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

by Joachim Kempin

  My next conference with Manfred Schmitt from Escom was more productive. He had started a kind of Vobis clone company by opening his own PC stores. He had flirted with DRI a couple of times but was reconsidering his decision to better differentiate from Vobis and contemplated bundling Windows. We established a good rapport, but I came away with an uneasy sense of his integrity. The rivalry between the two companies and their vying owners nevertheless offered up an opportunity to play them against each other. I left Germany comfortable with having a solid team in place capable of handling the local situation well. A bit too optimistic as we will come to find out!

  The concept of PC manufacturers opening company-run stores was unique. I questioned the profit model the two companies were using to justify what I considered a pretty bold adventure. Even after eliminating traditional distributors and retailers, they still had storefront and staffing costs. The generous margins in the early years supported this. But none of these stores was designed as destination stores or had unique merchandise like the ones Apple has built recently. In the end, hits to the German market from direct marketers like Dell and Gateway made profitability and, finally, survival tough. Vobis and Escom stayed alive longer than I had expected. The reason can be found in the Germanic reluctance to buy PCs by phone! Laugh all you like. Few Germans possessed credit cards and could not pay with check over the phone. Preferring to pay cash at retail, they enjoyed the instant gratification when taking their merchandise home then and there. The German soul ticked differently then and now.

  Visiting a smaller company called Groupe Bull in France was blessedly without controversy. Her executives had long been Windows fans and supporters, but like other licensees, they were waiting for a better-performing version. Bull’s main sales went through large warehouse-type retailers like Carrefour. Like any other PC manufacturer in France, Bull’s team considered Apple the main competitor. French PC buyers with their entrenched avant-garde intellectualism were indeed superloyal Apple customers. Their way of life had blossomed with the appearance of the Mac. The French regarded themselves as artistic, just plain different, or more sophisticated than other Europeans. Snob appeal or not! Apple had successfully stroked their intellectual complexity, flattering their egos. Jean-Louis Gassée, Apple’s first French country manager, gets kudos for recognizing and rewarding the French souls’ artful and esoteric aspirations. IBM PC popularity therefore took longer in France than anywhere else to take hold and dislodge Apple from the top spot. Bull needed an improved version of MS Windows ASAP, to compete and win! As usual, we were working on one.

  Visiting the Far East for the first time was enlightening, with a little culture shock thrown in. Ron Hosogi, who managed my Far East (FE) group, had planned our trip thoughtfully. A Japanese American who spoke the language fluently, Ron knew his crew well and was well respected, having been MS’s first Japanese subsidiary manager. Ron was analytical, understood technology well, and had a good memory for the different political vagaries of each subsidiary. I quickly learned that office politics were a way of life in Asia.

  The first stop was Tokyo, where we showed up at Nippon Electric Company (NEC), Toshiba, Hitachi, and Sharp. MS’s Japanese subsidiary, ran by the smart and eccentric Susumu “Sam” Furukawa, had been MS’s first foreign one. He managed to establish excellent relationships with NEC’s management and her nearest competitor, Toshiba. Our market share in Japan was close to 100 percent, with only a few supersmall OEMs, comparable to US screwdriver shops licensing from DRI.

  For a German, the gatherings in Japan were truly amazing. With the exception of our friend, Mr. Kaoro Tosaka from NEC, most executives preferred speaking Japanese instead of English. I came to rely mostly on translations provided by Ron. At once, my patience was stretched thin. Ping-ponging to and fro via intermediaries stretched the meetings into infinite exchanges. A congenial atmosphere was predominant. Any emotions customers experienced were hard to judge as their facial expression hardly ever changed. I was instructed by the local team to contribute only when I was handed a piece of paper—under the table—containing the proper answers the local team leader had predetermined. I ruefully obeyed. Nonetheless, this style of evasive communicating drove me nuts! Being the new guy on the block, I played along humbly and respectfully, but only on this first visit.

  I later discovered most real negotiations were done in drinking clubs late in the afternoon, often lasting long into the night. You were considered a kind of kin if invited, and you were allowed and expected to cry. Yes, cry! Most Japanese managers lived in densely complex political environments following strict etiquette. Confrontation on company premises potentially endangered their jobs. The off-premise private-club meetings provided a kind of relaxation and release. They could let go, and no mention would be made of it later, ever. An unwritten but religiously followed rule. Confidentiality was held in highest regard. I came from a sharply contrasting cultural background and enjoyed a less prescriptive operating style. Admittedly, I struggled with their exotic social mechanics and delicate rules of communication. Before leaving Japan, I informed NEC of our intentions to enter the printer software market, and her management showed sound interest in reviewing our plans.

  Next stop: South Korea and a totally different business culture. Many of the executives I met, such as the ones from Samsung and LG,15 spoke English reasonably well. Antithetical to the Japanese, the customers were refreshingly direct. We had a reasonable market share, but various medium-size OEMs were licensing from DRI. The customers I met knew precisely what their competitors were up to and perpetually mentioned DRI by means of prying price concessions from me personally. Luckily, they exported most of their systems; otherwise, DRI would have taken more business away from us. The various execs I met had remarkably close bonds. Most of them knew each other from attending business schools together. The word confidential was unknown to them; it was replaced by foremost honoring personal ties. A handful of them displayed a touch of hostility. Around 95 percent of the discussions centered on pricing and contract terms. If you made any concessions, everybody would know within the hour and demand equal treatment. An interesting climate to negotiate in!

  There was a common theme broached by our Korean customer. They envied per-processor and per-system agreements. Why then, I wondered, had they entered into them? There was a per-copy option providing maximum flexibility. Welcome to Asia. In our debriefing sessions, Ron and I probed the local team about these complaints. We concluded that per-copy licensing counted as a personal failure for the ambitious sales reps. June Park, the local manager, confirmed this in private. The behavior was typical for Far East culture; avoiding a potential loss of face in the office trumped over allowing customers to choose freely. I praised the team for their achievements but explicitly told the assembled warriors to offer all options in the future. They promised. Culturally, they had a hard time following through. There was no serious interest for Windows. The Korean manufacturers’ motto was selling cheap, bare-bones consumer machines, leveraging up their deliciously low labor costs.

  The third stop, Hong Kong. Our largest customer, VTech. Her main business was toys and phones, which she was producing in the People’s Republic of China (PRC). VTech had ventured into the PC business, selling her own brand locally and manufacturing PCs for European companies, one of them being Vobis. A first sign of things to come! The discussions with VTech went well overall; her executives appreciated the first visit of an MS VP. Bosco Ho, her chairman and CEO, brought up one interesting point I did not want to compromise on. As I mentioned earlier, VTech was manufacturing PCs for other companies. Bosco Ho wanted us to grant him a universal DOS license for all PCs his company manufactured, to gain a higher-volume discount regardless of who sold these machines down the road. Agreeing to his demand would have led to an overall royalty reduction, effectively granting her distributor status. I was adamantly opposed to entertain this. We had plenty of offices around the world to license and support OEMs locally. Our business approa
ch helped us gain insight into regional markets and improve market share, a good reason for continuance. Bosco Ho understood my position, and we found a way to compensate VTech with marketing funds mandating her to combat local piracy. Grasping this would help both of us; we parted as friends.

  Next stop, Taiwan—Acer and smaller OEMs. Under the leadership of her founder, Stan Shih, Acer had developed into a PC powerhouse. The main discussion centered on renewing her DOS license and exploring opportunities for Windows. The latter did not materialize. Agreeing on a new DOS license, we gave Acer pretty favorable terms. Again her management used the DRI threat effectively to achieve dreaded discounts. DRI had indeed been superactive in Taiwan. Several local companies were licensing her products in place of ours; I had to take Acer’s arguments seriously and dared not to lose her business. SVP Simon Lin was the main negotiator. He was a reasonable, smart, and friendly man, so the two of us reached the desired compromise in a short time. We promised to stay in touch, which developed into a long-lasting friendship. Not having a local subsidiary, we conducted our Taiwanese OEM business out of HK. As soon as I returned to Seattle, I lobbied for opening one to support local OEMs better and fight DRI more effectively.

  My most important stop: Beijing. The undeveloped PRC market represented an incredible opportunity. Despite consistent effort, not a single local PC manufacturer had ever bought any software from us. Yet MS-DOS could be found on 99.9 percent of PRC’s PCs. How had it gotten there? Strictly through piracy! The locals had never paid a cent. What a mess! Our goal, therefore, was to explore if the government would support an effort to reduce piracy and use her clout to instill honesty into local manufacturers.

  Arriving in Beijing, we met at once with Mr. Zee, CEO of the Great Wall Technology Company Ltd., who hosted our visit. After he detailed what to expect from our next-day government visit, we left for the old and disheveled US embassy building. We met the ambassador in the same office, occupied fifteen years earlier by then president Bush (41) as ambassador to China. Here we received a thorough briefing on the legal and political situation, which prepared us for our lobbying effort.

  My local team insisted on renting two stretched limos to add status to our visit. I reluctantly agreed. Such pompous manner was normally not MS’s style. I was accompanied by a government-cleared translator, one of our attorneys, the sales team, and Ben Hsu, our support engineer. Ben spoke both Chinese dialects fluently, and his role was to function as my trusted second ear. When we arrived at the Ministry of Technology, people were leaning out their office windows to catch a glimpse of the limos, which were two out of three in all of Beijing. Would causing such a commotion work for us?

  After a formal greeting ceremony, we were seated in a large conference room with our backs to the inside wall. My translator told me this was a centuries-old custom, allowing a visitor not to fear an attack from behind. At least our host was considerate and looking out for us. A large delegation from the ministry joined us, though the founder of Great Wall and the highest government official present were the only members who actually spoke. The rest of the group functioned as note-taking scribes.

  After politely talking around the issues for a while, per custom, the highest government official, a vice minister, told us flat out that he would not allow us to license any OEM directly but would be willing to sponsor a group license. He hinted that if we could strike such an agreement, the government would guarantee us a minimum annual amount paid in US dollars through the Bank of China. He further promised Great Wall would submit quarterly MS-DOS reports on behalf of all PRC PC manufacturers.

  During recess I thought the initial proposal was a good starting point. My reservation: I had just refused giving VTech a comparable role. I questioned if Great Wall would be able to obtain accurate numbers from her competitors. Could the vice minister, even if the PRC government had a stake in all local PC manufacturers, really enforce his will on them? Being the eternal hopeful, I was not convinced his first proposal would be his last word on the matter. Back in the conference room, I politely detailed our hesitations and determinedly aired our laundry list of concerns. I found out the hard way: it was the communist’s way or the highway. Welcome to a totalitarian regime. With no other option and wanting to at least get the big toe in the door, I eventually caved in.

  In November of ’89, Beijing was still recovering from the bloody upheaval of the Tiananmen Square protests. There were more important issues to address than dealing with software piracy. Soon thereafter, the verbal offer was taken back and later repeated in modified form; the details were rehashed again and again. We never gave up; they kept coming back. The wheels of the Chinese government turned slowly, inching forward, testing to see if a newly proposed deal was a politically correct one. Eventually, consensus began building between the policy makers, and two years later, a final deal was struck. Richard Fade, who by then was managing my Asian OEM business, deserves kudos for overcoming the obstacles Chinese bureaucrats threw into his path—tenaciously holding on and never letting go. To perform my signature duty, I happily returned to Beijing in ’91; Mr. Zee from Great Wall signed on behalf of the government. I still have a copy of the historic document residing in my office.

  Following the signature ceremony, we were required by custom to invite half the ministry to a formal reception, serving Western food. Afterward, a small core of the agency employees instrumental in concluding the deal enjoyed a more elaborate celebration. For the fancy dinner we had planned, all arrived in dark-blue Mao uniforms and throughout kept their caps—replete with a centered red star—on their heads. Our crew, in business suits, provided quite a contrast. Deviously they asked us to order rare high-proof Chinese liquor,16 which arrived in tiny bottles. Every single one of our seven guests proposed a toast to me and me alone. Seven times I stood, seven times I tossed one back; I still don’t know how I survived the evening.

  When the jamboree ended, we got into our car and asked the driver to take us to the Great Wall of China. November was frigid in Beijing. Liquored up, we climbed the historic monument after waking a protesting guard and tipping him to let us pass. The stars twinkled on the firmament in a subzero night. The moon was nearly full and lit the impressive scenery. Here, as we tottered about on the Great Wall of China, the icy winds from the Mongolian steppes greeted us and cleared our heads sufficiently to propose a final victory toast with good old Bourbon. Finally!

  The agreement in place, we patiently sat back and waited for the royalties and quarterly reports to arrive. The money arrived on time for two years, but no MS-DOS unit was ever reported. We never challenged the arrangement and bit our tongues, never complaining about missing information. Two years and two million US dollars later, our agreement expired, and the Chinese government allowed licensing local OEMs directly. Patience and restraint had paid off!

  GETTING OUT OF BONDAGE

  “Bring it on!”

  In late ’89, Jon Shirley announced his retirement while staying on the board for another ten years. As captain, he had steered our ship successfully through the rough seas of the last five years. Our finances were now rock solid despite the constant growing pains, market turmoil, and various nasty, competitive headwinds we’d experienced. The greatest disappointments during his reign were persistent and ongoing product delays. Unfortunately, they were mostly outside his influence. Bill had his most loyal knight, Steve Ballmer, running the OS division. My group suffered more than any other sales organization from its notorious failure to deliver products on time. The man in charge seemed to have earned the right to fail.

  In ’88 my group was proud of winning a big, breakthrough contract for our soon-to-be-launched LAN Manager product: developed with the goal of turning high-end PCs into small business servers. It fell into what analysts call the network operating system (NOS) category. Novell, a Utah-based company, led that category with a nicely evolved, mature, and stable product called NetWare, with Compaq being her largest OEM customer. I wanted a slice of Compaq’s
NOS business, and so did our product manager, Rob Glaser, the eventual CEO of RealNetworks, then reporting to Steve. My best group manager, Richard Fade, seized the opportunity and teamed up with Rob, landing the business.

  Unknown to me, Steve did not have the OEM channel in his sight of aim to sell LAN-Manager. For him the enterprise sales reps were better suited to peddle our newest baby. When he heard about the Compaq deal, he came storming into my office to read me the riot act. The deal was done and the ink dry. I was shocked by Steve’s outrage and responded, matching his lack of restraint. He quickly discovered his yelling tirade did not intimidate me. I remained convinced the freshly struck deal with server-market leader Compaq had tremendous potential complementing his plan perfectly. Yet Steve adamantly insisted on undoing the arrangement. Where was his logic? I happened to have the bulky and heavy Compaq file folder containing the contract on my desk, and when the screaming did not stop, I hurled it across the room at his chest, imploring him, “Undo it yourself!” It sickened me to see that Steve’s blind intervention was sacrificing a several-million-dollar deal. Angrily, he stormed out of my office.

  All later arguments fell on deaf ears. In the end, the agreement got undone. I was furious and took the unusual step of complaining to Jon, recommending to him first, and a couple of days later to Bill, to fire him. Jon stared at me in awe, replying only, “Are you serious? You can tell Bill. I won’t.” Bill just laughed at me. I soon learned the episode would come full circle back to haunt me later.