The DC district court then assigned Judge Thomas Penfield Jackson to the case. Late in ’95, he finally rubber-stamped the decree. Signing it had consequences for him. As long as he stayed on the bench, he was deemed its legal guardian, enforcer, and babysitter if you will. If any person, company, or government agency believed that the consent decree had been violated, a petition could be filed, and he would determine what action to take.
Voluntarily, we implemented and followed the agreed-upon rules two years before his court formally approved them. Returning to business as usual, we soon discovered that the new rules were causing no harm whatsoever. The struggle with DRI continued unabated. The battle with IBM’s OS/2 intensified. Apple persisted in luring away PC buyers. We continued to live, as now and ever shall be, in a competitive world. Justice sighted, or justice blind. MS trusted the government fulfilling her part of the deal, expecting the matter was settled once and for all. Dream on trusting one’s government!
PATENT HORRORS
Against MS tradition, the good news first: In ’93 we won the Apple patent infringement lawsuit. For Bill, this was a wake-up call and a reason to educate executive staff on the deceptive threats patents constituted. Particularly wary how OEMs could make use of them, Bill personally set out on a crusade to find ways to reduce the risk for MS and the industry as a whole. Violating just one inadvertently could result in a lawsuit and an injunction, freezing OS shipments and leaving the whole industry out in the cold.
Releasing the next DOS version in ’93 was again a race against DRI. Her mother ship, Novell, had finally succeeded in giving us the long-anticipated trouble. To remain competitive, we were required to include a hard drive (disk) compression program. Today’s affordable hard drives storing terabytes of information have made these programs basically obsolete. Back then, most PCs came with hard drives having a hundred thousand times less capacity. No wonder compression programs enabling users to store up to twice the data on a hard drive were popular. A math algorithm was used to condense the data and later reversed to recover it, a process technically somewhat comparable to encrypting/decrypting information.
Novell had licensed and used a compression algorithm derived by Stac Electronics, a small and rapidly growing software company located in California. Since 1990, this had been her livelihood. Attempting to license the same software, we soon ran into difficulties dealing with Stac’s execs. Unable to negotiate a reasonable deal, we eventually bought a comparable algorithm from another company. During the initial negotiations, two of our programmers inspected Stac’s algorithm for due diligence reasons. It left them impure and impugned. To remain on the safe side, they should never have been part of the team that would eventually develop our own version. Not following these sterility safeguards left the door open for infringement accusations.
After we released prototype copies of our new DOS version, Stac immediately asserted that we had stolen portions of her meanwhile-patented algorithm. After careful study of Stac’s claim, we initially ignored the allegations and then made several attempts to settle the dispute. When that failed, Stac’s CEO, Garry Clow, took us to court. With both parties stubbornly entrenched, the case ended up in jury trial while our product was already installed on millions of PCs. The technically challenged jury with an inadequate grasp of the salient facts found us guilty and convicted us to pay $120 million in punitive damages. To make matters worse, Stac succeeded in obtaining an injunction from a disgruntled judge, preventing us from shipping the malingering products until we paid up. The industry trembled under a doomsday scenario.
The product group scrambled, removing the compression code from the product. Until a new version was ready, OEMs were stuck. Bill’s darkest prediction in regard to potential patent impairments had come true. When an internal investigation discovered MS Word also included the infringing code, our Office application suite could no longer be sold either. Wall Street got the message, and our stock began abruptly trekking southward.
We stubbornly maintained our innocence. I honestly didn’t know what to believe. My problem was of a different kind. OEMs had stopped shipping PCs. Millions of systems were sitting in warehouses and at retailers around the world, unable to be legally sold until thoroughly reworked. The injunction would inevitably cause a tsunami of damage to the PC industry in general and to MS earnings in particular. Inside the company, denial was rampant. A bury-your-head-in-the-sand attitude dominated. I was convinced OEMs and retailers would hold us responsible for huge monetary damages. We were in deep shit!
Calling our chief financial officer, Mike Brown, I alerted him to the grave potential the injunction imposed. We agreed that speed was of outmost importance in settling the matter. A short time later, we walked into Bill Neukom’s office and proposed to resolve the matter amicably and urgently. He encouraged us, and my boss concurred at once. I didn’t inform the product group; entangled individuals were still licking their wounds and might sabotage our mission. Stac’s CEO, hoping we were serious, agreed to a meeting and offered to pick us up the next day at San Diego Airport. Upon arrival, we lunched with Stac’s execs and found them amenable to avoid further escalations. Against considerable odds, we soon agreed upon a balanced and reasonable compromise. I had to leave to attend my annual OEM meeting that Sunday. By then, Mike Brown’s second in command had joined us with one of our attorneys, and by Tuesday I received a call in the wilderness informing me we were out of the woods. Our settlement saved the company $40 million and spared my customers incalculable heartaches. The industry sighed with relief.
The incident rang the alarm bells, prompting us to take a harder look at how to avoid similar situations. During the summer, Bill and our patent attorneys convened and decided on a plan to approach large computer manufacturers with the goal of mutual patent exchanges. I reluctantly became involved in these negotiations. Our patent attorneys were far better suited for these engagements. Over time, they succeeded in buying selected patent portfolios as well as closing patent exchange deals. As additional defense, MS aggressively stepped up her filings for patents. Over time, I got several patents co-awarded for work I had done previously protecting our software from being pirated.
During 1994, under the leadership of Dave Heiner and Bill, we explored new avenues to further protect our core products. A simple concept but not at all easy to implement! We always defended and indemnified OEMs against patent challenges brought against products licensed from us. Could we, in return, ask OEMs licensing our products to refrain from asserting patent infringement claims against us or anybody else distributing or using them? The desired result: patent peace for Windows distributors, commercial licensees, and end users. I immediately embraced adding such a truce-like condition to our standard agreements to protect the Windows ecosystem.
It was later called a Non-Assertion of Patent (NAP) clause and turned out to be much harder to implement than I ever imagined. Japanese companies, led by Sony, were the most outspoken opponents. Fair values for patents are hard to determine. Google, Samsung, and Apple are experiencing this today. OEMs, possessing remotely related ones, argued that we treated them unfairly by disallowing them from extracting value not only from us but also from their competitors. Their old-school patent attorneys had a marked lack of interest in patent peace. It threatened their livelihood. Sticking to our principles was extraordinarily time-consuming and made licensing each successive product harder while earning us few new friends. The idea of granting competitors immunity when licensing Windows was against the industry’s belief of fairness. The contentious NAP clause was later reviewed by several government agencies though never challenged. Its derivation was defensive in nature and protected everybody for over a decade.
By 2004, a new regime of MS patent attorneys determined that the company had acquired enough patents to drop the NAP clause from OEM contracts. In their book Burning the Ships, Mike Phelps and David Kline explained how they arrived at the decision. The reasons were political as well as economical. MS wa
s still fighting the Feds in court, and her larger customers had gotten bolder, finding mischievous means thanks to industry group patent pooling arrangements to assert patents claims. One of these attacks was successfully fended off on an appeal involving the US Supreme Court. Another larger one was looming. The old idea of using patent cross-license agreements as a defense against the newest legal tricks was therefore revisited and adopted. It favors patent-rich OEMs and leaves the patent have-nots in jeopardy.
Patents will always be landmines for any technology company. Start-ups, in particular, are most vulnerable to the misfortunes of stepping on them. Until patents are abolished, no company is safe from enforcement attacks by ambitious and watchful patent attorneys. Obliterating patent protection, on the other hand, is unfair to inventors and would endanger future innovations and progress. Therefore, companies will continue chewing on patent challenges and need to strike a balance. During my time, MS successfully avoided a Windows patent war by employing the defensive NAP clause in license agreements, a harmonious approach compared the aggressive methods our competitor IBM deployed. To this day, I am proud of having done the industry a tremendous service against a lot of odds and resistance.
THE SAGA OF BIG BLUE
A SWEETHEART DEAL
Fighting IBM for domination of the OS market influenced my professional life profoundly. Now responsible for the IBM account, I soon discovered the mess I had inherited. To disallow the divorce settlement from spinning out of control, Steve’s team had made troubling concessions, and in my mind, he had given the shop away! The current version of MS-DOS had been licensed under a flat-free agreement, and IBM was therefore paid up. Compared to similar volume shippers, Windows cost her one-third of the normal royalty. For OS/2, she paid just $2 per unit and had the right to give a huge amount of copies away for free. Having performed the bulk of its development work, I found that price borderline appropriate. My particular grief was with the DOS and Windows deals. Not only were they unfair to other OEMs, but they also made IBM a nearly unnoticeable customer from a revenue aspect. I felt justified and empowered to clean up and, over time, bring her onto equal footings with my other clients. My hair was standing up! Blame it on your boss.
I still do not comprehend why IBM was fighting us so relentlessly. Bruised egos at work must have been the key reason, because PCs and software sales were only a minimal portion of Big Blue’s overall business. She was predominantly a mainframe and IT services company that experienced growing pains by ’91. After painful attacks from Japanese competitors, her mainframe market share dropped rapidly, which slowly turned a trickle into a river of red ink. Losing market share in the PC market to the likes of Compaq, Dell, and Hewlett-Packard, among others, appeared of lesser importance in the overall picture.
John Akers, a thirty-year IBM veteran who was running the company, had taken the helm when IBM’s stock price was at $32. Wall Street had originally looked favorably upon his reign. Now it seriously questioned IBM’s business model, her ability to respond to mainframe competition, and Aker’s overall leadership style. The stock price was now at $22 and supposedly warranted calls for resignation. Unthinkable for the CEO of mighty Big Blue! The proud, astute, and buttoned-down IBM culture was thrown into an absolute state of shock, having to relearn the meaning of humility.
Analysts traced IBM’s misfortunes back to former chairman and CEO John Opel, who in the early ’80s had dreamed of IBM becoming a $100 billion company. I was working for Digital Equipment Corporation (DEC) when these projections leaked out. In an interview, DEC’s CEO Ken Olson called them simply “nutsy.” IBM’s CEO, guilty of not foreseeing major IT paradigm shifts during his reign, had his work cut out. Build-up in payroll and manufacturing plants eventually created a nonsustainable cost structure, steadily eating away IBM’s substantial reserves. Struggling to turn the Big Blue tanker around in the recession of 1991/93—by then an Exxon Valdez of bloated delusions—appeared impossible even for Hercules!
Declining sales—caused by comparatively poor mainframe performance, sky-high maintenance cost, and mediocre services—and ever-increasing restructuring charges added to the worries. Until then, IBM had given the impression of being an unimpeachable empire and reliable supplier. Now, displeased IBM shareholders and Wall Street promptly dumped her shares. Watching a merry-go-round of changing plans, a carnival of confusion from within, a sharply disorientated sales force, and deteriorating development efforts, IBM customers swiftly reconsidered. At the height of what analysts called the second OS war, IBM was suffering from self-inflicted wounds and had become a structurally weakened giant. Good for us, as I thought.
But by spring of ’92, OS/2’s PC-access technology, called Workplace Shell, was at par with Windows. Additionally, running Windows apps under OS/2 had gotten easier. Against all odds and to my disgust, the hurting Goliath had managed to technically keep up with us and seemed on track to increase market share. The desire for corporations to limit the various OSs they deployed due to support costs made it an uphill battle. After Lotus and WordPerfect products became available for Windows, there was even less reason to change. Another obstacle was the growing customer uneasiness to commit one’s IT future to a shaken-up company like IBM! Adding to the misery, OS/2 was still too resource demanding to run well on low-end consumer PCs. With MS a seemingly safer bet for enterprises accompanied by more sex appeal for consumers, the resounding trajectory for Windows just continued!
To overcome these obstacles, IBM’s top management formed a personal software division under John Soyring, a Michigan Tech grad. It was fully responsible for marketing OS/2 to OEMs and enterprise customers, and its activities soon made our life harder! Giving the division an enormous amount of money, IBM’s president Jack Kuehler hoped bruised egos would work harder and guarantee a return on capital. To turn up the heat to the detriment of MS and promote PC sales, he went so far as to sanction the bundling of free Lotus SmartSuite—our Office software competitor—with OS/2-powered IBM PCs.
A declaration of war, as the furious Bill-and-Steve duo interpreted it. I sensed a serious competitive move. Lotus had never before sold her office productivity suite through OEMs. Watching diligently, and with none of my other customers entering into a similar deal, I concluded that IBM had obtained exclusivity. Her management had given us no chance to bid, obviously not wanting to feed a foe. Foolishly, all of my later inquiries for a competitive bid were turned down. IBM was not interested in a better price or a better product. Hurt was on her agenda. Our relationship had hit bottom and turned icy.
Soon IBM breakup rumors reverberated. With her stock price careening southbound toward $12, about 25 percent of what it had been five years earlier, Akers resigned. He was replaced by Louis Gerstner, former CEO of RJR Nabisco, stunning the IT industry and Wall Street! Being an outsider who was short on the type of tech background presumably required to run the world’s number one IT behemoth brought further damage to her stock price. The voices in the press demanding a breakup, on behalf of shareholders, grew louder. Aspiration over reality, but the brand of logic Wall Street adores. Gerstner took his own sweet time coming to terms with the destabilized components of IBM’s dilemma and stubbornly resisted.
For the financial press, the fight with MS was mostly on the back burner. Journalists covering the IT segment found the transition made IBM step up her anti-MS efforts, positioning OS/2 as “a better DOS than DOS and a better Windows than Windows.” Marketed in short as “OS/2 for Windows”! It read like semicohabitation, but no strategy of peaceful coexistence was ever intended. Instead, it depicted Windows running as slave under the auspices of superior OS/2.
Gimmicks as I saw it. Customers did not buy the slogans either. Windows sales increased by 50 percent yearly to 15 million copies sold—no suffering there. As IBM followed through with her strategy to install both OSs on most of her enterprise PCs, I savored the additional revenue but never believed that there was enough room for both of us.
IN THE SHADOW OF CHIC
AGO
To impress analysts, IBM began disclosing quarterly OS/2 shipments. A marketing ploy asserting OS/2 was alive and well, with dialed-up units fueled by shelf-ware fantasies. Let’s talk about bragging rights. Microsoft, on the other hand, made certain Windows sales numbers were correctly publicized. Creating the impression that IBM was making huge progress in the fight for OS market share. The tech journalists, always supporting the underdog, relished it. Hand-fed by IBM’s cleverly scheming marketing department, even reputable commentators got caught in the propaganda net, signaling IBM’s unmitigated success.
It fell on me to calm our by-now-famous internal paranoia. With access to IBM’s royalty reports, I knew the numbers IBM’s marketing augurs were concocting and bragging about were wildly exaggerated. I later found out that they included a healthy dose of not-completely-functional demo copies. Eventually, I won the internal arguments. There were no other possibilities. Numbers, as they say and I believed, speak for themselves.
In May of ’93, IBM’s new CEO hosted Bill in NYC. Consistent with his never-ending desire to improve our relations, Bill eagerly agreed. According to Bill, a cordial meeting ensued, though, to his great regret, became one with no concrete results. Much to my surprise, Bill shortly thereafter exhibited a glaring lack of restraint by disclosing details of their discussion. An enormous faux pas! The reaction from my contacts at IBM was not far behind. Lou was flabbergasted by the liberty of Bill’s exposé of the dialogue and questioned if he could ever trust him again. By chance, Bill met him again later in the fall on a golf course and apologized for the mishap. He was to meet Lou a third time in a colorful, clandestine meeting.22 Meanwhile, Gerstner continued to resist all calls for a breakup and, unknown to outsiders, had already begun implementing plans to transform IBM into a premier IT services company.
Resolve and Fortitude : Microsoft's ''SECRET POWER BROKER'' breaks his silence Page 13
