Autor: Przemyslaw Dobrowolski (dobrawka_at_nospam.org.pl)
Data: Sun 06 Jun 1999 - 19:11:21 MET DST
Mam nadzieje ze cos z tego bedzie:
Wysłał 04/06/99 6:02pm Graham Lea
IBM witness: the inside poop on MS and IBM killing OS/2
The DoJ has had considerable difficulty finding the right person and
company to give hard evidence
on how Microsoft deals with OEMs, because of the fear of retaliation
by Microsoft. IBMer John
Soyring was the wrong person, as it turned out (we've been saying that
about him for five years - Ed),
but at its second attempt, the DoJ seems to have struck gold with
Garry Norris.
As far as possible, we have chronologically restructured Microsoft
counsel Richard Pepperman's
arachnoidally-conducted examination, but there are some areas where it
is not possible to be sure of
what happened because of ambiguity in the transcript record that was
insufficiently probed by
Pepperman. We have indicated these areas, and sometimes suggested an
explanation. The
cross-examination is likely to provide more illumination.
In 1994 Microsoft proposed to IBM a frontline partnership, along the
lines of the one it had with
Compaq. IBM had proposed development projects with Microsoft, but in
each case Microsoft declined
on the grounds that IBM was a competitor, with the result that IBM
found itself at a disadvantage in
the marketplace. IBM would receive a lower price for Microsoft
products, with better technical,
marketing and development support - but providing IBM agreed to drop
OS/2.
A meeting between IBM and Microsoft was held in Chicago in July 1994,
when IBM VP Tony Santelli
met Joachim Kempin, the Microsoft VP in charge of OEM sales. The
subject was the improvement of
relations between IBM and Microsoft. It seems that Dean Dubinsky
(previously IBM's relationship
manager, and based in Seattle) for IBM, and Mark Beber for Microsoft,
were then charged with the
preparation of a framework document entitled "Alliance Proposal -
IBM-Microsoft relationship
overview".
IBM considers dropping OS/2
Pepperman introduced what was apparently a later draft of this as a
confidential exhibit (dated 5 April
1996, but it is more likely that this is a production date for legal
document discovery). The document
was subsequently reviewed by the IBM Corporate Executive Committee
(CEC), which today is
composed of the 13 most senior IBM executives. What was decided is
something of a conundrum,
since Norris' evidence is ambiguous on the point, and Pepperman did
not clarify it. The best
interpretation of the evidence available at the moment is that the CEC
may have changed its mind as
to whether to drop OS/2, which Microsoft was of course pushing for, in
order to get a better price for
Windows 95.
Alternatively, the PC Company may have acted alone, or with PSP (IBM
personal software products).
Dubinsky drafted a letter that Thoman sent to IBM CEO Lou Gerstner,
produced as an exhibit by
Pepperman, that stated that the CEC had not approved what Thoman
called the "Alliance". This letter
also says: "IBM PC company to reload [sic] OS/2 Warp on all systems."
It is the word "reload" that
suggests that the CEC may have reversed a previous policy.
It is also worth recalling that Microsoft's original problem with the
FTC in 1989, before the DoJ took
over, was over a collaboration between IBM and Microsoft whereby OS/2
was designated for the
business market, and Windows for the consumer market, this being
suspected as being
anti-competitive market splitting. This may have been one reason why
the CEC decided to compete
with Microsoft, if that was in fact what happened. When Norris took
over, the relationship between
IBM and Microsoft was poor "with little trust", according to a
document produced by Pepperman but
not identified precisely. Microsoft's principal reason for its
attitude was fear of OS/2. At a briefing
around March 1995 when he took over his new job, Norris was told that
Microsoft had been told that
IBM would not stop shipping OS/2, and that IBM would not promote
Microsoft products exclusively
or jointly. Norris confirmed that when he took over the Microsoft
relations job, IBM paid no royalty
on MS-DOS (or of course on PC-DOS), that the royalty on MS-DOS tools
was $2, and on Windows
3.x it was $9 (believed to be the lowest in the industry, and valid
until September 1997).
Gates loses face
There then appears to have been another meeting involving Rick Thoman,
Tony Santelli, and Bruce
Claflin for IBM, and Gates and Kempin for Microsoft, at Comdex in
November 1994. IBM apparently
informed Microsoft that it would be loading OS/2 on every capable PC
(i.e. with at least 8MB), with
Windows 3.11 also loaded as a dual boot alternative. Microsoft was
also told that IBM would follow an
'IBM First' policy, whereby sales reps would first try to sell IBM
products. If the potential customer
wanted Windows, IBM would support the product to ensure that the
customer enjoyed "a good
end-user experience".
The events at this meeting (which will not be considered by the court,
since it is hearsay evidence)
were described by Norris in his deposition, although he learnt about
them second hand during a
briefing four or five months later, when he was being briefed on his
new appointment: "I was told that
Gates was surprised; that Kempin was expecting agreement for us to
jointly and exclusively promote
Microsoft products, reduce shipments of OS/2; that he was embarrassed
because he didn't expect that
to happen. I was then told that over the ensuing months, up until the
time I got there, that Microsoft
had taken a number of retaliatory actions against IBM, reducing
coverage of the IBM account from
three people to one. They notified us that we would be treated like
any other OEM. They became
non-responsive to phone calls, slow in getting beta code.
"We would ship products up for capability testing. The test took 60 to
90 days and should have taken
one to two weeks. We were missing systems on the compatibility lists,
when our competitors' same
systems, similar-configured systems, were on those compatibility
lists. We were cut off and uninvited
to several OEM events. And some other things that I don't recall at
this time."
It appears likely that many of these retaliatory actions were
initiated by Kempin, who had clearly lost
face before Gates at the Compaq meeting. Microsoft was particularly
worried by OS/2 at this time,
because IBM was marketing it very hard, and sales were picking up.
Norris saw his first job as being
to renegotiate the market development agreement (MDA) that had been
signed in February with
Microsoft, to obtain additional better terms. Norris achieved this
later in 1995. Microsoft wanted $75
from IBM for Windows 95 - a very high price - but was willing to offer
some discounts in an MDA.
Microsoft offered an $8 reduction if IBM agreed to "restrict, limit or
delay shipping OS/2".
MS puts the screws on
Additional reductions were offered if IBM ramped-up Windows 95
shipments to 50 per cent of PC
shipments in 60 days, but IBM was unable to meet the requirements and
thought they were
over-optimistic on Microsoft's part. Close analysis of the Norris'
deposition transcript shows
uncertainty as to whether a decision was in fact made and implemented
to squash OS/2, in order to
take advantage of an $8 discount for Windows 95. No doubt there will
be further evidence about this
when Norris is examined and cross-examined. Many OS/2 developers and
users have felt betrayed at
the sudden change in IBM policy towards OS/2. Many feel that it was a
moment of infamy: but we
now know that eight pieces of silver were offered, and probably taken.
Norris negotiated the agreement for a Windows 95 licence, with a
further $7 of discounts agreed in
mid-1995. The first draft of a Windows 95 licensing agreement was
received by IBM around the time
Norris took up his new appointment. IBM did not commit wholeheartedly
to Windows 95 at the time -
probably as a negotiating tactic, although some IBMers might have
thought that OS/2 could compete
with Windows 95. The agreement was finally signed 15 minutes before
Windows 95 was launched, on
24 August 1995.
Four people from IBM attended the Windows 95 launch event in Redmond.
Microsoft's reason for
wanting a high price for Windows 95 was that IBM competed with
Microsoft, whereas Compaq did
not (and is believed to pay $25 for Windows 9x as part of its
frontline partnership). IBM's concern
was that in 1995 it had paid $40 million in Windows royalties, whereas
in 1996 the anticipated royalty
level would be $220 million, with the price of Windows having
increased from $9 to $45.90. This
should provide strong evidence of monopoly leverage, and negate
evidence from Microsoft's
economist Richard Schmalensee.
A key Microsoft negotiator was Mark Beber, who previously had worked
for IBM, as did his sister,
and his grandfather and father. He called Norris around 19/20 July
1995 and said that he had been
instructed to cut off negotiations about a Windows 95 licence until
the audit of IBM's Windows 3.x
sales had been settled. Norris consulted Tony Santelli, who was two
levels senior to him in the IBM
hierarchy. It appears that Microsoft wanted to negotiate at a higher
level in IBM, probably because
Norris was proving to be tough. An original list of 38 contentious
issues had been reduced to less than
10 by Norris before Santelli became involved in the negotiations.
Norris did the briefing of IBM's
management, and drafted communications.
Chairman Bill demands respect
Rick Thoman subsequently wrote to the IBM CEC: "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. ... He
[Gates] also cited 'smear
campaigns' planned by Dan Lautenbach and others against the Windows 95
product." Pepperman also
revealed in his questions that IBM alone was granted permission for
third-party installers to load
Windows 3.11, but at first this was not included in the Windows 95
agreement, although it was later
allowed again. It was also revealed that IBM negotiated the period
between the release of a bug fix
(OSR) and the beginning of IBM installing this to be increased from 90
days to 120 days, since IBM
said it needed the time for testing. Other OEMs had only 90 days.
Norris said that an IBM concern was that Microsoft might make ten
releases a year, and that frequent
quick releases would be burdensome. (The provision was included in the
Windows Family Desktop
Agreement, which was signed in 1996.) IBM was pressed by Microsoft to
agree to installing 300,000
copies/month of Windows 95 in the first five months after release,
failing which IBM would be liable
to pay an additional 20 per cent. IBM was sure this was impossible,
but signed in desperation to get the
code, it seems. In the event, IBM shipped less than 100,000
copies/month, but perhaps because of its
earlier protests, Microsoft did not seek the 20 per cent uplift,
although IBM did agree to an increase
from $45.90 to $46.60 per copy, with an agreement for 5 million copies
a year. We now know that
Microsoft was engaged in momentum marketing, and did not wish it to
leak out that real sales were
running at less than a third of what Microsoft hoped. This also
accounts for the unbelievably large
sales that Microsoft was claiming shortly after the release on Windows
95. The same pattern has been
seen for claims about NT sales, although these have been mainly
confined to percentage increases
rather than hard numbers.
Pepperman probed to find out whether retailers were saying that they
did not want OS/2, but Norris
said there were dual boot OS/2-Windows 95 PCs being sold. From
September 1995, IBM introduced
the 'IBM First' policy. In a document Pepperman produced dated
September 1995, and also used in a
presentation prepared by Norris for the IBM CEC, a bullet point read,
"'IBM Only' solutions have
caused client/server customers to lose confidence." Norris said that
at the time, IBM-Microsoft
relations were still poor.
Breakup hits IBM sales
Because of the delay with the licensing, IBM had missed market
opportunities and was late shipping
PCs with Windows 95. The document also said that "PC Company needs to
repair its Microsoft
relationship in order to respond to customer needs and avoid market
share erosion". Norris said that:
"As a result of that license agreement discussion and missing those
advantages that our competitors
had, we attempted to get in some of Microsoft's enabling program, the
solution programs, the
authorised technical centre program, the authorised support center
program, and the education centre
programs. But Microsoft rejected us on every attempt. Our competitors
were a part of those program.
So we were selling IBM Solutions. In some cases we were leading with
OS/2 by selling IBM Only
Solutions. And what the chart was meant to convey was just that --
that without the Microsoft
solutions, without the Microsoft certifications, without the Microsoft
assistance, that we would begin
to see market share erosion. And in fact, Compaq and Microsoft and
others had begun telling our
customers this."
Norris added that there were customers who said that they were losing
confidence in IBM, and that as
a consequence IBM decided to repair its relationship with Microsoft in
the fall of 1995. Norris
claimed a loss of $175 million at the time because of its inability to
support customers. IBM proposed
co-marketing to Microsoft, but it was always rejected while IBM was
"shipping those competitive
products".
IBM tried to license Microsoft Office, but Kempin said in a conference
call that Microsoft wanted
$250 for it, the same price as for OEMs that ship their machines
through retail channels. As a
consequence, IBM continued to ship SmartSuite.
It is going to be fascinating to see what happens in court when Norris
is examined and cross-examined.
Since there will be no written direct testimony, the Microsoft legal
team will find itself at a
disadvantage of not being able to spend days researching matters
disclosed in Norris' primary
examination.
The information in this chronology has been derived from the Norris
deposition, but there are gaps
and inconsistencies that cannot be resolved based on what Norris said.
Microsoft provided a
substantial part of the new information in documents it produced
during the deposition, and in leads it
provided in questioning the witness. We welcome comments and
information from readers to clarify
issues in The Register's Bulletin Board (see right-hand column), where
we shall post clarifications and
extensions, or to Graham_Lea_at_compuserve.com
--- --- *Przemek/2* - dobrawka_at_asua.org.pl Asua OS/2 Programmers http://www.asua.org.pl
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