Resolve and Fortitude : Microsoft's ''SECRET POWER BROKER'' breaks his silence (11 page)

Grant Duers, the team leader and an experienced logistic expert, pointed out that reducing the numbers of replicators would lead to larger production runs and lower repro costs. He had my ear. Investigating how costly these inserts actually were, he discovered every so often that they exceeded royalties paid to us. Our customers were being creamed! (In a footnote to our fact-finding mission, we enlisted the product groups to reduce documentation page counts.) This convinced me that if our moral intent would not find customers’ approval, cost savings for sure would! Intending to close loopholes and increase our ability to control the flow of goods, we asked our attorneys to include auditing rights and report requirements in our envisioned replicator licenses. We then made it mandatory to put an MS designed label, containing an encrypted serial number, on all packages.

Implementing the new procedures enabled us to compare replicators’ unit reports with the ones OEMs submitted. It took no time before large discrepancies were discovered. Lag time between the reports often caused this and was easily straightened out. Deviations had other reasons: every so often, OEMs served the black market without paying us or reported fewer machines than they were actually selling! Sufficiently large deviations warranted pronto follow-up, and an audit via an independent accounting organization was typically the result. It required my approval. Ironically, most caught did not deliberately cheat. They had grown so fast that their data processing and internal-reporting capabilities lacked accuracy. My controller therefore made it her task to educate customers on proper data capturing and reporting methods. To her delight, collecting the proper amount of royalties due was, from then on, much more easily achieved.

Other MS groups watched anxiously if the new measures made a difference, and they followed as soon as our lead showed progress. Aligning all sales groups and improving the safety system occupied our logistics group for decades. Next we established a network for issuing security numbers electronically, directly to the printing press. When installing our software, we demanded that end users type in the sixteen digits found on our security label. Still not adequate! The pirates soon cracked our algorithm. In turn, we made the math harder for them. The next logical step was to use a WW computer network, which could validate every single number from a central place denying multiple uses to cheaters. With the appearance of the Internet, that got solved as well. Not all holes were ever plugged sufficiently, leaving room for substantial leaks.

Internally, my colleagues labeled me the antipiracy czar. In the press I was described as MS’s enforcer. None of these monikers offended me one bit. Successfully discouraging the thieving backdoor artistes was all that counted. As long as I ran OEM, I continued advancing these means with passion. Eventually, our products would be delivered on CDs or DVDs. We worked with one supplier, printing unduplicable (or so we thought) blanks with holographic images and distributed them to other replicators for final production. They gave our products a distinct and artistic look and again increased our security incrementally. The pirates countered with a design mimicking ours. In a fascinating game of global cat and mouse, we indeed won over time after several incarnations of hologram technology. The last task was to create piracy-proof sticky labels. They were not only hard to replicate but also nearly impossible to remove without damaging the carrier. Applying banknote printing techniques and special glue, we upped the ante.

Protecting our products was without question a never-ending effort. Each of our actions provoked a reaction from the notorious scam artists. Even in this field of endeavor, we learned again that complacency was enemy number one.

FALLING BEHIND

MS Windows 3.0, in combination with MS-DOS 5.0, benefitted five companies totally committed to design and sell these types of PCs: AST
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Research, Dell, Packard Bell, National Cash Register Company (NCR), and Gateway (GW). The most interesting case study of these emerging movers is GW’s. Her founder, Ted Waitt, brought the company to life on the prairies of South Dakota with a strong belief in selling PCs directly to customers, bypassing the retail channel. Displaying his loyalty to the community he’d grown up in, he designed the Gateway shipping boxes with a flourish of Holstein cow pattern. Producing high-end PCs for gamers and power users, his company was soon widely recognized as bearing a strong brand. I got to know Ted well, and one day he approached me about licensing MS Excel and MS Word for his higher-end product lines. Supportive, Bill gave me the green light for a trial period. I was convinced we had found an ideal partner. Typical GW customers bought highly customized PC systems by phone. Why not try to sell them our Windows applications at the same time? GW could easily preinstall them and save an interested buyer time and installation hassle.

Teaming up, we expected to increase our Windows apps market share, reduce piracy, and give our products extra market octane thanks to Gateway’s advertising. For GW our willingness constituted a first in the US market, and I was hopeful that pioneering application bundles would boost her sales and visibility. I agreed to a three-month exclusive. Afterward I would unleash the opportunity on other parties. The reason for GW’s short contract term can be found in my desire to move slowly with so many inherent unknowns. After all, our Windows apps were by now part of our crown jewels—at par with our OSs. I offered GW a reasonable but not too aggressive price. The exclusive made this palatable.

Market reaction to our experiment was measured skepticism. Considering the additional cost burden, other OEMs told me the initiative would never succeed. I disagreed based on my German experience and what we were doing in Japan. Retailers, our own retail sales, and our application product group were initially not persuaded either. I was stepping on a lot of toes, exploring untested territory. Jealousy over the additional OEMs’ revenues developed, and a kind of turf war ensued—politicking at best. Steve, in particular, wasn’t terribly enthused about licensing apps to OEMs in the US. Again, he was fully committed to “his” retail channel and had the merchant’s full attention and best interests in the fore. It was soon too late to be sentimental. Against all odds, the experiment developed into a stunning success. Within six weeks, we had GW’s competitors knocking at the door. At the end of the trial, GW begged me, to no avail, to extend her exclusivity. In its place, I convinced Ted to increase his commitment and sweetened the pot. Other OEMs trying to follow GW timidly barked at our prices but nevertheless experimented with a limited number of their own bundles.

To my astonishment, our applications’ software competitors took several years to follow us. They lost revenue, market share, and product awareness. Over time, the product group seized her opposition and, in the end, like Steve, embraced our deals. Ted told me personally that the bundling had an exponential effect on GW’s growth and visibility. MS obviously benefitted by enlarging her market share on systems where our apps might otherwise not have landed on—at least not legally.

Dell, GW’s fierce competitor, founded by Michael Dell in ’84, was now located in Austin, Texas. Like Ted, Michael had established his company from the committed belief of a direct-sales model being superior to retail. Dell was regarded as a low-end PC manufacturer until he refocused his company on producing PCs for enterprises. With a larger ego than Ted, Michael insisted on talking to Bill instead of his underlings. I met him several times and always admired his business sense but found him otherwise distant, impersonal, and not committed to MS’s range of products.

With Dell gaining share with enterprise customers and Gateway and Packard Bell being successful with consumers, Compaq’s PC business in the US felt the crunch. While her server business was going gung-ho, her desktop PC sales slowed substantially. Only available at retail, she had missed the direct-sales wave. The struggle with competitors and her falling stock price caught the eye of chairman Ben Rosen, who was determined to turn the situation around. I was surprised when I received a phone call from Mike Clark, a Compaq VP, asking me if I would come to Houston, Texas, and offer the exec team my market perspective. As much as I wanted to help our “partner from birth”—as Ben Rosen characterized our relationship—the invitation made me uneasy. I was not sure if I could—or wanted to—compete with the in-depth perusals of her dedicated marketing pros and their presumably high-handedness. At the same time, I felt honored to be considered.

To accomplish the task, I had to base my projections on our database of actual OEM reports. It served as the basis for our annual planning exercises. For manufacturers who licensed from competition, we obtained volume estimates: occasionally from them, their competitors, or independent marketing research. The piracy segment was more complicated to guesstimate. Whatever the source, our statistical data supplied us with accurate-enough info to plan our business quite well. Outside analysts, on the other hand, depended on less-accurate data often obtained directly from PC manufacturers. The desire to impress investors, brag to analysts, and leave competitors in the dark often diluted realities—up or down. Understanding this, I was cautiously optimistic of being able to address Compaq’s management diligently.

The confidentiality of our database was the last obstacle. Customers providing data in good faith wanted it protected from falling into competitors’ hands. The solution was to combine several customers and present only calculated totals. So I set out to estimate WW PC shipments, including the screwdriver segment and the number of pirated systems. I then prepared a chart comparing the growth of directly selling OEMs with the ones going exclusively through retail channels. My analysis made Compaq’s WW market share appear considerably smaller than her own propagated estimates. Expecting a push back, I hoped the attendees would come open-minded!

Admittedly, I was nervous and hoped any perceived controversy would lead to a lively debate. I was not to be disappointed. Entering the meeting room, I found five of Compaq’s top echelons: Garry Stimac, Mike Swavely, Mike Clark, Rod Canion, and surprise, surprise, Compaq’s European manager Eckhard Pfeiffer. I knew him from my time in Munich. Commencing with my presentation, I
got interrupted multiple times. Several people in the room, most specifically Rod Canion, then Compaq’s CEO, attacked as expected my total-market-size assumptions. He further was skeptical about my growth analysis and conclusions regarding the fast-growing direct-sales channel. Mike Clark had told me the night before that I could, under no circumstances, turn the meeting into a “pitching Windows” event. My conflict: the sales data of the companies I had combined in my chart were all bundling Windows on most of their PCs. Sneaky maybe. The conclusion of my presentation did spark a Windows discussion, the one I had hoped for. Maybe I had been a bit too deliberate and hopeful in my selection, shooting for the so-far unobtainable. What else to expect from a sales guy? As I left the room, Mike thanked me for a job well done; Eckhard took the opportunity of doing the same in German. I was left in the dark on what I had accomplished and how much our discussion would influence our business.

For one week, nothing happened. It was later confirmed that Ben Rosen, Compaq’s chairman, who did not attend the meeting, had gotten the information I had provided. I was not surprised when he shook up top management but astonished when he promoted Eckhard Pfeiffer to Compaq’s CEO post. I felt good having Eckhard at the helm. I had a personal relationship with him and hoped to influence our business relationship personally from then on. But Compaq’s management did not venture into the direct-sales channel and, most disappointing to me, did not license MS Windows as a result of my visit. Instead, the newly appointed CEO focused his immediate attention to improving supply-line management. While I may have been a factor in shaking up the old team with my global presentation, my hidden objective was unaccomplished. In confidence, Mike Clark told me a couple of days later, “Don’t worry, Windows will happen, just a little bit patience, please!” Me and patience. His reassurances sounded Chinese to me.

Not going straight back to Seattle, I flew into Dayton, Ohio, to meet Bill for a memorable visit to the National Cash Register Company (NCR). We were hosted in the Wright brothers’ mansion, which had been converted into a guesthouse—on historic grounds as I thought. Meeting NCR’s flamboyant and outspoken CEO and chairman Charles Exley Jr. for the first time was an experience in itself. The over one-hundred-year-old company had roots in the cash-register business. By now her minicomputer-based banking and accounting systems as well as her ATMs and communication boxes made up the core of her business, nicely complemented by service revenue. In ’83 she had ventured into PCs. Her strength was not just in hardware but also in value-added accounting and banking software. She meanwhile was a solid Windows customer, and Chuck Exley had expressed interest in meeting Bill to receive an update on our future plans and to explore how to cooperate on NCR’s home turf.

After a cooperative and in-depth information exchange, he invited us for dinner with his whole executive team in the marvelous dining room of this historic place. Right after, desert Cuban cigars were passed around, with Bill, to my astonishment, taking one of the large Churchills and Exley helping him to light up. Only once before had I seen him smoking cigars: during a dinner we hosted in ’86 for Scott Oki near Cannes, France, where we bid him farewell from his international job. Like everybody else in the room, he did not dare rebuff Exley’s personal invitation to enjoy a bad habit I still share.

As the blue smoke and the aroma of the Cubans filled the partially candlelit dining room, the conversation, helped by a few well-aged cognacs, got increasingly animated. Exley suddenly stood up and, as he opened one of the curtains, made his voice heard by saying, “All my guys are making way too much money.” There was an immediate silence in the room. With a big grin on his face, pointing to the illuminated parking lot outside, he added, “Otherwise, they could not afford all these fancy Nazi cars.” We looked at each other in astonishment. Porsches, BMWs, and Mercedeses galore—only his visitors had arrived in American-made automobiles. He was quite a character. Unfortunately, one year later, NCR was bought by AT&T, with him leaving for good. NCR subsequently gave up building PCs.