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Secret evidence IV: the ‘MS Product Leverage Model’

Almost all of what Gateway wants to keep quiet about

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MS on Trial Examining what was omitted in the less-redacted, second version of Gateway software director James von Holle's second deposition gives some amusing insights into corporate paranoia. Gateway decided it even wanted to keep confidential the names of people involved in contract negotiations with Microsoft. We fail to see why Penny Nash, Kathy Skidmore, Thomas Kelly and Jim Collas should not have their names revealed on the record. Clearly Microsoft knew who they were. Perhaps Gateway was none to keen on the media contacting them, lest they said something unfortunate. There's further evidence of Gateway's fear of the media: its web site must be the only one in the IT business to give only a snail-mail address (no telephone, fax or email address) for media contact to corporate communications. Another redacted section deals with the hardware support that Gateway sought from Microsoft in March 1997, but why this two-year-old information should still be "secret" is hard to imagine. It seems that Gateway wanted drivers for AGP graphics, DVD disks, and dual displays released to them before Windows 98 was finished. In addition, von Holle wrote as part of Gateway's internal preparation for a meeting with Microsoft that: "The message to Microsoft is that they are slowing the pace of new product introduction in the industry. They have a dominant market share in the core operating system. They are not spending the required R and D to keep the pace of innovation in the OS current with the industry hardware. This will especially hurt Gateway because of our first to market sales of the latest technologies." So perhaps Microsoft's hot breath down Gateway's back is a little more understandable if that is what a major OEM privately thought of Microsoft - and we all know just how sensitive Microsoft and its leader are to the tiniest criticism. But it got worse. In a section entitled "Microsoft Product Leverage Model", von Holle wrote : "Microsoft 'Tax'. Wherever Microsoft gains a dominant position: no real option to Microsoft's products." Asked what he meant by the choice of the term "tax", he replied that "It was just a term used lightheartedly to indicate that that was something that we would pay each time we sent a product out the door." Von Holle admitted that alternative products were not evaluated by Gateway. He also noted under a heading "Microsoft strategic initiatives" that so far as the Internet was concerned, Microsoft wanted minimal competition. Another redacted section has von Holle saying that Gateway's margins on PCs are "generally in the 16 to 20 per cent range". This can hardly be a secret, since assiduous study of SEC filings would give basic data to work this out. So please don't tell anybody. Microsoft's corporal punishment method, as was so well seen in the rebuttal testimony of Gary Norris of IBM, is to be mean and demanding with the discounting of its price for Windows, which it does through a blackmailing system called market development agreements (MDAs). In Gateway's case, one of its many MDAs gives it a $1 rebate for installing the latest version of Windows. That's another secret, by the way, as is the information that compliance with the Windows Hardware Quality Lab's criteria gives a further $6.50 discount. The single section that The Register has not seen, because it was physically deleted from the file before we received it, follows some questions about what other OEMs were paying Microsoft for Windows. An exhibit was produced to von Holle that seems from its numbering to have come from Gateway. It may well be a Gateway discussion document about OEM Windows prices. After the 30 lines that still remain sealed, von Holle is asked if Gateway's relationship with Microsoft is important to Gateway, to which he replied in the affirmative. The next question concerns Gateway's desire to offer users a choice of browser, so it could also be that this was the subject of the hidden dialogue, although it is less likely. Microsoft agreed to pay Gateway for the cost of the IE4 CD-ROM that it shipped, it was revealed. In the interest of scholarship, if any reader could slip us [Graham:Lea@compuserve.com] the missing text, we'd welcome seeing it. Further evidence of Microsoft exerting its will was seen from the section that shows that Microsoft required Gateway to agree to grant Microsoft patent immunity. Von Holle said: "My understanding is that we grant patent immunity to Microsoft for any patent that we might hold that they ship in their products that we license." He agreed that Gateway would have preferred some compensation for this, but "it was not negotiable, that it was going to stay in if we intended to licensing products". There are no redacted sections in the cross-examination, which supports the thesis that Microsoft had control over Gateway's evidence. Indeed, the main revelation from this secret version of the von Holle deposition is the power that Microsoft continues to exert over OEMs generally. Unless remedies are found that deal with this, most of the effort so far will have been in vain. It is imperative that if Microsoft is to keep its stewardship of Windows, then the whole MDA system be dismantled immediately and there must be a published (and possibly regulated) price list. ® Complete Register Trial coverage

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