12th June 1999 Archive
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When the judge wonders if you're getting anywhere, you're in trouble...
Although IBM exec Garry Norris was personally subpoenaed to appear at the trial, he received a great deal of support from IBM legally, meeting IBM lawyers two to four times a week for three weeks before his testimony. From time to time there have been hints of internal dissension at IBM, but Norris seemed to be well-schooled in avoiding any responses that might have thrown light on it. Richard Pepperman, Microsoft counsel of Sullivan & Cromwell, at times acted like a Microsoft marketing person, as Microsoft expects from all its paid help. He sometimes made propaganda statements in court, rather than cross-examining Norris. An example was in citing the revenue of IBM versus that of Microsoft ($81.7 billion versus $14.5 billion), and how IBM's software revenue was $11.9 billion last year. Norris was not prepared for such debate, so did not point out how Microsoft's asset value considerably exceeded that of IBM because of its bloated share value. Pepperman did not do well personally with Judge Jackson. He attempted to ask Norris about IBM's antitrust record, but was told by the judge "I don't think it's worth the time", so Pepperman did not succeed with his intended propaganda point. His courtroom inexperience showed when he broke court etiquette three times by starting to ask questions about exhibits before they had been accepted by the court, prompting the judge to say: "May I admit it into evidence before you ask him questions about it?" Pepperman made another mistake, and was admonished: "Mr Pepperman, don't refer to it as an agreement, yet. You misstate the character of the document. It's an IBM/Microsoft alliance proposal which, apparently, was a work product of Microsoft." Pepperman several times tried to quiz Norris on documents he had not seen, and to find out what he knew from hearsay. This provoked Judge Jackson to say somewhat irritably: "He can only testify as to what he had personal knowledge about". At one point, there was a discussion about the link between two documents, so Pepperman offered to get Baber or Kempin to clarify this to the court, but the judge remarked: "Well, if you're going to call Mr Kempin or Mr Baber, there is a lot more they're going to have to testify besides who wrote these documents." It was another indication that Judge Jackson was none to keen on Kempin. Another non-relevant attack was on IBM's excessive hierarchy. Norris was only five levels below Gerstner, so he is of course quite senior. He also introduced much talk about "your boss' boss", but there was no mention that Baber, Norris' Microsoft equivalent, was several levels below Gates as well. Pepperman tried to diminish Norris in ways that went beyond normal cross-examination practice, but Norris weathered the attacks well while Pepperman emerged battle-scarred. Pepperman managed to develop some of the religious fervour seen in Microsoft's so-called evangelists in following lines of questioning as to why IBM did not promote Microsoft products. Norris explained patiently (20 times) that IBM would not exclusively promote Microsoft products. There was a nice example of Norris turning the tables on his inquisitor: Pepperman: Now, pursuant to this "IBM first" initiative, IBM attempted to market and sell IBM products to customers first; correct? Norris: What's wrong with that? Pepperman: Nothing. Pepperman may have been under pressure from OEM boss Joachim Kempin to put in the boot, because Kempin was sore that he had "stuck his neck out" in an attempt to bring about an alliance with IBM, and been made to look a fool in front of Gates when IBM refused his terms for this. Dean Dubinsky, IBM's Kirkland, Washington-based relationship manager was something of a loose cannon, although there seems to be no evidence that he went native as a result of his geographical proximity to Fort Redmond, judging from a draft briefing that he prepared for the incoming svp of the Personal Systems Group, Sam Palmisano. Norris thought that Dubinsky's remark that "IBM turned the tables on Joachim Kempin" a bit too strong for the briefing, and excised it. Several times Pepperman failed in his point scoring. In one instance he pounced on what he thought was an error made by Norris in his deposition concerning the authority to sign contracts. Norris had said there were two places to sign, but Pepperman had not considered that this might be an either/or situation, rather than requiring both signatures, so Norris sent him away with his tail between his legs. Microsoft failed to produce a document to the DoJ during discovery but it wanted to use it to make a point. Judge Jackson allowed it to be admitted, but thought it was "a self-serving out-of-court statement" without provenance and which could result in a sanction against Microsoft. It raised the spectre of other documents that had not been produced by Microsoft. Unfortunately, many of the juicy exhibits being presented in court have not yet been posted, nor are they available at the courthouse in Washington. Judge Jackson became bored at Pepperman's trivial line of examination, and asked pointedly how much longer he would be, to which Pepperman replied five or six hours. Judge Jackson offered a sage suggestion: "I'm not sure how much progress you have made so far... but be economical with your examination". The judge enquired whether that would "keep you on schedule". A recess was then taken. after which there was a bench conference with the transcript taken under seal, which probably concerned timing issues. It therefore seems that there is an implicit agreement that each side has eight court days for rebuttal, meaning that the present phase will end on 1 July, in good time for the independence day weekend, and possibly a well-deserved holiday for Judge Jackson, while the litigants scrape together their legal arguments for the next stage. ® Complete Register trial coverage
Business 12 10:49
The deal isn't 'ship less OS/2,' but 'ship more Win95,' capiche?
MS attorney Pepperman tried to establish that Microsoft did not make efforts to kill OS/2, but the story that emerged was more about how Microsoft set about achieving this indirectly. There were some semantic issues examined, but nothing further emerged about any IBM executive decisions concerning OS/2. The suspicion still lurks that there are important aspects of this story that are not yet told. Microsoft's approach to OS/2 had been to find ways of sidelining it rather than confronting it, for example by suppressing mention of it in advertisements, in exchange for soft dollars. Microsoft was clearly careful not to include in agreements any direct dealings about OS/2, because of the prima facie evidence that this would have provided for antitrust purposes. Pepperman claimed that "Microsoft never included in any MDA proposal any milestone that required IBM to stop shipping or eliminate OS/2", no doubt aware of that Microsoft had not done this because of antitrust concerns. Judge Jackson scented the implication, and his question implied his cynicism: "You mean in writing?", which Pepperman confirmed. It was an important indication that the judge is concerned about illegal practices to suppress competition. The criteria that Norris elaborated as to how Microsoft was trying to kill OS/s were: first, there were milestones for royalty reductions that, combined, had the effect of IBM reducing, eliminating or dropping OS/2 in the market; second, Microsoft said verbally that it wanted IBM to eliminate, drop, reduce or stop shipping OS/2; and third, financial incentives amounting to $48 million that "would have the effect of killing OS/2 in the market". Norris said that "We asked Microsoft on many occasions what the 'adopt Windows 95 as the standard operating system for IBM' meant. Microsoft would not quantify what that meant. Did it mean that we had to ship 100 per cent to make it the standard? Did it mean we had to ship 90 per cent for it to be standard, 80 per cent, or what have you? We also asked how it would be measured. We were informed, according to my briefing, that it was up to the discretion of Microsoft as to whether or not we met that milestone." Sam Palmisano [svp personal systems group] emailed John Thompson [svp software group] in September 1996 that "Once Windows 95 was announced, retailers told us that they would no longer be ordering any OS/2 systems as their demand was going for Windows 95 only". What we can never know with certainty is whether OS/2 would have been a success if IBM had declined to license Windows 95. The consequence of IBM not making a serious stand against Windows 95 was revealed in the following exchange: Pepperman: Part of the reason why IBM decided it needed to repair its relationship with Microsoft was because the marketplace had gone strongly in favour of Windows 95 rather than OS/2, correct? Norris: Yes. As a matter of fact, speaking of the marketplace, we really had no commercially viable alternative to Windows 95. So the fact of the matter is while the marketplace may have gone there, we had no place to go." There was no commercially viable alternative to Windows 95. You had to have Windows 95 to be in the PC business. When Pepperman asked "And when did IBM begin shipping Netscape Navigator with its computers?" it had the same innuendo as if he had asked "When did you start using heroin?" The answer was some time in 1996, and that IBM still did this. In his redirect examination, Philip Malone for the DoJ focussed on some little tricks Microsoft had invented to help the OS/2 market to wither away: Malone: While there are no dollar numbers here, if IBM had agreed to ship 75 or 90 per cent or even 100 per cent of its desktop PCs with Windows 95, what if any impact would that have had in reducing or eliminating your shipments of OS/2? Norris: It would have had the impact of reducing or eliminating OS/2 shipments. Malone: What, if any, impact on IBM's ability to ship-sell OS/2 would it have had if you had either only mentioned Windows 95 in your ads or said that Windows 95 was better than other operating systems? Norris: Well, we certainly would not have shipped OS/2 for much longer, had we done that. Malone: ... it says "PC 95 shipping within one month of Chicago launch," whereas the one we looked at before was "PC shipping at Chicago launch," and again, "minimum, 75 per cent, exceed would be 90 per cent, far exceed would be 100 per cent of desktops and portables." In order to earn any MDA royalties that are similar to this, what if anything - what if any impact would that have had on IBM's ability to ship OS/2? Norris: It would have forced us to reduce, eliminate or drop OS/2. ® Complete Register trial coverage
Business 12 10:53
Who's playing hardball in the Samsung talks then?
Pointed remarks about copper and Alpha can only mean that negotiations over the chip's future ownership have reached the hardball phase. As reported here a few days ago Compaq is in talks with Samsung with a view to offloading the whole shebang, but a senior Alpha executive has been talking in terms that make IBM sound the more likely future partner. Does Compaq want Samsung to move faster, pay more, or both? The crux of the matter is that Alpha marketing director Jim Parsons has been telling journalists Compaq wants to move Alpha to copper interconnect in the 1999-2000 timeframe, at the 0.18 micron stage. Alpha is currently fabbed by Intel and Samsung, but neither of them wants to go to copper this early, in that size. Which leaves IBM as the only obvious company whose fabbing could support the move. Compaq has been talking to IBM about fabbing Alpha for some time, but the possibility of a better offer from Samsung has given the company two directions it could jump in. By talking about an early move to copper Parsons is effectively suggesting that an IBM deal could still roll, while putting pressure on Samsung's negotiators. We'd therefore expect this one to come to a conclusion pretty soon, and wouldn't altogether rule out a scenario where Compaq offloaded Alpha, and both IBM and Samsung picked up the ball. ®
Business 12 13:26
But it's not being sold directly by Microsoft - yet.
Microsoft has finally got its act together and started selling the full version of Windows 98 SE from its Web site - at the somewhat less than bargain estimated price of $209. As we've been pointing out for the past couple of days, (MS dozy Webbies story) the company seems to have been trouble figuring out the Ts and Cs of this particular permutation, but now it has. This version of the product is aimed at buyers who don't already have a Microsoft operating system that qualifies for an upgrade, and it's actually something of an innovation for Microsoft. The company has previously tended to sell upgrades at retail and full product via preinstalls on shipping PCs. This particular version, although marketed at the Microsoft site, is actually being fulfilled via online retailers, so Microsoft is clearly ring-fencing its own Win98 service pack and upgrades sales channel from its retailers - for the moment. Microsoft is also pushing an upgrade version for Win95 and Win 3.x users through the same channel, estimated price of this one $109. That's more in line with the usual price tag, and fits in with a probable street price in the $90 area. What you pay retail for the upgrade is of course more than what a lot of PC manufacturers pay MS for the full product. What MS appears to want for the full product at retail meanwhile is even more than MS charges IBM for NT Workstation when it's trying to screw SmartSuite and OS/2 (see trial reports passim). Finally, a little perspective about who's making most out of this process (three guesses). A former CompUSA staffer claims that Microsoft charges CompUSA around $97 a pop for Windows 98, and CompUSA usually sells it for $99. For Red Hat 5.2, on the other hand, the cost to CompUSA is approximately $29.95, and it sells for $39.95. Says our informant: "I got the general impression that Microsoft had somehow 'forced' CompUSA and other retailers into keeping such low margins." Microsoft's price to the retailer compared to what the company calls the "estimated retail price" would give the retailer a margin of approximately 10 per cent. But if the usual street price (which Microsoft happily dishes out when it launches products) is $99 or thereabouts, then there's really no margin at all for anybody except MS. We'd welcome further information on how MS keeps its price up and the retail price down. Note for non-US readers: Yes, we know we haven't covered non-US here. The international subsidiaries don't have their act together yet. But Software Warehouse UK is currently saying it has "Windows 98 V2" on order, priced at UKP 112 for the full version and UKP 59 for an upgrade. There's also a Japanese version of Win98 on order for UKP 220, we know not why. ®
Business 12 13:28
And is lucky VIA being cajoled into one of those alliances Intel's so keen on?
Earlier Register stories (Intel outed on PC133) suggesting Intel is planning a volte face on support for PC133 SDRAM have been partially confirmed by a highly reliable source - company CEO Craig Barrett. In an interview with CMP mag Electronic Buyers' News Barrett concedes Intel has "contingency plans," but we think it's a wee bit stronger than that. Says Barrett: "If it happens that PC133 becomes a preferred choice, Intel has lots of options for new memory bus lines in chipsets." Not exactly what you'd call a firm commitment, but it certainly means Intel has shifted visibly from the previously official 'not in million years' policy. But as we reported a few days back, Intel has been busily writing to VIA Technologies' customers telling them VIA's PC133 chipset breaches Intel's licence agreement with Intel. Intel seems to be intent on slowing VIA up, but magnanimously says it won't be demanding that VIA recall the offending articles. Nor has cuddly old Intel busted VIA for the breach as yet, although there was the small matter of the "accidental" lawsuit it fired-off last month. Despite appearances to the contrary, all this adds up. You can almost smell the burning rubber as Barrett says "If it happens that PC133 becomes a preferred choice." Right now PC133 is the preferred choice, Intel's Camino problems mean the company has a large and widening hole in its roadmap, and Barrett's handbrake turn is a last-second attempt to avoid it. As we've been predicting for months, Intel's going to have to go PC133. Climbing down gracefully and coming second to VIA isn't however particularly palatable, hence the claim that VIA's chipset is illegal. That one might or might not play in the courts if it came to it, but Intel's intention is more likely to be to coerce VIA into coming to a buddies arrangement where the two stride forward in formation, claiming undying mutual devotion. That would allow Intel, fresh from one antitrust suit, to avoid being seen brutally beating up on a small competitor. But mightn't one see such an arrangement as smelling more than a little of the allegation being made against Intel in the other antitrust suit by Intergraph? If at some point in the near future VIA's chipset miraculously gets the Intel OK after all, and Intel equally miraculously supports PC133, you'd do well to wonder what else might have changed hands. ®
Business 12 16:10
Bizarre wish that Gerstner pay tribute to MS technology (sic)
Microsoft attorney Pepperman was last week determined (or under orders) to exact some revenge for what Microsoft saw as IBM's lack of respect. He produced an internal IBM memorandum dated 24 July 1995, shortly before the launch of Windows 95: "A general point is their perception of IBM's non-respect for Microsoft. Gates was irate because of the lack of respect he feels IBM has for Microsoft. He cited Lou Gerstner's quote in Business Week that Microsoft was a great marketing company, but not a great technology company, as an example". Pepperman noted that the memorandum said that "Gates also cited, 'smear campaigns' planned by Dan Lautenbach and others against the Windows 95 product." Norris was pressed about the smear campaign, but pointed out that "smear" was Gates' word. He told Pepperman: "What I'm trying to... relate to you is the fact that we did marketing promotions and marketing campaigns for OS/2 during this time frame. If you refer to them as 'smear', that's one thing. If we refer to them as normal marketing competitively, that's another." Pepperman dug out an article from Computer Dealer News, 8 March 1995, that said: "When IBM launched OS/2 Warp, the latest version of its operating system, last September, it also distributed a remarkable document entitled 'OS/2 Warp versus Windows 95.' It is subtitled 'a decision-maker's guide to 32-bit operating system technology'. What is unusual about it is the lengths it goes to in touting the superiority of the OS/2 and the way in which it denigrates its competitor. From the first sentence in the document, IBM launches into attack. 'This document is designed to provide the corporate decision-makers with the benefits of OS/2 and information about critical weaknesses in Microsoft's forthcoming Windows 95 operating system.' " At least there was no doubt about the source of the magazine's advertising revenue, or the influence that Microsoft PR was able to bring to bear on the editorial content. Norris did his best to even things out by insisting on reading into the record the context of Pepperman's highly selective quotations, such as: "So what about Chicago [Windows 95]? Good question. With one foot still buried in the DOS/Windows grave, Chicago is yesterday's technology dressed-up to look like tomorrow's 32-bit OS/2. Why wait for an impostor? OS/2 is here today, and represents the real future in personal computer operating systems." Norris seized the initiative: "You asked me as to whether or not we were engaged in a public campaign to disparage Windows 95 from this document. "And then you read from the bottom three paragraphs without going on to the next paragraph that... goes on to talk about all the salt that Microsoft rubs into the wounds, stating, 'the OS/2 applications market is small and getting smaller. Windows applications account for almost 60 per cent of all dollars spent worldwide on applications software.' And then the document goes on to talk about how the two were engaging in a fight between OS/2 and Windows." It is symptomatic that Microsoft still wished to play a propaganda game for its remaining supporters while the sand runs through the hourglass of inevitable legal doom. At the time, Microsoft was waging the greatest marketing blitz in the history of computing, with nothing being allowed to detract from its Windows 95 campaign. Gates was evidently peeved that Gerstner had not come to kowtow at his court during the summer of 1995, despite several requests from Microsoft that were orchestrated by Kempin, who seemed to be taking on himself the mantle of chief of protocol. IBM suggested that a Thoman-Gates meeting as a first step. Dean Dubinsky from IBM's Kirkland, Washington office recorded current sentiment in an email to Norris in November 1995: "Neither IBM or Microsoft is satisfied with the current relationship as it stands. Microsoft believes that IBM is out to annihilate Microsoft, and this perception, (reality), has made any co-operation almost impossible. At a minimum, Microsoft would like IBM to stop 'disparaging their products in public'." Pepperman dwelt on this, trying to suggest that this was Dubinsky's belief, rather than a report of what Dubinsky had found out from Microsoft. Judge Jackson called 'time' and told Pepperman he thought he had "exhausted that line of enquiry". ® Complete Register trial coverage
Business 12 16:17
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