The key product introduction in ’92: Windows version 3.1. A much-improved and nearly bug-free version with exciting multimedia features was soon followed by 3.11, adding crisply performing communication protocols. Shortly thereafter, a protocol stack was added that enabled users to access the fledging Internet through corporate networks. Still missing were long file names and a reliable shield against ill-written applications able to collapse the whole system.
The impressive improvements were due to SVP Brad Silverberg’s leadership. He had come to us from Borland a year earlier. Brad, a bit of an introvert with dry, caustic humor, was admired for his business acumen and technical skills. An avid biker, he was often referred to as “lean, mean, and hard-core in all matters,” a characterization I readily endorse. He had an excellent understanding of the software industry and an incredible talent managing what I decried as MS developer prima donnas. He was nicely complemented by Brad Chase, an outgoing marketing executive with highly creative ideas and a can-do attitude. Brad C. was a super guy to work with and a truly gifted listener. The “two Brads,” as they were often called, did not arrive a second too early. Their keen energy and astute market knowledge was desperately needed to win the battle against OS/2. I loved working with them, strategizing our competitive raids. Both true pros!
Eckhard Pfeifer, Compaq’s CEO, had meanwhile succeeded in streamlining product lines and manufacturing systems. Back in the black and growing, Compaq had maintained her position as the leading PC server company and was approaching Eckhard’s goal of overtaking IBM as the largest PC shipper. In March ’93, our marketing teams ironed out a synergetic alliance for mutual customer benefits. Without our revamped enterprise sales force, the Front Line Partnership (FLP), what we entered into would probably never have come about. It delighted Steve. The joint announcement of this far-reaching pact by Bill and Eckhard at the Federal Trade Show in Washington, DC, was an enervating accomplishment and a major milestone for my group. The partnership was not just another product deal; it was a pledge to promote each other’s technologies “primarily” but not exclusively—explicatively leaving room for other close relationships. From now on, the two companies considered each other partners in arms with similar marching orders, marketing missions and harmonized product developments. The implicit vow was to mutually develop products that were “the easiest to use and the simplest to install with the best performance and value in the industry.” Most importantly for me, Compaq at last signed a five-year Windows license for all her desktop PCs. All in all: awesome! Big Blue, you better watch out.
Customers from both companies greeted the news with enthusiasm, anticipating enhanced IT performances. Several of my OEM customers, and IBM in particular, though, were shaking in their boots. They recognized we had picked the best company for such an encompassing technology and marketing bond. Right off, they suspected the pact rewarded Compaq with better terms and conditions, centering the ensuing parleys with them on price, price, and again, emphatically, price. They got it right. Going forward, we had agreed to a most favored pricing clause with Compaq. She in turn had committed to purchasing the highest volume of Windows licenses ever. As long as Compaq occupied that position, she undoubtedly earned this concession. I never imagined how much resentful fervor the announcement of our alliance would create! Particularly inside Dell, Hewlett-Packard, Digital Equipment Corporation, Acer, and the large Japanese manufacturers! IBM’s response turned out to be the most demanding and eventually the toughest to accommodate. This surprised me the most, considering the signature under the OS/2 divorce papers had hardly dried.
Over the next few years, the temptations to consummate comparable agreements with other OEMs mounted. Doing a second or a third comparable pact would not have been impossible but certainly delicate, considering our commitment and desire to keep the relationship with Compaq vitally alive and well. After careful considerations, MS never seriously contemplated another FLP except with IBM. In its place, we got creative and developed a novel strategy to mollify all other customers. Nevertheless, I was pleased to see the FLP survived the manifold changes resonating through the industry. Hewlett-Packard, who bought Compaq in ’99, decided to renew the alliance in 2010. We must have done it right eighteen years ago!
For the next couple of weeks, I committed considerable time to our larger and historically loyal customers, putting the newly formed alliance in the right light. They all felt excluded and left out in the cold, accusing us of complicity, extending Compaq an unfair advantage. Fortunately, our product offerings were strong, and despite a cacophony of objections, no major OEM abandoned us. A few threatened to make a revengeful run to the competition. Responding to the challenge at hand, I dared my marketing folks to help alleviate the situation. They started by putting the marketing section of the FLP under a microscope. Under the guidance of Carl Gulledge—my ace marketing guru—they indeed came up with an interesting plan, providing me with a rich variety of options to address the lingering and thorny concerns.
Compaq, in the meantime, used the FLP to the hilt. Her aggressive public display created extra pressure for us to offer some form of marketing cooperation to other OEMs. When consolidating our ideas, we borrowed a page from Intel’s playbook. To promote her CPUs, Intel had convinced OEMs to insert her logos and promotional slogans into print and TV advertising. In return, Intel paid for selected or all advertising cost. The savings earned were enthusiastically welcomed, allowing beneficiaries to extend budgets through placing additional ads or simply saving some money. Intel further convinced OEMs to put “Intel inside” stickers on their PCs, an idea that really hit home with me. AMD copied her as usual, so why couldn’t we initiate something equivalent to promote the MS Windows brand better or get our antipiracy messages across? Education over legal actions—what could possibly work better with end users? OEMs selling PCs with a genuine OS should have a vested interest in differentiating themselves, especially from the side-winding, cobbled-together screwdriver outfits.
My marketing folks knew our OS gurus were unfailingly displeased with overall PC quality and performance. As an example, booting a PC took far too long—one of Bill’s favorite topics! The Apple Mac booted in half the time. Could we inspire OEMs to design swifter-booting PCs? The pact with Compaq intended to promote each other’s advancements. Why not encourage and incent other customers to work on comparable product improvements? Far more beneficial for end users and pungent than merely adding sticky slogan labels on PCs. Intel was satisfied; we went beyond. To retain our Windows logo would require a minimum system configuration and performance testing, thus upping quality for purchasers.
Rewarding OEMs for designing superior features—sure-footed and better-performing PCs—and promoting Windows and enlisting their help in reducing software piracy sounded intriguing to me. Joining us, PC manufacturers should increase their competitiveness versus Apple Macs and IBM PowerPCs—an easily acceptable and common goal as I thought. We discussed our ideas with the product groups and got their nod. Involving our attorneys, we asked for a first draft of what would later become a market development agreement (MDA). Its final version specified royalty discounts for OEMs as rewards for joint marketing efforts and more user-friendly PC designs. OEMs could choose how much they wanted to participate. The more engaged, the higher the rewards. The newly brewed concept should help level the playing field with Compaq without the need to appoint additional frontline partners. OEMs now had a simple method of positioning themselves as our partners and ultimately enriching the lives of PC users. Weren’t we all in the same boat, competing with Apple, IBM PowerPCs, Sun’s workstations, and other proprietary computing solutions? According to surveys, MS had just become the second most-recognizable brand worldwide. Why not share our newly acquired image with our customers?
Engaging the product groups and MS top executives in a lively debate preceded the selection of the top priority items we eventually included in our first MDA. Bill, much engaged, commended our approach. After fina
lizing the item list, we determined the rewards of each—based on priorities, hotly contested internally. To respond to technology changes and emerging marketing trends, we made it a habit to reevaluate the listed items annually. It allowed us to drop activities, add new ones, and readjust individual monetary rewards.
Introducing the MDA concept to our customers was nevertheless extremely challenging. For the most part, the smaller OEMs reacted positively. The larger ones were harder to please. As much as they liked gaining reductions, a few resisted joint product promotions or adopting requested hardware alterations. In turn, we showed flexibility. I couldn’t understand where the resistance originated. Pursuing a proprietary design agenda without our well-intended guidance contradicted with the strong desire to be on a level playing field with Compaq. OEMs felt we were babysitting them and ultimately wanted hand-outs without performance considerations. IBM led the pack. Convinced we were doing end users a favor, we stuck with the concept.
RESCUING LITTLE CRITTERS
The computer mouse was first mass-introduced by Apple for the Lisa workstation and the Mac. In ’83, it made its way to the PC—thanks to a point-and-click interface we designed into MS Word and MS Multiplan. The appearance of Windows in ’85 made it, together with the keyboard, the number one device operating a PC. When mice usage took off, so did its design. The device lightened up (no more steel rollers!), advanced ergonomically, and came with better resolution to make pointing on the screen highly accurate. MS had taken an early lead in this hardware category ahead of Logitech, a Swiss-based company, helped by superior retail marketing and advanced driver software—the program instructions making the little critters function to perfection. Logitech’s retail presence was modest, yet she was the leading manufacturer selling inexpensive mice to my OEM customers, ahead of a multitude of Taiwanese competitors.
Back in ’88, I saw an opening for my group to add OEM mice sales to our growing basket of successful products and compensate for shrinking Windows revenue. With our mice rated best at retail, I boldly predicted we had a chance to unseat Logitech in the OEM channel. The VP of our hardware group, Rick Thomson, listened and was at once enthused about venturing into the realm of sticking it to what he considered his main competitor! Selling the critters nevertheless was not an easy task. As we did not own a factory, our production cost and our prices were therefore up to 100 percent higher than Logitech’s. What helped was a combination of quality perception, our top-rated brand image, and OEM’s desire to differentiate and improve the quality aspect of their system offerings. Soon we were on our way to selling 20 million of these little critters annually, expectedly annoying the reigning Swiss-based company.
I received a flurry of calls and letters from her CEO Pierluigi Zappacosta, who couldn’t comprehend why his salespeople were losing business. Considering his attractive prices and alluring design, he firmly believed in some form of foul play. He accused my sales force of giving favorable Windows terms to OEMs in exchange for buying mice from us. I repeated again and again that only our high-brand recognition and better quality accounted for our winning hand. Several times I personally investigated his claims, and each time I failed to find any wrongdoing. To be dead certain, I had my legal team investigate the matter. Eventually, after accepting my explanations and having no further proof of malfeasance, he decided to accelerate his design efforts along with his cost-reduction programs and wholeheartedly revamped his marketing. His renewed, vigorous competition eventually began impacting our sales efforts. Though as long as Logitech’s perceived image did not visibly improve, we grew at a reasonable pace. Compared to executives of other competitors, Pierluigi was a true gentleman. He did not run to the government for regulatory help but made us struggle by competing fairly and vigorously. I commend him!
By ’93 our mouse business had suddenly stalled despite vast increases in Windows units. My group had a hard time locating new customers or keeping existing ones. Customers were no longer willing to pay our premiums. The golden era in which we had enjoyed a fountain of unremitting rewards was drying up. I had met with the mouse product group several times, outlining my concerns and demanding forceful actions. Its response had remained tepid; cost reductions or exceptional new products were not forthcoming.
I deployed e-mails to my managers requesting a detailed competitive update. Most surprisingly, they all no longer considered Logitech our largest competitive threat and identified the danger coming from the smaller mostly Taiwanese companies. Computer mice had gone from novelty to commodity. Brand recognition no longer vital, price had become the key factor winning a bid. With an unresponsive product group, I faced a discouraging outlook.
On my next trip to Europe, I visited a midsize customer called Viglen in the UK. She had been a longtime Windows and mouse customer of ours. The visit turned out to be superfortuitous. Her CEO Vig Boyd and his right-hand man Diran Kazandjian personally showed me a mouse designed and manufactured by a nondescript company in Taiwan. When they mentioned the price the little critters could be purchased for, I was flabbergasted. Graciously, they allowed me to take three prototypes back to Redmond. As I left, Vig casually mentioned that the mouse manufacturer was hunting for additional business. Back, I pried one open then did the same with one of ours. Patiently and deliberately counting the number of parts, I found the tally immensely revealing: our mouse contained twice as many pieces as the prototype obviously achieved by using higher-integrated components. In addition, I admired the lighter plastics and the slick ergonomic design the manufacturer had exploited. In comparison, our mouse looked like a dinosaur. Our product people had been asleep at the wheel by not reducing cost through integration and improving eye appeal through design and advanced materials. Without being an engineer, I knew intuitively that our design was costly, antiquated, and no longer competitive. When I confronted our product manager, he told me he had nothing close in the pipeline.
He took two of the mice along with him, promising to check them out. I sent him a couple e-mails, eager to learn what he’d concluded. After two weeks, the guy was still looking into the matter! Not responding well to silence, I went over his head and engaged Rick Thomson, VP in charge of MS’s hardware division, one more time. Rick was an engaging guy with great business sense and an excellent understanding of doable hardware technology. Performing the same screwdriver exercise in my office, I got the response I had wanted in the first place. Rick had heard about my newly found mouse though had never seen its innards firsthand. He promised to get engaged at once by lighting a fire under somebody’s behind, understanding immediately that his retail business could be next to fall.
Two weeks later, he personally visited with the Taiwanese manufacturer and closed a sweetheart deal. Purchasing the design, related patents, and manufacturing rights, he placed a one million mice order with the company. Our run rate would allow us to sell them in less than two weeks. The new design had cut our cost in half and resulted in an up-to-date, most reliable, and sexier-looking product. When Logitech and the rest of the bunch woke up to the news, they found themselves outgunned. We had regained enough of a competitive edge to win additional critter business. During the hardware division’s midyear review, Bill commented that I had saved our total mouse business. He never told me personally, but I made sure the sales rep who had invited me to visit her UK customer received extra stock options. Vig, who had gifted me the prototypes, was granted free internal use of MS Office for his company. Unfortunately, my rescue did not guarantee success for long. When new technology emerged, I had to repeat the bailout a second time.
MONOPOLY ACCUSATIONS
“MS’s responsibility is to keep her customers happy.”
And that might have an opposite effect on MS competitors, as our general council once remarked. I fully agreed with him, and let me add—so be it.
In February ’93, MS got good news: the five FTC commissioners had deadlocked; no antitrust action would be forthcoming. One of the commissioners owned stock in the com
pany, and the other four were divided. No majority, no action. We nearly popped the corks but were cautioned by our general counsel, Bill Neukom, who knew how to interpret political vagaries. He had come to MS from the law firm Bill Gates’s father had helped found. Dartmouth- and Stanford-educated Bill N., in his trademark bow tie, stood well over six feet and was an accomplished marathon runner and fly fisherman, indicating to me that he could be a patient man. I considered him an astute and extremely smart attorney, fully capable of managing the over three hundred lawyers we employed along with the myriad of outside firms MS retained. Bill N. was warm and good-natured but tough as nails when need arose. He was aided by Dave Heiner, who headed up the antitrust section. He made sure the OEM division was getting sufficient training on antitrust issues and our contracts would survive government scrutiny. I liked working with Dave. He was an established expert in his field, a bit on the dry side, but always with a good joke in hand.
The Federal Trade Commission being deadlocked didn’t mean the case against us was in the dustbin. Far from it! Janet Reno, a bumbling misfit of a US attorney general (AG), and her crack teammate Anne Bingaman were still purring over the case. The two ladies toured Capitol Hill long enough to convince equally brilliant and presciently motivated politicians they possessed a solid case against us. Funds were made available, and in August ’93, the Department of Justice (DOJ) announced that Anne Bingaman, the head of its antitrust division, had eagerly taken over the stalled investigation ready to lead a tough pursuit.
Resolve and Fortitude : Microsoft's ''SECRET POWER BROKER'' breaks his silence Page 11
