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

by Joachim Kempin

  More depositions were conducted, and more subpoenas were issued. Our attorneys raided my office and my e-mail storage sometimes several times a week, though nothing of much interest was ever found. People working for me, other execs, and product group personnel experienced similar invasions. The government was treating us as criminals. The raids executed on behalf of the DOJ created a distorted prism of anger, violation, and helpless despair. I counseled employees to not feel belittled and guilt ridden or distracted when suffering random searches or reading vilifying press articles. Innocent until proven guilty? Certain politicians, the press, and the DOJ turned that noble principle on its head. Our competitors happily chimed in and joined the witch hunt. Public opinion labeled us a monopolist, and competitors and their lawyers branded us the evil empire, a slogan that stuck.

  Resenting the uproar most was Bill. Once upon a time, he had been the darling of the press and Wall Street. He had been honored by President Bush with the Technology Achievement Medal, no small feat but counting no longer. Being characterized as a greedy monopolist was tough on his stomach. How can tireless hard work—the deepest of all possible commitments and sacrifice—and enviable success or overachievement become punishable by law? Bill once told me in private that he feared for his legacy if the world would ever remember him as just another Rockefeller. It scared the shit out of him! Bill had, of course, basic legal education from his stint at Harvard and whatever had rubbed off from dad. A conviction under antitrust laws, he knew, could cause considerable damage to companies and individuals. Deeply worried about the unfolding story, his sleep came less easy at night. Even so, he assumed that the government did not have a solid case. The potential stigma was what bothered him foremost. Blindfolded Lady Justice, that allegorical personification of truth and fairness, bearing her delicately balanced scales of impartiality into the brave new future of PC software tech, shook her head in incredulity.

  With the danger of being sued by the Feds quite imminent, the two Bills made it their top priority to settle the case by shuttle diplomacy, visiting the Feds in their lair in Washington, DC. In public, wrongdoing was adamantly denied. Behind the scenes, MS’s team was adroitly probing how a fair and favorable compromise could be reached.

  Meanwhile, the government was painting MS as a company “in a position of immense power in the software industry.” People working there disagreed. From the day I had stepped into the company, I personally observed our absolute and nearly daily vulnerability. Stop innovating? You would lose. Was this no longer true? Had our leaders created paranoia simply for fun? Using emotional outbursts, feeding fear, and projecting doom too often had won few accolades with me, but I never doubted we indeed lived in a hypercompetitive and exposed world. We had to earn our success the hard way, producing and marketing innovative software people wanted to buy and use. As the saying goes, good products win. Mostly! Management knew no other principle cause for success than striving to deliver them.

  Admittedly, version 1.0 product realizations were mostly visionary and imperfect, which left us vulnerable, offering competitors dangerous openings if they attacked early enough. After version 3.0 appeared, a counterstrike was harder. After we gained the lead, competitors either envied or hated us! An opportunity missed. Carpe diem, dear opponents! Build a stronger team, work a few extra hours, and make essential personal sacrifices. Finding themselves unable to beat us fair and square, they exploited the legal route. Stirred by legal arguments of overambitious and tea-leaf-reading lawyers. Self-identified losers never quite acknowledging their inability to compete or how badly they timed countermeasures. Shame on them, and welcome to a US system of jurisprudence allowing these political and legal escapades! Garry Reback, starry-eyed high priest of antitrust litigation, among others of his lowbrow ilk, built empire careers teaming up with marketplace losers trying to publicly flog victors like us in the US court system.

  At the very end of the nineteenth century, Congress had passed so-called antitrust laws extending powers to the DOJ for reining in superstars like us. The way I read these laws: a successful company had to produce winning products and compete rigorously for buyers. Any company surviving such competitive warfare and emerging in a leadership position was, as result of these laws, free game for ambitious DOJ attorneys. Shady politicians regularly joined con gusto, cheered on by the press stirring up public animosity, using sensationalistic hysteria aroused by unproven allegations. Gotta sell print and attract viewers! Nothing had changed since medieval times or Salem; religious dogma hunts had just been replaced with antitrust pursuits.

  I look at antitrust allegations and dealings from a business perspective—disgustedly. Ayn Rand, the phenomenal philosopher, said it better in the headline of one of her early essays20 about the topic: “Antitrust. The Rule of Unreason.” Government exploits in the past, regulating meteoric superstar companies, had mostly damaged consumers. If changes in competitive behavior of punished leaders were ever achieved, they never produced regulators’ desired results. The ultimate punishment under antitrust laws was to break up a company more often than not, only leading to needless pain and suffering for her employees and clientele. In undertaking antitrust actions, the government punished her people and did not protect them as the constitution intends. Politicians exploiting the spirit and intent of the law should all be ashamed. Why not allow the vibrant wellspring of bottom-up, wholesome, and creative human endeavor—what could easily be argued as the very divinity of commercial evolution herself—to freely and naturally flow forth? In its place, spending energies on top-down judicial smothering of beautiful and powerful human enterprises had become not only acceptable but also celebrated. Government for the people and by the people through excessive regulations?

  Fair or not, interpreted properly or not, the antitrust laws were on the books. Rockefeller’s Standard Oil experienced antitrust regulations; so did AT&T, IBM, the NFL, and the MLB organizations. These laws, according to regulators, existed to protect consumers first and foremost, not necessarily competitors. The government was supposedly doing her citizenry a public service when applying them. In reality, these laws provided cover for reward-losing competitors. Any notably successful enterprise with high market share was suspect of being a monopolist and, therefore, might be accused of hurting consumers.

  The legal community was split on just how genuinely effective government antitrust actions really were. If an antitrust case wound up in court, a sitting judge was no guarantee for justice being served. Judges were charged with having to be not only absolutely unbiased but also smart and wise enough to see right through the phony arguments and theories the plaintiff’s lawyers and economists presented. They were often not well equipped to handle antitrust conundrums, lacking sound understanding of underlying economic theories and, certainly in today’s warp-speed world, up-to-the-second technological insight.

  As a mathematician, I consider economics inexact, leaving room for speculation, guesswork, unproven assumptions, and political maneuvering. Any court having to deal with antitrust issues was therefore in a tough situation. Trying to pass a fair judgment would therefore be, to some degree, subjective and certainly prone to appeal. Flaky career lawyers at the DOJ and biased politicians like Janet Reno and Anne Bingaman did not share my views of antitrust bias. In their high-handed view, they embraced the opportunity to rein in MS on what amounted to a grossly misguided mission to serve. Glorifying their political prowess by taking over the case from the FTC proved too tempting for them. MS’s aim was to confront the damage head-on, dissect the dynamic duo’s questionable motives, and limit any harm unleashed by them.

  Let’s quickly examine what constitutes a monopoly. Certainly there is such a thing. According to USLegal.com, a monopoly is a control or advantage obtained by one entity over the commercial market in a specific area. The two elements of monopolization are the power to fix prices and exclude competitors within the relevant market and the willful acquisition or maintenance of that power as distinguished fro
m growth or development as a consequence of a superior product, business acumen, or historical accident. Firms with monopoly power have, in general, little or no competition—indicated but not proven by high market share—and are able to completely dictate the terms and conditions of how her products get acquired. Ironically, an enterprise can obtain monopoly power legally. The US postal service or state lotteries come to mind. Consequently, a firm labeled of being a monopoly remains, against common belief, an honorable company encouraged to compete vigorously.

  Economists then argue that monopoly power is typically derived by creating or using barriers to entry, effectively barring competitors from the marketplace. Barriers of entry can be formed in various ways. To judge this properly, the relevant market, meaning the environment a firm is operating in, has to be firmly determined—one of the most contested subjects in antitrust trials. According to most economists, market power of a monopolist is often demonstrated in setting prices independent of any competition. Consequently, in a monopoly situation, as the theory goes, the usual supply-and-demand model fails to function.

  Take a look at your local electric power company. Assuming there is only one around, she could, in theory, extract any price from customers not possessing their own generator or a naturally fueled energy source. Certainly a valid reason to watch her carefully.

  Excess profits and profit maximization are other signs of a monopoly-governed marketplace. The laws in the United States require any enterprise to not conduct her business in an abusive way, defined as limiting supply, engaging in predatory pricing or price discrimination, refusing to deal, entering into exclusive dealings, or engaging in unreasonable tying/bundling of products. Some examples: consequentially, MS could not have made the sales of MS-DOS conditional to buying Windows or refused to sell MS-DOS to a single OEM while supplying all others.

  According to economists, a typical monopoly charges unjustifiably high prices. Let’s examine if this could have been a reason for labeling us a monopolist. OEMs typically paid MS 1–2 percent of total system value for DOS systems and twice that much for the ones powered by Windows. Prices for OS/2 and the Mac OS resided in the same neighborhood, with UNIX being at least three times as expensive, while DRI charged approximately half. Nothing indefensible here, as we had always kept prices in check! My discussions battling MS top management certainly bore that out. I was consistently told to compete by lowering prices and be fearful of the pirates who operated at zero.

  We had earned our position with considerable sweat and successful products, converting first-time customers into happy loyalists. Improving our product line constantly, we kept them hooked. Fair-minded economists normally would admire the way we played the game, remaining in the lead thanks to fabulous work ethics, great products, superior marketing, and contented clientele. Sounds legal to me!

  Not so fast! Evaluating whether or not a company had obtained or maintained monopolistic power, legally, leaves a tremendous amount of room for judicial interpretation. The laws and the applied standards and tests are by no means ironclad, leaving for plenty of subjectivity. At stake are egos, reputations, careers, and future earnings. Most companies accused of becoming or maintaining an illegal monopoly will be convicted in the public mind and by the press long before judgment is passed, branding the accused with an unjustified and unearned reputation and leaving a sitting judge with at least a hypothetical pretrial bias. Good reasons to avoid any such trial altogether and make a dedicated effort to settle all allegations out of court—exactly what the two Bills were now engaged in.

  Weighing the above carefully, government attorneys knew they had a weak case against us but could not drop it for political reasons. Three issues caught their eyes: our minimum commitment clause, allowing processor-based license consolidations, and the duration of our contracts.

  I had made the CPU-based licensing option available to make customer reporting easier without removing any other existing choices. I was in full agreement with the government: variety makes happy customers. Why, then, was introducing this option even an issue? Customers were never coerced to commit to this variety, and actually only 40 percent selected it for Windows and around 60 percent for MS-DOS. The DOJ had this on record. The minimum commitment clause making OEMs pay for systems they sometimes did not ship while enjoying larger discounts cannot be considered anticompetitive either. A more realistic commitment schedule translated into paying one to two dollars extra per unit and left no money in limbo. Customers had that choice! Offering longer term contracts benefitted them through locking in prices. Customers demanded them; I hated them. They allowed me less flexibility in adjusting terms, conditions, and prices. Did the Feds really ever tried to understand my customers’ motives?

  If these contractual terms had to go to placate the Feds, luring them into a settlement, only the minimum commitment option needed analytical attention. It was the basis for the volume discounts we extended for firm purchases. One option was to do away with it; higher-volume customers would feel cheated. Not a valid path to pursue. I needed to find a clever and government-acceptable replacement system. After sleeping on it, though, the mathematician in me took up the challenge. Any new discount system I came up with had to be simple, pragmatic, and based on mutually-agreed-upon forecasts. It had to allow for real-time adjustments and treat performing OEMs better than laggards. Using these principles, I developed a model using past revenue data. I soon discovered that my envisioned scheme would hypothetically provide increased revenues per unit without jeopardizing my overall business. Let the Feds have their cake!

  After probing my assumptions carefully with my team and accountant, I informed Bill, who ferociously challenged my ostensibly arrogant-sounding assertions and my conviction of not losing customers or any business to competition. Hearing me project more dollars per unit as result of the adjudicated changes made him come around, and he conceded, agreeing that the DOJ’s demands would do us no harm whatsoever. As long as the company continued to produce winning products, used her profits to blaze the trail deeper into the dizzying universe of tech advancements, and created higher standards, she would emerge out of the current mess not only unscathed, but with increased profit.

  The two Bills meanwhile had succeeded in easing the DOJ’s concerns about exclusive dealings, tying products together, and any form of customer coercion we were suspected of. As they inched closer to settling the matter, the Feds insisted on including an exhaustive list of forbidden activities into the final settlement agreement. With zero proof in their hands, they wrote us the equivalent of an unwarranted speeding ticket, making us, for political reasons, appear as villainous as possible.

  I was in Bill’s office when the last remaining objections were overcome, Anne Bingaman on the other end of the phone line, all-ears Janet quietly listening. By agreeing to cease and desist demanding minimum commitments in the future, the deal was sealed—both sides exhausted and relieved. I was all smiles after reading a clause the two Bills had been allowed to sneak into the covenant. It allowed the future integration of unlimited consumer-benefitting functionality into Windows as we saw fit. Or at least we believed so!

  After the two parties finalized their agreement five years after the ordeal had started in July of ’94, a judge needed to sign off on what was now labeled a consent decree. This was a step in the legal process designed to ensure no collusion existed between the Feds as plaintiffs and us, the defendant. Laugh as much as you want! When the DOJ announced that the two parties had settled the matter, the headline read “Microsoft Agrees to End Unfair Monopolistic Practices.” A catchy phrase meant to impress the public but grotesquely distorting and patently untrue! The DOJ had never proven—in any way, shape, or form—that we had a monopoly, yet we stood condemned. The agreement itself stated that the parties “having consented to the entry of this final judgment without trial or adjudication of any issues of fact or law; and without this final judgment constituting any evidence or admission by any party with respect to any
issue of fact or law.”

  Anne Bingaman proudly sucked the following out of her thumb: “MS has used its monopoly power in effect to levy a ‘tax’ on PC manufacturers who would otherwise like to offer an alternative system.” So spoke a public servant whose education and career was allegedly derived from a command of the facts, details, language, and integrity. Microsoft the “IRS” of the PC world OEMs could not escape from—how ridiculous! With me as the chief tax collector, oh my, oh my, where had I landed?

  The fastidious and insightful Janet Reno patted herself on the back with the following stupid comment: “Today’s settlement levels the playing field and opens the door for competition.” Her leveling bulldozer at work! Protesting the ill-worded DOJ press release did little to revise the projected image. The government had the larger megaphone. Politicians applauded, and the press, having condemned us long ago, fell in line. The ladies from the DOJ celebrated on Capitol Hill. Politicians believed they had served the public well. In reality, they had extracted meaningless concessions from us.

  Embarrassingly for the DOJ, Judge Stanley Sporkin—appointed by the DC district court to sign off on the decree—shared my opinion, arriving at it from a much different angle. Garry Reback, an outside attorney, reinforced his belief by submitting an amicus curiae21 brief. He had been hired by several competitors with the goal to stir the pot against us; to me his activities in themselves appeared conspiracy driven, with him as the mouthpiece.

  In February of ’95, after an unusually lengthy hearing, the judge ruled that the decree was not in the public interest. First round lost! Disagreeing, MS and the DOJ immediately filed a joint appeal. To our delight, the appellate court overruled the judge three months later and removed him from the case. He had read a book called Hard Drive, adopting the opinion of its authors, James Wallace and Jim Erickson—avowed MS opponent—as his own. Justice by bedside reading?