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

by Joachim Kempin

  When visiting US customers for the first six months, I had to play catch-up. So I required the account teams to provide a thorough review of each and every outstanding issue beforehand. Jim Harris helped me get the ball rolling. Once he believed I had a good handle on things, he graciously stepped aside, allowing me to move seamlessly into existing relationships. A handful of these early meetings were emblematic and memorable.

  I remember visiting the Michels duo from SCO9 with Jim. We were licensing Xenix—MS’s version of UNIX—to them, which no longer fit into our portfolio. During my first visit, we began preparing them for a technology transfer, allowing MS to concentrate primarily on MS-DOS, Windows, and OS/2.

  SCO was founded in ’79 by a colorful father-and-son team, Larry and Doug. They were a couple of fun-loving good old tech warriors of an earlier stripe, given to deep number-diving, raw humor, and multiple entrees. Generously proportioned chowhounds who did business for real and for fun! We met them at a boisterous fish-fry eatery on Santa Monica Pier and didn’t get around to discussing serious business issues until their second round of plates arrived.

  “Well, men,” said Jim H., “now that you’ve met Joachim, you know exactly who’s going to be pampering you even more than me from now on. If that’s possible!”

  “No,” snickered Doug around a mouthful of fried squid, “it isn’t.”

  Larry winked at me, chewing bawdily, and gave a thumbs-up with one hand, waving the waitress over with the other. Jim just sat smiling contentedly. You could see it wasn’t his first rodeo with these guys. He enjoyed it deeply, grinning at me, contributing to the growing sense of certainty that the new relationships were going to be enjoyably successful.

  Another notable visit with Jim was with execs of Phoenix Computers. They were eager for an agreement to sell MS-DOS together with their BIOS10 chips (containing a piece of software enabling the CPU of an IBM PC to perform basic input and output operations). Phoenix sold her version loaded into so-called read-only memory (ROM) chips, ready to be inserted onto a PC motherboard socket. In 1981 she had bought Seattle Computer Products (SCP)—the old Tim Paterson company. The same-self firm MS had acquired QDOS11 from—our starting point for creating MS-DOS. In her by-now-ancient contract, SCP had retained the right of distributing her own hardware with MS-DOS, and the new owners had decided to exercise this long-forgotten distribution privilege.

  As much as Jim and I resented having Phoenix as a second supplier for MS-DOS, we had come to negotiate the desired deal in good faith. Priced at around $5, Phoenix’s BIOS chip hardly qualified as hardware, as outlined in the old agreement. It therefore needed careful pricing considerations. To avoid potential conflicts and overlaps, we proposed they target system builders,12 which we served poorly, for such a combo pack. There was no shortage of these entrepreneurial garage-band front-runners who, for us to be thorough in an energized low-end marketplace, had to be reckoned with.

  If Phoenix could become a bona fide distributor for this market segment with a track record of denying us revenue through piracy, she would be of great help. Her management team fell in at once, but enthusiasm waned when we revealed our royalty expectations. Our potential partner was already disappointed by our initial pricing proposal when Jim Harris, adding insult to injury, dropped the derogative bombshell I headlined. I was deeply embarrassed. The Phoenix guys, visibly upset, shared my sentiment. I couldn’t blame them. Up to then, we’d had have a lively, constructive, and amicable meeting. Why pee in the pool? Jim was wise and diplomatic enough to excuse himself at once, and with me at my best behavior, we managed to arrive at a balanced agreement.

  By then Compaq had become MS’s most important OEM customer. The company occupied the lofty position of most innovative PC manufacturer, along with being a close ally and the world’s number two PC manufacturer. Bill had befriended her chairman and main investor Ben Rosen, remained close to her CEO Rod Canion, and enjoyed the demanding intellectual exchanges with her R & D SVP Gary Stimac. Steve’s buddy was her sales and marketing VP Mike Swavely. MS’s early engagement with Compaq had helped the start-up in ’81 to a quick breakthrough. By now she was firmly established, fast growing and profitable, and respected throughout the industry by friends and foes alike. Product-development organizations in both our companies continued to work closely with each other, ensuring new Compaq PCs would function smoothly with all MS software. To IBM’s dismay, our partnership resulted in Compaq staying well ahead of the innovation curve. Unfortunately, our mutual working relationship was focused solely on MS-DOS. Compaq had neither licensed nor actively promoted Windows. My personal mission to change!

  The challenge of moving Compaq to Windows grew into a long-term struggle despite our continuing and mutually inspiring bond. The introduction of version 2.03 at the end of ’87 supporting Intel’s 80386 CPU promised to change this as we succeeded to persuade her execs to license it for one model. Against our advice, Compaq’s product management skimped on its memory configuration to strike an attractive price point. The result was predictable: running in super slo-mo, Compaq’s Windows PCs failed to shine. Compaq blamed it on bloated code; we cited missing memory. From then on, convincing Compaq of the glories and marketing miracles of Windows amounted to a herculean task. I had my work cut out!

  Our business relationship with Digital Equipment Corporation (DEC), one of my ex-employers, was another complex one. She had entered the PC business relatively late. Ken Olsen, her cofounder and CEO, couldn’t quite bring himself to believe PCs would ever gain traction in the real world. The respected, wise old oracle was famous for quoting, “There is no reason for any individual to have a computer in his home.” Oh boy!

  I met him personally for the first time in a sales training class in ’74 in Maynard, Massachusetts, DEC’s headquarters. He was a leader and an engineer by heart and a business executive by accident. Success had never gotten into his head. Whenever permitting, he made room in his schedule to attend the last day of a new-hire sales training class. His visit with me in attendance was advertised as a luncheon meeting. To the participants’ great disappointment, lunch was never served nor paid for by the company. In his excessive stinginess, Ken brought his own, normally a sandwich prepared for him by his wife. He expected his sales personnel to do the same or buy theirs in the company’s cafeteria. “As a good salesperson, you have to be underpaid” was the phrase always omitted during Ken’s visits. The incident reminds me of the slogan for one of the cooking channels: “Stay hungry.” Underpaid was his way of expressing that hungry salespeople will perform better—I subscribe to that.

  When he reluctantly allowed Digital Equipment Corporation (DEC) to enter the PC fray, the company did so by licensing the needed OS from DRI. Her selection made no friends in MS and created a myriad of incompatibilities for her customers. DEC paid a tall price by not choosing the better partner and by not making her PCs true IBM PC clones. As losses mounted, DEC finally switched to MS-DOS. Living successfully in a proprietary world, her hardware, even in round two, was still not engineered for 100 percent IBM PC compatibility. Trying to be different and adding proprietary touches did not work. Failing twice was difficult to accept for the leading minicomputer vendor. When DEC eventually fell in line, she found herself far behind and had overpaid MS several millions in royalties.

  Cleaning up the mess fell squarely in my lap when visiting DEC in ’87 for the first time in my new capacity. I saw an urgent need to alter her payment schedule to stop her from bleeding cash. Not present when she entered the PC business, I carried no baggage from her fling with DRI and was best qualified to reset her license without prejudice. After two false starts, Ken Olsen had put VP John Rose in charge of her PC business. John was a rational and friendly executive who openly acknowledged the deep hole DEC had dug herself into. Honesty is the best foundation for a successful negotiation, and it did not take long to arrive at an agreeable solution.

  One company I visited relatively late was Packard Bell (PB). Her founder and
CEO, Beny Alagem, an ex-Israeli tank commander, was as bold and aggressive in business as he had been in the tank battles of the ’73 Yom Kippur War. He was a brilliant, quick-on-his-feet sort of guy, blessed with an abundance of wit and humor. A talented and shrewd negotiator who sold PCs exclusively through retail. When I first met him, he was expanding into Europe, for which I offered him valuable insight. He had been reluctant to buy Windows—the reason for my visit. Laser focused on the supercompetitive and price-conscious consumer market, the resulting increase in costs had hindered him to commit.

  The man was notorious for obtaining the best possible prices for all PC components; software royalties were no exceptions. Every meeting or phone call with Beny always ended with him requesting a better deal. He worked on rock-bottom margins, making pennies count. My visit did make a small difference as we agreed to a Windows trial for a number of higher-end systems. A surprise for his competitors who never gave Beny the credit he deserved, even when his company grew beyond wildest expectations. In the meantime, I enjoyed a constructive, harmonious business relationship with a man who never stopped calling me Jochen.

  Observing Beny in action, I recognized his adopted management principles were similar to mine. The successful Israeli defense forces had adopted the principle of Auftragstaktik to guide its troops early on. Watching Beny at work proved he had had taken his military training lessons to heart as he crisply defined his motives, methods, and goals and issued clear instructions. He never lost sight of his aim. His refreshing openness and honesty was no doubt the reason the two of us hit it off at once. Respect naturally followed.

  Visiting numerous customers set an example for my troops, increased my understanding of their business perspectives, and last but not least, affected my continuing restructuring effort. It motivated me to refine and tune our policies and to match personalities between customers and sales reps. As a result, I chartered Jim Cecil, a consultant, to independently conduct annual customer surveys to improve customer satisfaction. Increased marketing campaigns with OEMs were the other most obvious consequence. My now-intimate understanding of the galloping US PC market enabled me to produce an accurate business forecast for my second fiscal year. As the economy picked up, we beat our budget handsomely. I had my bragging rights back!

  As I was the new kid on the block, the press had initially been eager to talk to me. As manager of the German sub, I had given interviews freely and initially without much thought. Journalists covering our local activities and the mother ship were critical but open and fair. Once in a while, an interviewer was a bit sneaky, making me increasingly wary over time, planting the first seeds of deep circumspection in my perception of the media.

  What I came to experience in the United States was considerably worse. Most journalists were driven by self-serving agendas, often pretty hostile ones—based on speculation, seldom on facts. In my first couple of interviews, reporters put unrecognizable words in my mouth, with no relation to the verbatim. My position, with intimate proximity to the highest ranking MS and customer executives, provided plenty of knowledge of goings-on behind the curtains. I became hypervigilant about disseminating or confirming confidential information, on or off the record. I soon concluded the press was using me to suit a narrow, high-handed agenda of sensationalism and lowbrow controversy. I couldn’t quarrel with publishers wanting to sell papers, but misinforming their readers was a tactic I wanted no part of. I consider myself a pretty straightforward guy, and it irked me to watch my words become twisted into journalistic knots.

  Further agreeing to be interviewed by sensationalists could simply lead to a world of hurt with my loyal customers and my trusting superiors. Disputing or denying parts of an interview, once published, came off poorly and served only to enhance the misguided story. By then the cat was out of the bag. I therefore began declining interviews in the United States, leaving the thankless chore to others. Understandably, my snubbing did not create accolades. I continued giving interviews in other parts of the world where reporting was less slanted and self-serving. In retaliation, the US press called me all manners of names and unearthed any gossip they could find. All the mud hurling bothered me little. I had a terrific and important job, and I fortunately didn’t need the distracting glare of the limelight. Less enabled me to succeed where it counted.

  DEAD ON ARRIVAL

  “I believe OS/2 is destined to be the most important OS… of all times.”

  Who would not have shared this opinion after reading what MS’s visionary chairman expressed in the programming guide for OS/2 published in ’87? The business world and trade press certainly bought the story as advertised. Early disagreements and lingering tensions between IBM and MS about its specifications and development schedule had by now been overcome. Despite the thorniness of the past, a release date had been set for the fall.

  This release date made my OEM customers in the summer of ’87 hurry to jump on the bandwagon! Under no circumstances would they risk missing the transition or allow IBM the opportunity to establish another lead. As agreed upon with IBM, OEMs could license OS/2 from either company, presenting my group with a potential challenge. Yet our initial fears were soon proven groundless. Licensing from the number one competitor was just not in the cards, and to my delight, we obtained that business almost exclusively.

  Lacking an effective licensing department was probably one factor driving OEMs to us. The way IBM’s contracts or prices were contrived might have been the other, but with my customers never disclosing any details. In that respect, I was blinded. We drew up our pricing guides without ever talking to IBM and experienced no resistance. A nearly feverous atmosphere incited a perfect storm of a sign-up frenzy and, unbeknownst to us, a world of severe headaches in the not-too-distant future.

  One of the companies eager to deploy OS/2 was Hewlett-Packard (HP). Jon Shirley accompanied me on my first visit to Palo Alto, California, meeting her execs. The game plan was to conduct a relationship review, introduce me as the new VP, and then address an OS/2 issue HP had previously brought up. HP produced and marketed her own PCs while operating—with the exception of her printer division—like a slow-moving utility company. Her bread and butter was selling mainframe like minicomputers and terminals, running a profitable software business, and developing her consulting practice. As with IBM, MS judged her cooperation with healthy skepticism. The reasons can be found in her DRI-based terminal business and her nearly religious UNIX engagements. The overall review went reasonably well, and we agreed to follow up with her printer division for a cooperative alignment.

  Convening separately with HP’s PC division, we veered quickly into a vicious contract dispute. HP was one of the companies still holding on to an old MS-DOS flat-fee agreement. According to her contract interpretations, it included OS/2. Jon considered this a ruse. Having familiarized myself with the old contract language, I couldn’t find any reason supporting HP’s claim. Her hairsplitting attorneys’ adamancy was based on language unearthed by reading an ill-worded press announcement positioning OS/2 as the successor to MS-DOS and Windows. Forgetting that Windows was not part of DOS per se and HP’s unwillingness to acknowledge the substantial differences between OS/2 and MS-DOS made their arguments look like an irrational ploy. During the meeting, Jon, the ever the inspiring leader, assigned me the task of resolving the dispute. Empowerment at its best without yielding the driver seat!

  Given the steely insistence of holding the line, my initial go-around with HP’s predisposed negotiation team was a rough one. Over the next couple of months, we eventually arrived at what I considered a reasonably balanced resolution. Signing the new agreement at last, her team still bore reservations. My role in settling the conflict was not considered an acceptable victory for HP, in particular by her lawyers wanting to run the show. Worse yet, my interaction left bruised executive egos behind, and being internally branded a tough cookie strained my relationship with HP from the beginning.

  Though we did initiate a printer softwa
re development project with HP. Her printer division was run by Richard Belluzzo, an eventual MS president. Being the dominant PC printer supplier, failing to team up with HP would have been futile. In return for her development participation, HP received most favorable licensing terms. For us to develop and license a printer OS was an exciting and inspiring project. The idea of achieving a leading position in yet another relatively high-volume market segment drove our ambitions to believe we could create a second OEM leg. Off we went to new shores, targeting the printer divisions of Nippon Electric Company (NEC), Sharp, Canon, Epson, and IBM.

  As we concluded the HP deal, OS/2 was just reaching the market. To ship on time, a compromise had been agreed upon. Version 1.0 would be released without a GUI.13 A potentially dire handicap and disadvantage compared to operating a Windows PC or a Mac. The two partners considered this low risk assuming the glaring deficiency would not hamper the targeted business community’s interest. Accustomed to character-based applications, this customer class then cared less about the benefits of operating a computer with point-and-click mouse and graphically powered windows technology. Hard to imagine today!

  The trade press positioned OS/2 as successor to the DOS/Windows combo. Using her clout with enterprise customers, IBM promoted it as the most advanced OS for business PCs. We had spent the long, hot summer closing deals with all OEMs interested in selling PCs to this community. Embarrassingly and disappointingly, early reviews gave it a tepid reception. Having only a text-based user shell had disenchanted few. Missing the mark to fully support Intel 80386–powered PCs, the ones the business community preferred to deploy, was deemed a catastrophe. It effectively cut potential system performance in half. Windows and MS-DOS fully supported it. Why bother with OS/2?