, and Sharp. MS’s Japanese subsidiary, ran by the smart and eccentric Susumu “Sam” Furukawa, had been MS’s first foreign one. He managed to establish excellent relationships with NEC’s management and her nearest competitor, Toshiba. Our market share in Japan was close to 100 percent, with only a few supersmall OEMs, comparable to US screwdriver shops licensing from DRI.

For a German, the gatherings in Japan were truly amazing. With the exception of our friend, Mr. Kaoro Tosaka from NEC, most executives preferred speaking Japanese instead of English. I came to rely mostly on translations provided by Ron. At once, my patience was stretched thin. Ping-ponging to and fro via intermediaries stretched the meetings into infinite exchanges. A congenial atmosphere was predominant. Any emotions customers experienced were hard to judge as their facial expression hardly ever changed. I was instructed by the local team to contribute only when I was handed a piece of paper—under the table—containing the proper answers the local team leader had predetermined. I ruefully obeyed. Nonetheless, this style of evasive communicating drove me nuts! Being the new guy on the block, I played along humbly and respectfully, but only on this first visit.

I later discovered most real negotiations were done in drinking clubs late in the afternoon, often lasting long into the night. You were considered a kind of kin if invited, and you were allowed and expected to cry. Yes, cry! Most Japanese managers lived in densely complex political environments following strict etiquette. Confrontation on company premises potentially endangered their jobs. The off-premise private-club meetings provided a kind of relaxation and release. They could let go, and no mention would be made of it later, ever. An unwritten but religiously followed rule. Confidentiality was held in highest regard. I came from a sharply contrasting cultural background and enjoyed a less prescriptive operating style. Admittedly, I struggled with their exotic social mechanics and delicate rules of communication. Before leaving Japan, I informed NEC of our intentions to enter the printer software market, and her management showed sound interest in reviewing our plans.