Resolve and Fortitude : Microsoft's ''SECRET POWER BROKER'' breaks his silence

by Joachim Kempin

  Soon thereafter, real trouble started. OEMs selling PCs to the business community had made huge commitments to us. We had priced OS/2 at approximately $60 per copy, and OEMs had pledged over $60 million in the form of firm guarantees. The fear of IBM gaining an advantage had caused a stampede of commitments. The lukewarm reviews made its demand plummet. Potential buyers’ opinion of the software bombed, tanked, and crashed. Suddenly, there was no longer a sizable market; even IBM was struggling. Enterprise customers decided to wait for the next version. Yet the payment clock had started ticking. I logged a crescendo of complaints. Hoping the crisis would be resolved sooner than later, I decided to sit tight until a more promising next version arrived.

  I readily admit juxtaposing OS/2 versus DOS and Windows was not an easy task. In contrast, IBM positioned it to the IT world as the mother of all OSs. The bet was on! Her covert goal was to ultimately wrestle the lucrative business away from us. To accomplish this, she demanded that the next version comply with IBM’s newly concocted, hyperambitious, mainframe-encompassing software architecture. The crux a preponderance of Windows programs would have to be altered to run in the latest OS/2 environment violating the holy grail of preserving software compatibility. MS battled this tooth and nail but was forced to give in—all of a sudden facing a long and painful waltz to IBM’s tunes.

  Our top trio immediately stopped tooting OS/2’s horn enthusiastically and avoided calling it a replacement for DOS/Windows. A hurricane of inside opinions regarding the value of continuing the joint development surfaced and swirled. Among MS executives, there was a growing fear of not being able to determine the company’s destiny much longer. Would we have to follow IBM’s lead or, worse, live forever beneath the pinstriped, belabored, and unforgiving rule of her increasingly ironfisted dictatorship?

  Anyone with a pulse and a newspaper knew. I got my updates from SVP Paul Maritz, a lanky Rhodesian educated in computer sciences at the Universities of Natal and Cape Town. Calm, deliberate, sardonic, and self-effacing, Paul offered welcome counterpoints to Bill’s and Steve’s frothiness. Part of his brilliance was his penchant for thinking things through and taking his time to do so. Where Bill and Steve would hip-shoot you an opinion in thirty seconds, Paul might take a day for better judgment. I liked working with him; he was no fear monger, always keeping his cool.

  He dealt with IBM’s development groups. Steve handled the continuing and politically delicate negotiations with her line management, like IBM’s SVP James Cannavino, an outspoken and prickly executive. Mistrusting the relationship, MS had semicovertly begun to improve Windows’s performance. I was given a preliminary demo and was left much impressed. This was going to be fun to sell!

  Plugging along and not considered the most talented group, our OS/2 team displayed far less enthusiasm. The stubbornly rigid IBM bureaucracy imposing archaic development and testing rules left a mark on our programmers. Containing the disagreements and rising conflict was tough. Once in a while, a disgruntled developer from either company called a journalist, spilling the anonymous beans. The whole ordeal became a bit of a public secret. With a confidentiality agreement in place, talking to the press could have meant dismissal. Were these leaks planted? I really didn’t know, but rumors about the tensions were swirling every which way.

  My customers heard about them, grew skeptical, and observed how fast OS/2 became IBM-centric, creating an unfair disadvantage for non-IBM peripheral sales. Supporting such a trend was absolutely not in their best interests. In talking to independent software developers, they found that applications for OS/2 were not their priority. If not paid by IBM, they finished their Windows versions first. The momentum was changing rapidly.

  At the beginning of ’88, a decision had to be made to chart avenues beyond OS/2. I soon learned that MS’s product management—encouraged by the progress made—was accelerating Windows. Meanwhile, Dave Cutler, a top-notch Michigan-born software architect from Digital Equipment Corporation, had been hired. Not fond of OS/2’s internal design, he concocted a new architecture, later called MS Windows NT.14 Its emergence guaranteed a head-on collision with IBM.

  Tinkering with OS/2, accelerating Windows, and brainstorming about NT’s future was a high-risk gamble at a time when Steve Jobs was secretly approaching IBM’s top echelons to convince them to bet on NeXTSTEP as the future OS supplier for IBM PCs. He had developed this UNIX-based OS after his ouster from Apple at NeXT, a company he founded to make superior PCs for the education market. Jobs’s motivation to approach IBM was twofold. First, he wanted to get even with Bill, who had refused to write applications for his new baby. Secondly, he desperately needed money to keep his fledgling company alive. IBM turned him down, and when Bill and Steve heard about this from James Cannavino, they made sure IBM had no second thoughts about this opportunity.

  As head of a sales team, I was struggling to clarify why my customers should bet any longer on OS/2. The for-now-fictional Windows NT was internally already positioned to succeed it. NT was being designed with a robust, secure, and portable architecture in mind. Its plan called for adding sophisticated networking and mainframe connectivity for enterprise customers, exceeding OS/2’s capabilities. Selling four OSs in parallel challenged our positioning knack, confusing OEMs, end users, and foremost the backbone of our success: ISVs. There were rumors the nebulous NT would be named OS/2 version 3.0. For my taste, MS was waffling instead of communicating compelling reasons to stay on course with Windows.

  Even after version 1.1, OS/2 sales hardly improved, except for IBM’s, who continued to basically give it away. Having decided to wait before addressing the overpayments quagmire, I had to act. Our relationships were being severely strained, particularly with OEMs who had signed long-term contracts. My disbelief in the success of OS/2 ultimately influenced me to stop my customers’ bleeding of cash by scaling down their unrealistic commitments. We both had grievously erred by trusting the unproven to succeed.

  IBM never gave up on OS/2, and when version 1.2 arrived, her drive to increase its popularity eventually affected Windows sales. With its improved version delayed further, Bill and I were getting greatly concerned. The pendulum was swinging slowly but surely in favor of OS/2! One of the key reasons: neither Lotus nor WordPerfect was willing to move their applications to Windows. With commercial customers depending on them, IBM had a valid selling point. I suspected that IBM gave both companies monetary incentives to keep them away from Windows. Bill made several calls to Lotus execs, beseeching them to alter course. They never wavered. No one ever expected that betting on the wrong horse would one day cost Lotus her independence.

  It got more confusing. To cover up the simmering conflict, IBM and MS announced an extension of their partnership, broadening it to MS-DOS. The weird and politically motivated move made IBM responsible for its next version. It contained nearly four hundred bugs when it was released. IBM had flunked the test. Unable to shift the blame, MS was embarrassed and set out to correct its deficiencies. Some insiders accused IBM of sabotage. The reality was different: we were resource bound. The renewed focus on Windows, the still-manpower-sucking OS/2, and the ambitious NT plans had left us with no resources to spare to take care of our bread-and-butter product. In addition, top developers excited by up-to-the-minute Windows technologies were no longer overeager to work on good old MS-DOS. My customers lost confidence and started looking toward DRI. A hit for my business was a foregone conclusion.

  Not wanting this to happen, I started selling non-OS products to receptive OEMs like MS Money, MS Encarta, and MS Works. These applications had consumer appeal, and it did not take long to find interested OEM customers with focus on retail. But I knew the only things that would truly get us out of crisis was an improved version of DOS, the release of Windows 3.0, and a further weakening of OS/2 demand.

  FLYING HIGH

  THE WORLD BELONGS TO ME

  At the tail end of ’88, MS’s board requested my presence to analyze the OS/2 situation and the future dimension
s of the OEM business. I must have passed muster because soon thereafter, the company went through reorganization, and I was promoted to run the OEM business worldwide. What a career move! Jeremy Butler, who had been my second boss in MS when managing Germany, was my new superior, reporting to Jon. Being moved down mattered little because I maintained my direct access to Bill, so I went to see the world!

  I had shared my sales strategies with the international team in the past, but the regional guys, loving their sovereignty, did not always follow them. Therefore, policies differed by region at a time when our customers were establishing beachheads in foreign countries and expected equal treatment. To get a grip around this challenge, I centralized the OEM organization, something that ran counter to MS’s general management philosophy. The change allowed me to enforce pricing discipline, explore opportunities simultaneously and without delay, respond to a crisis faster, and stamp out local favoritism. I appointed US-based managers—and not all of them United States nationals—to take command of each of the different regions in the world.

  OEM personnel working in local MS offices around the world still reported into their country teams. As such, they were part of a matrix organization with the caveat of taking OEM business directives only from headquarters. Being commanders in the field while remaining closest to their customers, they were welcome to accept tactical inputs from their country teams as long as this did not endanger the overall aim of our missions. This is squarely along the lines of how Auftragstaktik principles work best. Initiatives desired and rewarded!

  People working in the newly formed OEM division appreciated the clarity provided by the new structure. Several GMs and Area VPs still regarded the newly centralized organization with skepticism, yet business benefitted from streamlined communications and timely executions. Over time, the nonbelievers came around. The new org allowed me at last to add a small nucleus of marketing people to the team. It eliminated an Achilles’s heel and created a vital and effective weapon for the division, keenly focused and decisively driven to increase share and defeat competitors.

  With the new organization in place, I addressed some lingering customer issues. Customers were complaining that reporting royalties on a per-system basis was too burdensome, time-consuming, and costly. The sheer number of new systems rolled out had exploded, and they recommended bunching the ones carrying the same central processor together instead of listing every model separately. My key managers agreed in principle but warned me that losing these details would make our forecasting less precise. I acknowledged their concern but sided with the customers. From then on, we allowed them to license and report on a “per processor” basis.

  Next, customers were asking for extended contract terms. Demanding these beyond our customary two-year term meant long-term price guarantees for them. If I had run a PC manufacturer, I’d have been challenged to commit beyond two years, however tempting. For a number of customers, price stability trumped the uncertainty of turbocharged market transformations. So we gave them the option to lock-in prices for up to five years.

  Revising our licensing options presented a golden opportunity to reduce the number of pages in our contracts. I loathed the ever-ballooning page count, and so did my customers. So I challenged my attorneys, and they astoundingly reduced them by 40 percent. Encouraged, I made it a habit throughout my tenure to keep agreements as tight as possible, saving negotiation time and legal expense for all involved.

  To discuss next year’s objectives and to personally get to know my top managers, I invited them to attend a conference in the USA. For the first time, they all sat as one team in one room and listened to the self-same messages in unity. I opened the event with a key note, which I started by playing a video clip containing Patton’s monologue from the movie named after him. Watching George C. Scott reenact this passage, calling the Germans Huns and listening to the gory descriptions of how to kill Krauts had its effect. The audience loved it and took notice of this German fellow who had the guts to use such a drastic animation as introduction. After I finished, they all understood why I had opened with Patton’s monologue. A brutal fight was looming with DRI. That company wasn’t taking prisoners, and our job was to be smarter and win against them all over the world. Our key weapon as I postulated and demanded then: significantly improve customer relationships. The expected result: increased Windows sales and zero losses to DRI and beyond!

  The message got across to my sales reps, who found the newly created per-processor variety easiest to sell. Customers liked its reporting convenience and the longer terms we now offered. Consequently, my new team secured a ton of new business as it gave DRI a run for her money. This prompted her to march—hat in hand—to the Department of Justice screaming for intervention. Unable to beat us with winning products, she and other competitors lobbied the Feds to regulate us. Proving once again what the Prussian general Clausewitz once advocated that the “defeated feel their setbacks more than the victors enjoy their triumphs.” The Feds lent an ear, and by the end of ’89, the Federal Trade Commission launched a secret investigation. OEM practices were not the only issues of their interest. As its commissioners began scrutinizing our dealings, a few of our joint OS/2 announcements with IBM smelled of collusions. Eventually, the latter was dropped, and the simple customer accommodations we had extended were given foremost attention. Unbeknownst to me, dark thunderclouds loomed on the horizon.

  The following year, I made all OEM personnel attend the gathering and utilized it annually from then on to propagate next year’s business objectives. The event became legendary and instrumental in making my group wickedly effective. Mixing business instructions with team sports, fun, and recreational activities fostered a notably energized sales and marketing force. People talked for years about our adventures in the wilds of nature and the great team spirit they engendered. Creating such a driven and high-spirited crew was extremely rewarding. Someone used the nom de plume Marines for the OEM group. I was visibly proud and felt privileged to be their commandant!

  HISTORICAL CUSTOMER VISITS

  A visit to Europe opened my eyes to DRI’s successful counters. My first stop was to the UK to meet with London-born Alan Sugar, founder of Amstrad, which had roots in the consumer electronics business. Performing as a highly efficient copycat, his company caused disruptions in the retail landscape by undercutting brand-name pricing through reduced production costs. Her entry into the PC business came in the fall of ’86 with her legendary PC model 1512. Aggressively priced with a low-end CPU, it cost roughly half of what comparable PCs were going for.

  Amstrad’s OS vendor of choice was DRI, instantly catching the eyes of Bill Gates, who was adamant about gaining a piece of Amstrad’s business. Winning any deal with such a cost-conscious supplier meant major pricing concessions. At first, Amstrad did not budge. Unexpected help arrived from a German consumer electronic company named Schneider. Their management’s ultimatum: if Amstrad wanted to be the supplier of Schneider PCs, it had to deliver them with MS-DOS. This ultimatum prompted Scott Oki to make a cold call and cut a shocking rock-bottom deal with Alan. Since Schneider was located in Germany, he gave me, then the German country manager, a courtesy call. Being under Bill’s gun had translated into lowering his pants in order to win. My request: “Keep the deal quiet.” To my utmost surprise, Alan Sugar kept his word. After all these years, thank you!

  Over the next couple of years, Amstrad captured nearly 20 percent market share in Europe. As I prepared for my visit, the luster was fading from Sugar’s company. Struggling with quality issues and reputation, he was considering returning to his consumer roots. I had been briefed to expect a flat-out arrogant and unfriendly CEO. His played-up animosity was used to pry up a better deal and was reserved for suppliers who did not dance to his tune. When we met, I found a depressed and not-exactly-overloquacious executive. Rather than work hard to regain his reputation and get his PC business back on track, his overall interest had wandered off. This did not prevent him from
attempting to wheedle lower prices out of me and threaten me with going back to DRI.

  In Sir Alan’s mind, software was an unnecessary evil. It just added cost and questionable value to his PCs. Fortunately, he was no longer speaking from a position of strength. I certainly didn’t relish a direct confrontation with him, but I nevertheless told him straight-out that another sweetheart deal was most likely not forthcoming. At that time, we achieved somewhat of a truce, but after our current contract expired, I expected renewed fireworks and pricing pressure. I was frankly delighted when the short meeting concluded.

  The meetings in Germany were civilized and friendly. Siemens, the gigantic industrial engineering conglomerate, was a loyal MS customer. I knew most of her executives from my days in Germany. The only time we truly disappointed them was in ’86 after they licensed Xenix together with Windows, Word, and Excel tailored for this OS. This was a unique deal personally approved by Bill and Steve, which was never repeated anywhere in the world! Before I left Germany, MS changed direction, and we had to undo the agreement. The relationship setback was severe, but we managed to keep Siemens close.

  The leading German PC manufacturer by volume was a much smaller company called Vobis. Her PCs, mostly manufactured in Germany, were sold through company-run PC stores. While mainly focused on the German market, Vobis had expanded into other European countries. This included opening a store in Paris on the famous Avenue des Champs-Élysées. Talk about an expensive ego!

  The marketing campaigns Vobis concocted to increase showroom traffic were legendary. Her energetic CEO and co-owner, Theo Lieven, deserves credit for their success. Easily approachable, Theo was nevertheless a supertough and shrewd negotiator and quite a piece of work. In private he was an accomplished concert piano player and would later go on to found a piano institute from a Lake Como palazzo in Italy. The local press liked his outspoken and eccentric style. MS’s business with his company was dismal. He was DRI’s best customer and sold some PCs without any OS. MS Windows had wound up in his stores as a stand-alone product, but there was no chance to conclude an OEM deal for it. Our first meeting was uneventful beyond receiving yet another request for cheaper MS-DOS prices as a prerequisite to gain his business. He wanted me to slash our price to meet DRI’s offer. Not needing another Amstrad deal, I said “Thanks but no thanks” and departed.