Compaq-MS murky secrets II – an analysis

We piece together the story of how these two lovable companies conduct their business

MS on Trial Many secrets about how Compaq negotiates with major partners such as Microsoft and AOL have been exposed in the transcript of Compaq vp John Rose's evidence at the Microsoft trial, and in documents that have been released.

Although there were several closed sessions of the court when details of the fees paid by Compaq were revealed, and although many documents are still wholly secret, enough has been released to make it possible to attempt a forensic reconstruction of some of Compaq's most important negotiations.

It is hard to piece together the evidence, because of the confusing way it has (deliberately) been given, but we present the events chronologically. 1 October 1992: Microsoft-Compaq agreement (Frontline Partnership) about Windows prices.

January 1993: A Compaq document filed under seal and entitled "Microsoft meeting preparation" noted issues that worried Compaq at the time: "Judgment: how retaliatory would they get? [probably referring to Compaq's intention to license the Go OS for a hand-held device]. Pricing advantage [implying Compaq was getting better prices from Microsoft than other OEMs]; revenue from updates; access to early SDKs; field sales people; support and training; inclusion in advertising; tone towards Compaq in press and with customers; selection and elevation of other OEMs as leaders; making integration relations even more restrained than they are today [the strain from shunning Winpad, presumably]; access to source code, modification ownership; Microsoft directional information and plans."

Another slide is headed "potential reactions to Go PDA decision" which confirmed that Compaq had decided to go with Go. 21 April 1993: Gates wrote to Compaq CEO Eckhard Pfeiffer thanking him for selecting Microsoft as "the exclusive supplier of operating system software for your hand-held computer products."

A handwritten annotation on the letter by Pfeiffer to Lorie Strong and Bob Jackson says: "Exclusive? Please draft response for my signature" which suggests that Compaq did not think its agreement to drop Go, following the meeting with Microsoft, meant it exclusively turned to Microsoft. An unknown hand has added "March 12, 2 (b) 'Compaq agrees to market and sell Winpad as the exclusive operating system for Compaqs for the period of ????? exclusivity".

This seems to indicate that the Microsoft-Compaq agreement was modified, almost certainly to give Compaq better terms from Microsoft. Of course, Winpad failed, and so alas did Go. 19 January 1995: A Compaq internal document noted that: "Jan Claesson [Microsoft's OEM group manager] said that few OEMs had renegotiated their licenses after the consent decree.

He said most companies are still paying on a processor basis, some with a five per cent exclusion. Jan indicated that a Compaq request for a 'per copy' license would be viewed as a major issue at Microsoft. David is planning to propose language changes to see if our proposals would be acceptable to Microsoft."

This is an indication as to how Microsoft was working with OEMs to frustrate the terms of the consent decree. The prohibited conduct in the consent decree, which Microsoft seemed to be ignoring according to this Compaq document, was:

"A. Microsoft shall not enter into any License Agreement for any Covered Product [which includes Windows 3x and 9x] that has a total Duration that exceeds one year ;

B. Microsoft shall not enter into any License Agreement that by its terms prohibits or restricts the OEM's licensing, sale or distribution of any non-Microsoft Operating System Software product;

C. Microsoft shall not enter into any Per Processor License; D. ... Microsoft shall not enter into any License Agreement other than a Per Copy License."

8 August 1995: Rose claimed that a verbal agreement was reached with Microsoft in a conference call involving Gary Stimac, Hugh Barnes, John Rose, Steve Flannigan [vp, strategic relations, reporting to Rose], Lorie Strong and Steve Goldberg of Compaq, and Joachim Kempin and Don Hardwick of Microsoft. One agreed point was that Compaq would not remove IE and MSN icons from the desktop. Dunn (responsible for Presario software) had not participated in the call, as Rose had originally thought.

15 August 1995: A Memorandum of Understanding (MOU, exhibit DX2264 [DX is a designation fro Defence exhibits accepted by the court]) apparently reflected the conference call and is said to be an amendment to the Compaq-Microsoft licence agreement, with an attached letter from Don Hardwick [Group Manager, Microsoft OEM Sales Division] to Flannigan.

However, it was not signed until June 1996, and Judge Jackson wanted to know why it took so long. Rose said that "it took the lawyers and contract people that long". The judge was incredulous: "To write two paragraphs and attach a letter?". Rose said the next day that they were under the impression that Compaq was operating under the Hardwick letter, and that Microsoft accountants needed a signed agreement, as Compaq was to receive 50 cents for every CD distributed from Microsoft, and Microsoft's financial year ended 30 June.

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