Secret deals MS uses to control PC companies

MS on Trial MDAs are not discounts from royalty rates, Norris adamantly maintained, but "a vehicle that Microsoft used in order for us to perform activities that benefited them in many ways. It was a vehicle that also gave royalty reductions that imposed costs on the PC manufacturer, in order to attain the royalty reductions. There were several provisions in it, for example, that would have required us to reduce or eliminate our shipments of OS/2, one of which I can specifically recall where it said, 'make Windows 95 the standard operating system of your company'." Some of the conditions that Microsoft presented to IBM if it wished to get a licence for Windows 9x or NT4 were: "adopt Windows 95 as the standard operating system for IBM: $3 [discount per Windows 95 licence]"; "Windows 95 is the only operating system mentioned in advertisement", to gain a $1 MDA reduction; and "reduce, drop or eliminate OS/2", which would be worth a total of $8 in MDA reduction. New in Norris' testimony was the reason for Microsoft stopping negotiating in July 1995. The instruction came from Gates, Ballmer and Joachim Kempin (Microsoft OEM VP) and resulted from IBM's bid for Lotus that was announced on 5 June 1995. Microsoft was concerned that Notes and SmartSuite would erode Microsoft's market share of Exchange and Office. Mark Baber, Microsoft's IBM OEM rep, quizzed Norris: "What are your plans for Lotus? What are IBM's plans? Do you plan on pre-loading SmartSuite? Are you going to drop SmartSuite in the boxes of your PC systems? Exactly what do you plan on doing with SmartSuite?" OEM chief Joachim Kempin played the 'I wanted to meet to clear the air. Bill Gates does not know we're having this discussion' card to Tony Santelli, general manager of the RS/6000 over dinner. Santelli emailed IBM vp Rick Thoman with Kempin's message: "LVG [Gerstner] should have called Gates to explain [the Lotus acquisition]", which was arrogant, to say the least. Another Kempinism that appeared to owe more to Far Eastern notions about face saving than a business negotiation in the USA, was when Kempin suggested to Santelli that the $10 million payment might be reduced if there were "an offer of good faith from IBM, something he could show Gates". It smacked of a demand for a "confession" in the worst days of the cold war. Roy Clauson, who was the resident manager of IBM's programming centre in Kirkland, Washington for liaison with Microsoft, was also at the dinner and emailed Santelli the next day a comment: "Microsoft is definitely worried about SmartSuite being given away and eating into their `office heartland' ". Clauson also noted that "there are lots of `combative' people in Microsoft ready to go to war with IBM." It is noteworthy that IBM has access to NT source code at Kirkland. If IBM only produced what Microsoft liked to call "neutral systems" (which in the real competitive world would be called systems with no competing software), then it would be allowed access to Windows 95 and BackOffice source code. On 17 July, following the completion of the acquisition on 5 July, IBM announced that SmartSuite would be the primary desktop offering from IBM in the United States. Microsoft told IBM it was breaking off negotiations three days later. It was at this point that Thoman had a call from Gates in an attempt to get matters moving, and Norris was able to hear a "pretty loud" Gates, despite the fact that Thoman "had the phone up to his ear". (The day Gates screamed IBM's house down) The foci of Gates' wrath were: SmartSuite, the audit, and OS/2 competition. The concern was that Microsoft might be forced to reduce its price for MS Office, in the face of competition. Since OEM prices for SmartSuite were in the order of $5, it was a serious threat. Furthermore, it was a case of a competitive market acting in the interest of consumers, which is the last thing that Microsoft wanted. Gates and Ballmer decided that a Windows 95 licence would be linked to the completion of the audit (which in fact was for MS-DOS, LAN Manager, Windows 3.0, Windows 3.1 and "eventually" OS/2) being undertaken by Ernst & Young). ® Complete Register trial coverage