Resolve and Fortitude : Microsoft's ''SECRET POWER BROKER'' breaks his silence (26 page)

On May 17, 1998, I received an early morning phone call from Bill at home. Calling from DC, he detailed how he and his legal team had convened with the government attorneys several times since the court had lifted the Windows 98 injunction. In return for not filing the next suit, the Fed’s demanded that MS drop IE from Windows and open up certain nondocumented Windows application programming interfaces to all independent software vendors. Our ensuing phone conversation centered on eliminating IE from Windows. The other issue was for Bill to decide. The request to rid Windows of IE meant that the DOJ was slipping its long prying fingers right through a crack in the workshop door to mingle with our product design. My key question to Bill: what would be the next feature on their list of objections? He didn’t know but that agreed caving in would be only the beginning of further government interferences. Or as Churchill once said,
the end of the beginning
—for our ability to compete!

Bill went on to describe that he had solicited Warren Buffet’s advice, who had asked him to yield and compromise. Remembering my German-army education, I disagreed. There comes a time for soldiers in combat to understand the vital importance of taking a hill, regardless of the consequences for their own lives. It’s a tactical issue, though often a moral one—testing a person’s own courage and commitment to the cause alike. You see the hill, it’s the right thing, you summon your resolution and reserves, and you move on to conquer it—bullets or not. I considered this an equivalent situation. We undoubtedly had a noble cause! So I just said to Bill, you cannot let the government determine what underwear you can’t sport. You will have to stand up for your right to design products as you see fit. Good products are winning products; government-compromised ones suck. “Take that hill, Bill!” He answered mumbling, “I hear you,” and left me guessing what he would finally decide. I had given him my perspective, though I remained unsure if he had the resolve and fortitude to follow through.

I had observed Bill making pretty tough statements in a number of situations, only to compromise hours later. There is nothing wrong with such behavior; I have no doubt executed similar reversals in my business career. My People’s Republic of China MS-DOS license negotiation comes to mind. The current situation the company found herself in was different, and not just a simple business negotiation over a couple of dollars here and there. We had to defend an ironclad principle MS had been built upon: the freedom to design successful products. This was our most noble cause, a hill we had to take at all cost. I couldn’t locate any middle ground Bill could have settled for.

During our phone call, Bill had reiterated his fear of history remembering him as just another Rockefeller. Reflecting on this comment later, I concluded that I had probably given him poor advice. If he harbored fear for his reputation and his legacy, stalwartly standing up to the Feds began looking daring. Bill would need to let go of his personal feelings and trust his integrity and the compelling nature of his cause. I am unclear with how many other people he talked to during that eventful day and just how much he valued my input. In the end, no compromise was offered, and as promised, the DOJ filed a new, broad, sweeping, and historically profound antitrust lawsuit on May 18, 1998. Knowing the outcome today, I would still have given Bill the exact same advice.

The new filing, lastly, affected a number of people in MS the wrong way. Despite feeling greatly enthused about the upcoming 98 launch, the renewed attack left people depressed or uncertain about the outcome of the looming conflict and fearful of how much real peril it posed. Again I was pressed to field numerous questions in the hallways and over water coolers, e-mails, and phone calls. I radiated optimism and confidence that we could defend ourselves successfully, which helped calm people down.

The mood in the company changed significantly just seven days later when the court issued a 2:1 decision in regard to Windows 95 in our favor. In a nutshell, it said, “The preliminary injunction was issued without adequate notice and on an erroneous reading of the consent decree. We accordingly reverse and remand.” The court plainly and soundly overruled Jackson in toto. In very few instances had this magnitude of a reversal ever been levied. The tone throughout the twenty-one-page opinion was harsh and embarrassingly cast Jackson in an awkward and incompetent light. But it was not unanimous—reason to worry?

The most promising fact was the court’s acknowledgment of MS’s integration power. It found “consent decrees are generally interpreted as contracts,” and the ambiguous provision under dispute needed to be judged on the parties’ original intent. The court explained that the decree was issued because Novell/DRI back then had sternly opposed the integration of MS-DOS and Windows components into Windows 95. By explicitly permitting this integration, the appeals court found that the Feds had sanctioned “any genuine technological integration [sic: by MS]” into 95 and what we had done passed that test. An incredible total victory for us! In a nutshell, Jackson had failed to perceive the case as a contract dispute, obviously eager and motivated to muddle in software design. In this regard, the appeals court reminded him, “Courts are ill equipped to evaluate the benefits of high-tech-product design.” Would this ruling, even as it was not unequivocal, strengthen our position in the upcoming trial and make us head for the victory lane again? I was hopeful.

Not appreciating the harsh ruling and its tone, Jackson was deeply hurt. He never quite regained his emotional state of mind, as witnessed by his closest friends and a few journalists. Yet the saga would continue with him in the center. He was down but not out. In a fresh sweep of irony, one week later, he was picked by the DC district court to preside over the freshly filed antitrust case. Either an enormous judicial blunder or good luck, we will see!

Numerous observers claimed that Jackson, appointed by President Reagan, was a conservative judge. No activist on the bench, Jackson professed he loved free markets and fierce competition and was in general opposed to an overreaching government. But he for sure did not appreciate competition in the legal arena, the one he had to bitterly endure when the appellate court relentlessly picked his final judgment apart. The new and complex antitrust case would challenge him further. In fairness, I will say Judge Jackson is a human being, and his battered emotions about the blunt reversal are understandable. He could have recused himself from the new case. Yet a flickering fire burning inside him made him go on doing his duty as he wanted to understand it, overshadowing the legal journey ahead of us.

INTERNAL POLITICS

Despite the legal wrangles, my business was exploding. For fiscal year (FY) ’96, ending June 30, my group had earned about half of MS’s profits. We were riding the Windows 95 and IE 4.0 combo wave. One year later, we got close to surpassing $5 billion in total revenue, an annual growth of over 50 percent, exceeding my projection by $650 million. I had mentioned this possibility to my skeptical bosses once or twice before. They responded by shaking their heads, expressing I was nuts. Close to the end of that FY, by mid-June we were approximately $350 million short of my personally stated goal, with time rapidly running out. The money was there—I was convinced! Salespeople, who beat their FY revenue objectives early on, tended to slip invoices into their drawers and hold them back to sandbag next year’s results. They had done this before, and we had always clamped down on them. They tried anyway. I instructed my controller, “Find the money,” and within forty-eight hours, she discovered nearly $300 million in delayed invoices. As the deadline approached, more royalty reports ready to be invoiced were revealed, enabling us to finish the year $20 million over target. We celebrated with pride and deep satisfaction, relishing an astonishing achievement.

The response from our CEO was markedly different. Bill immediately proceeded ordering the corporate controller to conduct an audit into what he called “revenue invention by the OEM division” without warning me. This was his prerogative, no question, though another sign his management style was being impacted by outside events. Our relationship over the years had been built on trust, but now that rare and historically effective essence was eroding.

I knew our result was unimpeachable; I shrugged it off and told my controller, “Let him bring it on!” We actually could have done an extra $150 million, which I decided to hold back—call it my personal sandbagging privilege. They came in handy the following FY. As expected, nothing came out of the audit. All numbers checked out, though I personally never received any praise except from my executive colleagues, who wondered why their shared annually bonuses were so large.

The company had always been cautious in projecting business revenues. Our profits had earlier come up at the hostile Senate hearing, and follow-up articles had labeled them excessive and typical for a monopolist. Producing record results was therefore suddenly considered inappropriate—at least for now. What counted for me: we had done it! Delaying revenue would have only worked for one quarter anyway, so why pile it up too much? It was a golden time of great accomplishments, of self-sacrificing teamwork, and extraordinarily dedicated efforts. In our own little moment in time, we were as good as it gets, old team. Thank you!

The internal audit was just another sign of the company growing political. The huge OEM revenue jump aroused jealousy inside the company. Friends of Steve were covertly working on changing the way revenue was being recognized. They’d been trying for a while, but this time their pleading took effect. As a first step, Steve decided to allow the enterprise sales group to include all versions of Windows in her sales portfolio. From now on, these types of customers had a choice where to obtain OSs from directly—from MS’s enterprise sales group or through my OEM customers. Steve was convinced his decision would accelerate our Windows NT workstation share drive. In my opinion, it would mainly lead to discounted OS prices for large enterprises. And it did!

Maybe the sudden change was inspired by placating the Feds in showing less revenue and profit for the OEM division! Being pretty annoyed with Steve’s unilateral action, I argued my case hard. I showed him the math; he just shrugged, not wanting to lose face. His decision stood. I told him he was the boss and I would not question this in public. He had blatantly taken away part of my business without proper analysis or consulting me beforehand. Politically motivated as I thought and his to justify!

I was not upset enough to quit or, God forbid, challenge him in front of Bill; I knew better. I struggled explaining his decision to my people as we continued to go about our business. Under these new considerations, the hardest task was preparing next year’s budget. No one could predict with any degree of certainty how much business would stay in the OEM group and what would wind up over in the enterprise sales group. As a result, both groups sandbagged their revenue predictions. In turn, fewer resources were allocated, and we missed out on valuable sales opportunities. If this was Steve’s intent, he truly managed it to shining perfection.

It would have been infinitely more effective had Steve formulated a business objective for reaching a desired goal and let the division leaders hash out a strategy to achieve it. In doing so, we would have worked closely together, shared resources, and coordinated marketing and sales campaigns. Because of his ivory-tower decision, the gap between the two groups widened, became personal, and turned into rivalry. Steve was learning the hard way.

The not sufficiently vetted decision caused real harm in regard to OS piracy. Product deliveries to enterprise customers had traditionally been less guarded than the ones through OEM and retail channels. Enterprise customers were trusted to report product usage based on an honor code. Checks and balances were nearly totally missing. While most reported honestly and secured the unprotected master copies they received appropriately, some abused the system. Unprotected masters found their way into the open market, enabling pirates to replicate products at will. Over time, certain reporting and replication rules were tightened but never sufficiently, leaving us vulnerable.

THE BUSINESS MUST GO ON

WINDOWS 98, FINALLY

Launched on June 28, with the slogan “Works better, plays better,” 98 was unmistakably stable and consumer-centric. Allowing for faster program switching, it added DVD, USB drivers, and two-plus gigabyte disk partitioning as core features. Its most controversial aspect remained the inclusion of a nonremovable version of Internet Explorer 4.01. Emboldened by the appeals court ruling, we felt free to take even this last amount of freedom away from end users. (I never understood why!) Adding insult to injury for our loathing enemies, it left the Feds speechless. While the channel bar I had lobbied for earlier soon developed into a minor flop, 98’s dynamic HTML
35
engine allowing independent software vendors to easily integrate Web-browsing abilities into their applications was widely praised. A preview in the
PC Pro
journal applauded the updated browser enthusiastically. IE now allowed easy to launch and customizable files and folders to act as hyperlinks on the Web, making them totally transparent and seamless to use for information gathering. Netscape Navigator had lost its edge, and with Apple deciding to exclusively bundle IE with all her Macs, Netscape’s last main bastion fell.

Despite the seams-bursting dot-com bubble showing early signs of peaking, my business continued to grow nicely at an impressive rate of 20-plus percent—though considerably less than the impressive above 45 percent, which had catapulted my division through the mid ’90s. Exceeding revenue and profit projections, my group continued to show a nearly flawless performance.

We had beaten DRI and IBM and had backed traditional versions of UNIX into a niche position. Apple had remained a formidable competitor over the years but was hampered by the never-ending turmoil in her executive suite and her pricing philosophy. After Jobs had been ousted in ’85, the company had gone through three CEOs before Jobs got reinstated in ’97. By then Apple was licensing her Mac technology—the exact move we had always feared. This was authorized by Mike Spindler when he was Apple’s CEO and was continued by his successor as a mean to gain market share.