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

by Joachim Kempin

  For that to be successful, her CEO needed a consulting arm offering IT-integration services. In a surprise move, he made an offer for ailing Digital Equipment Corporation (DEC). My old friend John Rose, having joined Compaq several years earlier, was the driving force behind that deal—stunning me. The ’92 departure of Ken Olsen, DEC’s admired founder, caused by her first quarterly loss, had left that company polarized and with no clear direction. Her new CEO, the capable Robert Palmer, one of the founders of Mostek, had since then struggled to turn the ailing ship around. Despite successfully launching an advanced minicomputer line and executing massive layoffs, he failed. After consuming the deal, Compaq’s management had a tough task ahead. DEC was a wallowing, wasteful company, and her reputation with customers had begun to break down. A situation comparable or worse to what Gerstner had found when taking over IBM.

  Evaluating Compaq’s acquisitions, Bill and I thought Pfeiffer had bought anchors, not sails. By early ’99, merging the three companies ran into tremendous difficulties. When an earning crisis developed, dropping Compaq’s stock price 20 percent, Pfeiffer got ousted. Chairman Ben Rosen took the title of interim CEO. Replacing him four months later was a lackluster insider, Michael Capellas, who tried his luck to fuse the floundering wreck into a coherent and meaningful competitor to IBM. During this turbulent time, Steve Jobs—still mad at Bill for not liking the iMac design—attempted to upset the MS-Compaq relationship by offering Compaq a license to the Mac OS. Fortunately, her management rejected the idea and stayed loyal, though it again showed how vulnerable MS remained.

  Eventually, Hewlett-Packard (HP) came to the rescue by buying Compaq through a stock swap worth around $25 billion. The deal was completed in ’02 against the objections of Walter Hewlett, HP’s major shareholders and director. From thereon out, the combined company was the undisputed PC king. Carly Fiorina, HP’s CEO and chairwoman, tried for another long four years to restore and revitalize the shipwreck, forgetting that in a wickedly competitive environment, the scent of blood travels fast in the high-speed winds aloft. This time to the east! Carly’s failure allowed Dell to seize the opportunity and erode HP’s market share deeply enough to lead to her ouster. The appointment of Mike Hurd managed to put HP back on track, restoring some of her old glory. A genuinely astonishing achievement! By ’04, the consolidation in the industry left HP and Dell with a combined 40 percent of WW PC volume, a concentration of power never experienced when I was still running the OEM group.

  FORGING AHEAD

  My last remarks have ranged well beyond my time with MS, so let’s get back to early ’99. Despite his promotion to president, my boss’s relationship with Compaq never completely recovered from earlier mishaps. Whenever Steve visited the company’s execs, Gary Stimac, Compaq’s SVP of engineering, stood a life-size cardboard cutout in the conference room, in lieu of him attending personally—an insult poorly taken by Steve. Observing the struggle Compaq meanwhile experienced was the last motivation he needed to embark on a mission to acquire new friends by cultivating her competitors. Concerned about a promising pursuit of the enterprise server and workstation business, he fostered a rapport with Dell’s president Kevin Rollins, future CEO and Michael Dell’s right hand. The marketing money to seal the envisioned pact, greasing the tracks, and forging a cooperative spirit came directly out of my budget. Unbudgeted. Looking back, it turned out to be a good decision. I did not resent striking the deal, though I was deeply hurt by the way it was forced on me impulsively in a meeting with no advanced warning or prior analysis.

  With Steve firmly in command, I recognized another change in the company, one I personally had never wanted to witness. The meetings where decisions were supposed to be made swelled into teeming crowds involving all manners of logistical impossibilities. Anyone who remotely had something to learn, and most of the time nothing to contribute, would now be invited. The presentation folders distributed grew into Manhattan phone books. The PowerPoint presentations labored on ad infinitum. The review meetings I now had to attend often ran for days, at twelve hours per. Ironically labeled team-building exercises! McKinsey and the whiz kids were casting their long dark shadows. Nobody was allowed to step on anybody’s toes any longer or display the normal MS style—raucous at times. Drawing strength out of healthy disagreements was suddenly a lost art. Right or wrong, one company, one team! As practiced, the resulting charade suppressed true opinions, maverick passions, and controversy—attributes that in the past had led to impressive progress and breakthroughs fanning a healthy competitive spirit. The earlier culture suffered. Forgiveness was favored over accountability. Being a friend of Steve was becoming important. He was making an effort to keep his temper under control; I never thought that day would ever arrive. The company was drifting into a decision-by-committee organization. I often did not possess enough Sitz Fleisch43 to endure these never-ending sessions and began finding excuses.

  As the decision-making style in the company shifted, I refused to be party to spreading the cancer. Once, after calling for an operational review with my logistic group, nearly fifty people showed up for a meeting scheduled for three hours. I looked at my business manager with astonishment and said, “I am going back to my office, and when I return, I want four people in this room. If there are any more, I will start firing the rest until we get down to exactly that number.” I barely finished issuing my instructions as a mad scramble for the door drowned out the last part of my final phrase. After we were down to the quintessential group, we finished the agenda in less than fifteen minutes. I had to repeat the same exercise again during a marketing review. From then on, decision-contributing gatherings never exceeded six to eight people; all others needing to know were later informed by e-mail.

  I was nearly at the end of the rainbow. Steve must had sensed this when he expressed his desire to build his own leadership team and wanted to know if he could count on me. What inspired me to stay was twofold: first, the desire for an orderly and smooth transition, and second, my loyalty to the nearly five hundred people working for me. The trial was not over yet, and I firmly believed that an experienced hand was needed to steer the group through the turmoil of the aftermath.

  Assuming I would join the exodus in progress was not far-fetched. Early employees like me had created enough wealth to explore other venues or simply retire. As the stock price drifted further and further south and stock option packages became less valuable, a lot of talent left, absence felt; there were ghosts in the hallways. Paul Maritz grabbed me one day and, looked straight into my eyes, imploring, “I am not sure why the two of us are still around!” He departed before I did.

  As Steve detailed his ideas further, he expressed his desire to build a team of executives in their late thirties or early forties. Why mention age? Did experience not count any longer? Was loyal service and years of stellar performance no longer rewarded, honored, or appreciated? He made me think harder with several not-so-off-the-cuff remarks. I had not made up my mind completely, but I had a capable person in my division to take over for me. Owning the conviction that age and performance are not necessarily correlated, I ignored his anti-age comments and carried on—yet I felt freshly motivated to seriously consider my life after MS.

  In a follow-up meeting, I told him I would be happy to stick around until the end of FY ’0144 before wanting to move on, suiting my remaining stock option vesting schedule. After thinking it over, he agreed to my proposal, and from then on, we were both actively on the lookout for a successor. Knowing that my time was coming to an end had no impact on my group’s all-star performance. Steve, writing a personal note on my bonus notification in August of ’99, saying, “JK, another huge year. Superb!” must have had the same impression.

  JUSTICE ON THE BLOCK

  TRIAL SETUP AND STRATEGIES

  The MS antitrust trial of ’98 shook the IT industry at its foundation and was soon dubbed the trial of the century. Attempting to bring down the most influential software and largest capitalized c
ompany in the world, the Feds caused lusting minions to circle like vultures above the veld. Not far behind, the press venally manipulated the truth to drive an appetite for extra copy, sell more newspapers, or attract a larger TV audience.

  My research shows at least 150-plus voluminous white papers or books have been published to postanalyze that historic event. Why write another long chapter following the path of no return. In its place, I will share with you how I experienced the trial as a participant and observer and reveal my own feelings on where justice, finally, came to reside within the process—focused mainly on my OEM business. Its practices were inarguably its centerpiece, and my chronicling stage lights will therefore track and illuminate and scrutinize those facets, without neglecting to capture the emotions of the key players as I witnessed them from the inside out.

  After Anne Bingaman’s departure as chief of antitrust enforcement, Joel Klein took over. Skeptical of winning the ongoing consent-decree-violation complaint, he hired Jeffrey Blattner, the talented but rough-hewn former chief counsel for the Senate Judiciary Committee, to covertly broaden the never-halted investigation. His true role was a well-kept secret: to dig deeper into the documents already in the DOJ’s possession and to distill and condense e-mail snippets and other evidence into a deadly antitrust Molotov cocktail. Just in case Jackson’s ruling wouldn’t survive the appellate court. Somebody was thinking ahead.

  Blattner was assisted by top-notch gunslinger David Boies. The DOJ, engaging him first as legal consultant and after hiring him fulltime, made him chief prosecutor in the newly filed case. Boies came loaded with marquee credentials as a most celebrated and successful trial lawyer. In 2000, Time magazine dubbed him lawyer of the year, stating, “Mr. Boies’s memory is one of the first things when people discuss his strengths. What’s most impressive about that gift—focused as it may be by the intensified concentration that his dyslexia demands—is Boies’ uncanny ability to recall a key fact, legal citation or piece of contradictory testimony at moments of the most intense pressure.” He had garnered firsthand experience with antitrust laws when defending IBM against the Feds. The historic trial lasted from 1969 to ’92, and Mr. Boies had ever since been recognized for devising IBM’s winning strategy.

  A victory coinciding with an all-new Regan Republican administration noted for having the least active antitrust enforcement, motive, and record in modern history. Yes, politics do play a dreadfully active role in antitrust cases. By now we were under Bill Clinton’s rule—his administration certainly not known for welcoming or practicing Reagan-friendly enterprise policies as we were experiencing firsthand.

  In the spring of ’98, the joint Blattner/Boies mining operation burrowed deeper and deeper into the never-receding cordillera of documents. Digging for the mother lode and carefully considering the latest appellate court ruling, they waxed confident of having their case wrapped up. Soon thereafter, the Reno DOJ filed the aforementioned sweeping shock-and-awe antitrust suit, accusing us of having illegally obtained and maintained a monopoly in violation of the infamous Sherman Act. A bloody and protracted battle was guaranteed. The gist of the accusations was still based on tying IE features illegally into Windows. A lot of others, variations to the theme of anticompetitive behavior, had been added. Twenty states had joined forces, with every single one of their AGs dreaming of headlines and inaugural balls in the governor’s mansion. They were coming at us in droves—sabers raised. Success surely breeds contempt! Political activists were milling and murmuring in the restless night, pitchforks in hand and torches ablaze. The home state of MS, Washington, declined to join them.

  Judge Jackson’s top priority for the upcoming trial was to avoid a prolonged battle and complete the proceedings before the Clinton era drew to its close. According to later-revealed interviews, the judge claimed he was still open-minded toward MS despite our earlier eye-poking performance. He made no secret whatsoever of having been hurt and humiliated by the harsh ruling of the appellate court. A bad omen? I heard the phrase “Humiliation is a license to hate”; let’s see how humiliated he felt.

  Jackson had a lot of discretion and elbow room conducting the trial. He used it boldly by fast-tracking the trial for September of ’98—curtailing our prep time and slightly advantaging the Feds. Next he limited the number of main trial witnesses to just twelve and a scant three for the rebuttal phase. As a multifaceted company with the action of one branch of MS not necessarily reflecting the company as a whole, we felt straight jacketed. Hostile or not, the company’s legal forces went into overdrive. The Feds kept adding to their workload by requesting ever more information, further pinching valuable prep time.

  Total documents delivered: approximately three million, barely fitting inside two 18-wheelers. To capture them, our attorneys, on behalf of the Feds, raided employees’ offices with no warning and regardless of whether you were in or out. Whatever they deemed relevant got shipped off. They harassed everybody, and many took the intrusions personally. A pest and a nagging distraction from running the day-to-day business for sure!

  As the Feds began conducting depositions, we, in return, deposed government witnesses and collaborators. Another time-intensive task for our extraordinarily committed but equally stretched and overworked legal team as the clock approached deadline. In the end, Jackson relented and agreed to delay the trial until October 19, 1998. My friends on the legal staff, totally exhausted, were barely ready.

  I was named one of the twelve main MS witnesses. No surprise—this was all about my business. Paul Maritz and most of his direct reports found themselves on the same list, while Steve’s and Bill’s names were absent. MS employees were shocked, recognizing that the top two honchos we had worked and sacrificed for, followed, trusted, and obeyed were dodging the trial. The news spread like wildfire on campus. People were dismayed and in stunned disbelief.

  Upon questioning Bill Neukom, he explained that Bill had indeed volunteered to defend the company, but our legal team had deemed him a bad client. With all his hyperintellectual smartness and word-mincing abilities, he apparently lacked the coachability required to transform him into a sensibly forthcoming, judge-placating witness. Or, as the NY Bar Association defines one aspect of a bad client, “He has tunnel vision about the matter and does not want to listen to new ideas, is not interested in other options, or can’t face reality about his role in creating the situation.” Not privy to how Bill N. had concluded this, I concurred after watching a video snippet of Bill’s own deposition. Churlish, thin-skinned, and agitated, he reminded me of President Clinton’s depositions in the Paula Jones and Monica Lewinsky cases, where he questioned the meaning of the word is.

  Our policies and actions were the direct and accretive result of Bill’s and Steve’s visions, plans, and business acumens. Like Siamese twins, they were joined at the hips as they outlined key strategies and instilled a take-no-prisoner operating style into everybody. Then and now, they were the architects of the MS house of cards, which could collapse anytime from the pressure the DOJ was putting on it. Them baling out compares to refusing to be at the hospital the day your wife has your baby.

  I suffered through a lot of explanations with my people and, against my belief, excused our leadership. I never talked with Bill about the vacuum he created, one we all felt, but I mentioned it to Steve, who just confirmed he had left the witness selection solely to the lawyers. I harbored profound reservations on the appropriateness of such a delegation but dug no deeper into the man whose enduring passion was rallying and rousing his troops. Not being selected to be on his beloved stage this time needed no further insult. How he could maintain his proud, upright bearing and justify his no-show to himself was inexplicable to me!

  Decision made, my life went in a different direction. I was not eager but certainly proud to be a witness and defend our profoundly successful actions, well-considered policies, and our people’s tireless work. Emphatically, they all wished me good luck. I thanked them for their support with all my heart!
I would need it!

  In September of ’98, I spent one week with our attorneys scrutinizing documents. I was extremely thankful for their in-depth preparations for yet another deposition and hoped my former experience would help me to get through this one with flying colors.

  Mr. Malone, the prosecutor in the earlier contempt case, deposed me, and no smoking gun was revealed. Compared to the first DOJ attorney I experienced back in the early ’90s, he was well organized and understood the vagaries of the OEM business reasonably well. He was cordial, polite, and stayed on his agenda. I was forthcoming enough in my answers, but once in a while, I had to resort to the worn-out Oliver North phrase employed during his public grilling by congress: “I do not recall.” Small wonder, as several events he questioned me about had happened six and seven years earlier. He focused on the OEM business along with relevant e-mail exchanges or documents I had written or received. His style was diligent and persistent but not gratuitously mean. As experienced before, he tried to trick me by asking what other people had meant when they wrote their opinions down. When I told him “Ask them,” he countered by asking me what I had understood as the receiver. Several years later, who can truly remember all connotations? So we struggled along, Malone laboring by means of inference and innuendo to prove evil intent of the authors or the recipients and me grappling to deny him that same pleasure.

  OEM pricing was a central issue he pursued. He failed to appreciate a number of my answers as he pushed hard to contrive how we were overcharging customers. He relished hearing how we had arrived at our royalty prices. Whatever the method, he always implied we had pricing power. He was loath to accept the truth of having only scant competitive information to base them on. As a hired skeptic and deputized enforcer of the law, he therefore cavalierly concluded that he had found yet another way to prove our alleged monopoly power—not accepting an obvious information gap. He confronted me with the letter Hewlett-Packard’s VP Romano had sent me, decrying Windows as the only game in town. I pointed out other options close to what I have explained earlier here. For Malone, the opinion of the Hewlett-Packard guy neatly trumped my own deep experience and considered logic.