Resolve and Fortitude : Microsoft's ''SECRET POWER BROKER'' breaks his silence (20 page)

The next morning, I had second thoughts about my proposal. I was concerned about the difficulties both might encounter in selling the settlement plan. Calling Tony, I made a strange and unexpected offer: if Lou Gerstner would sign that agreement personally, I would get Bill to do the same. If they could make this happen, I requested three originals. Yes, I wanted to keep one of them for my own library as a historic document. I offered a five-million-dollar discount for Lou’s signature.
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Was I overstepping my bounds? Perhaps. Foolishly, I banked on good old-fashioned raw courage for IBM’s hierarchy to approach its chairman and tell him the bold-faced truth. Yet the cowards in IBM did not fess up. I had played a game of compromise and redemption in the spirit of reciprocity, progress, and easing pain. I lost. The final response signaled excessive pride or principle. Stupidity did not cross my mind, though in retrospect, the word neatly applies. Continuing animosity—irreconcilable differences—toward MS still appeared deeply entrenched. Until the complicit and afflicted souls left IBM altogether, we would continue to struggle with any and all cooperative efforts.

What I did not know was that Bruce Claflin’s days in IBM were coming to an end. Two months later, Tony Santelli stepped in to fill his gap. As I understand it, Bruce was being blamed for having lost the lead to Compaq in ’94. He went on to run 3COM as CEO. No wonder he no longer possessed sufficient clout brokering an internal deal—I had unknowingly and unfortunately made my pact with the wrong devil.

In hindsight, the man in IBM who was responsible for the inflated OS/2 numbers was probably Lee Reiswig, head of IBM’s personal software division. As he talked to
Research Board
in ’94, he bragged about having shipped 4 million copies of OS/2 the year before, confidently boasting to ship 6–10 million copies during the next twelve months. He further claimed that 40 percent of all enterprise customers were using OS/2. Knowing the reality better,
Research Board
people mentioned in their book
The Limits of Strategy
, “Wasn’t this just ‘shelfware’ shipped but neither bought nor used?” It was worse—most of it was never shipped!

ON STAGE AND BEYOND

To achieve maximum attendance, the Windows 95 launch would normally have been hosted in NYC or San Francisco. Helped by the circus-like frenzy, we arrogantly chose a different site, the new software mecca: Redmond in the state of Washington. And everybody showed—lock, stock, and barrel. The MS campus got converted into an amazing tent city, a teeming spectacle accommodating all global sultans of tech. My key OEMs, including IBM, showcased Windows 95–powered PCs, a multitude of component manufacturers demonstrated new graphic and audio cards, and our software competitors eagerly showed off their newly created 95 applications. An imposing and never-repeated industry occurrence! The main tent where the official announcement would be made held just over five hundred people and was packed to the seams. Invitation only!

Two hours prior to the main show, I hosted my customers for breakfast. A lot of them knew each other from our annual briefings. Bill and Steve joined us, thanking them for standing behind us at this critical, competitive junction. I echoed their sentiments. License negotiations had not been easy, and together with our guests, I was happy the hard work was behind us. Only IBM was missing. The last company yet to sign on. Reminding the audience of the master agreements they had all painfully negotiated and signed, I expressed my sincere hope that one day a license would fit on a single postcard. I expected these to be signed and returned without legal review. A robust chorus of applause and laughter was the response. Inwardly, I deeply hoped we could one day deliver on what I had just joked about, and somehow, the company did.

Right afterward, at 8:35 a.m., just twenty-five minutes before Bill and Jay Leno went on stage to launch Windows 95 to the roaring fanfare of the Rolling Stones’ “Start Me Up,” I met with IBM’s team. Bruce handed me a check signed by Mr. York, IBM’s chief financial officer, along with the 95 license agreement and audit settlement. We signed them simultaneously, shook hands cordially, and wished each other luck. No smiles anywhere. I then handed the check to my controller and went into the event tent letting Bill know we had the money and the last holdout on board. He offered me a perfunctory “Great job,” not a hint of a smirk. Like me, he was concerned that this was a Pyrrhic victory,
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which is considered the successful conclusion of battle with a formidable competitor inflicting more long-term losses than immediate gains. Would we file this away under the same category?

The signs had been on the wall since three months earlier, after IBM had bought Lotus to obtain her office productivity suite, including Lotus 1-2-3 and a program called Notes: an innovative and extremely popular server-based groupware product used for network collaboration. MS had no equivalent. Like a browser, the product included its own programming language and had the potential to upset the OS balance. Notes was the brainchild of Ray Ozzie, who shortly after the merger left IBM and much later, after I had already left the company, actually joined MS as chief technology officer.

In purchasing Lotus outright, IBM was taking serious aim at another set of MS crown jewels. While IBM charged for Notes, she expanded the bundling of Lotus’s office productivity suite, called SmartSuite, to all her PCs, enticing businesses to adopt it as standard and preventing consumers from buying our version. Fortunately, she stopped short of licensing it to her rivals at rock-bottom prices, which could have hurt us profoundly.

I never understood why IBM bought Lotus for such an incredible price. Nearly four billion US dollars. Lou Gerstner, in his book, mentioned that it was all about Notes and not because of SmartSuite. The Notes concept and the surrounding hype were relatively short-lived. It was neatly eclipsed by client-server computing and collaboration over the Internet. Most Notes clients were later given away for tokens or bundled free with WARP. IBM again demonstrated that she had no well-grounded experience selling PC software. Buying Lotus—though never admitted—served only one purpose: to further nettle MS. The Feds happily approved the merger with no strings attached. Fortunately, as IBM gave her newly acquired software away, mostly for free with little appreciation from her customers, zero revenue streams were created, and improvements were defunded over time. The Lotus gnat therefore developed into only a short-lived annoyance and wound up as a nice little tax write-off for IBM.

Obviously, it soured the relationship between us further. IBM’s history of bundling software with her PCs started with World Books encyclopedia in ’94, a competitor to our Encarta. She temporarily bundled IBM-Works, an integrated and inferior MS Works–like product, with her consumer PCs. OS/2 got enhanced with a free Web browser of her own making. The behavior, while predictable after our separation, irked Bill and Steve tremendously. Bill, still looking for opportunities for fence-mending and synergies, was the most disappointed. Only he could eventually solve this puzzle, and he would get his chance.

For now he felt outright rejected and disrespected by IBM’s management, and when he had any contact with IBM representatives, he vented his feelings by offering a solid dressing-down. I never understood why he was so compelled to reveal his true emotions. His adversaries were in no mood to change their way of doing business, and with—or because of—IBM’s new boss, the animosities between the companies continued to flourish. My job was to conduct normal business with her PC branch and not to get defocused because of mother Big Blue’s hostilities. Bill in his heart—despite being furious about IBM’s current attitude—never quit dreaming of her as a one-day potential partner. For the time being, this was only in his head, and on hold! All the same, I had to be ready for the day sentiments changed and the Rubicon separating us could be crossed.

I found an interesting comment in Lou Gerstner’s book about the “high-performance culture” he was desperately trying to create: “Losing to a competitor—whether it be a big fight or a small one—is a blow that makes people angry.” Touché. Bill felt the exactly same when he called Richard Thoman, IBM’s group VP in charge of the PC group, right after IBM had bought Lotus. I was in Bill’s office when the phone call turned ugly and Bill became angry, fearful of an abrupt loss of market share and describing to Thoman how licensing and bundling competitive software was a detriment to our overall relationship. He acted exactly like a man living in Gerstner’s high-performance culture. Not appreciating what his boss was preaching or how Bill treated him, his counterpart took it personally. Unknown to us, one Mr. Norris, another IBM employee, was allegedly sitting in Thoman’s office, listening to Bill’s comments. While I was listening on the speaker phone—and Rick was made aware of my presence—Norris’s presence was not revealed, and Thoman did not use a speaker phone. Hmmm! How could the secret listener really understand the content of this exchange as he would later claim in court? I still wonder.

The dust-mantled audit was finally completed in November of ’95,
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showing that IBM owed us approximately $10 million, including interest. I was surprised at the amount, having anticipated, together with the audit team, a far greater number. IBM at once attempted to retrieve the residual millions. Bruce by then had moved on, and so had Richard Thoman, enjoying a brief and unsuccessful spell as president and chief operating officer of Xerox. Tony Santelli, replacing Bruce, could not or did not want to remember what we had agreed upon, though he should have. So we kept the money, investing only a token in a new PC model intro with IBM. My sincere hope was that the long and winding road of this episode had offered IBM the following insight: the wisdom of compliance in the event another vendor ever had the guts to audit her. Goodwill and an expedited process could have saved a lot of pain, suffering, and company funds.

I meanwhile was off to learn an extra job. VP Chris Smith, who had followed in Jeremy Butler’s footstep and ran what we called the rest of the world, decided to retire just before we launched Windows 95. Steve asked me to take over his territory. Now I was responsible for the WW OEM business and all other MS business for Latin America, Australia, Southern Africa, and all of Asia except Japan. The next year I spent five and a half months on the road—the road of a jetliner—seeing customers, giving speeches, talking to analysts, and visiting subsidiaries. I could not ever possibly have performed this wide new range of responsibilities successfully without the invaluable aid of an additional business manager, Kathy Weisfield. She knew the people in my new territory intimately, and I empowered her to make many decisions on my behalf. I never once regretted it. I have to admit that the extensive travels did get to me. I was conditioned to do them for two to three months per year; doubling that made managing OEM difficult. Succinctly put, my life now raced by in alternating phases. One week on the road and the next week in my office, preparing for another trip.

For my OEM business, the Windows 95 frenzy translated into a nice uptick in PC units bundled with Windows. OEMs distributed Windows 95 complete with IE. Not up to par with Netscape’s browser, we followed up with solid improvements. With us not sleeping at the wheel, Netscape delivered an improved version as well just after 95 shipped. What journalists called the browser wars was definitely on and raging. MS and Netscape went head-to-head, matching each other’s browser features and functionalities with passionate and unrelenting conviction.

Most interesting for me was how OEMs started complementing their business model after discovering the Windows desktop as a lucrative advertising media. Interested vendors paid OEMs to put promotional icons there. In their mind, they constituted in-your-face and well-targeted advertising that produced better results than magazine adds. Several of my colleagues nevertheless believed it threw design aesthetics overboard and cluttered up our original desktop layout. Yet we did not object. Our standard contracts stipulated that OEMs could freely add icons to Windows’s desktop, including the ones from our direct competitors. But they were not permitted to remove any of ours, making certain Windows was presented and preserved as a whole.

With the appearance of 95, purchasers found a newly designed MSN (Microsoft Network) icon on their desktop. Pointing to and clicking on it steered them to an MS-owned subscription service providing online information and e-mail services. Entering into this business meant competing directly with AOL. Right away, AOL accused us of leveraging Windows and getting a free ride to obtain subscribers. Not having to pay OEMs a bounty to be present—like she did—seemed unfair to her management. The ever-present Internet Explorer icon on the Windows desktop made Netscape equally unhappy. Her management accused us of competing unfairly by illegally tying our browser to Windows—a potential antitrust violation. The Feds were listening again.

Eager to entice and induce end users into using IE, both Steve and Bill abhorred it when OEMs placed other browser icons side by side with ours. They were undoubtedly on a crusade, subscribing to the competitive culture notion, à la
Gerstner. I wanted no part of it and told my people explicitly to make placement of any non-MS icons never an issue with customers. They were just distributing product options. The browser-usage decision was ultimately made by end users, influenced by recommendations from colleagues, friends, and family. OEMs populating the Windows desktop with alternatives had no control over user habits. Yes, IE was Windows and Windows was IE, as Steve had expressed to me once. IE for sure was a convenient choice. A trap to rely on. As I saw it, we needed to provide the best browser to beat Netscape. My order to my troops: Don’t be confused. Sell Windows, guys, period, and not IE!

Expanding their advertising options, OEMs cleverly added promotion sequences into the Windows boot-up process. But here they were on thin ice. To accomplish this, they had to change Windows code, which they had promised to refrain from in their license agreements. Another quarrel was brewing as we carefully addressed these violations.