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

by Joachim Kempin

  Bill’s image within the company was undergoing profound change. People expected him to lead, not delegate visionary leadership to his loyal knight who was still learning the ropes. Great leaders, as I knew them, mastered their most imposing challenges, subsequent breakthroughs, and victories by confronting harsh realities with outermost logic, determination, and pragmatism—gaining respect. Admiration could wait. At this crucial junction, Bill failed to take that introspective path, dig deeper, and question a few of his own traits like his overly assertive tactics. The government was deviling us and the means by which the Feds pursued their quest was maddening and painful. A true leader would have gutsily leveraged this unfairness into an opportunity and reviewed business policies and procedures. One would have pulled heads out of the sand and demonstrated that he was able to cause change in places where the company had genuinely erred or had been over the line, as Gerstner had done when he struggled solving the IBM crisis. There was a call for urgency and a demand for honesty coming from all corners of the IT universe. Unexplainably, the company’s commander retreated or answered with more of the same.

  The push for paranoia continued unabated. The newest target was the DOJ. Paranoia, though, is not a smart way to win the end game. Changing behavior is. Openly irritating executives from Apple, Intel, AOL, and Netscape not only made enemies but also demonstrated unnecessary macho behavior. The barely veiled threats tendered by over-the-line employees emotionally poisoned the well where business flowed from. If Bill would have jumped over his own shadow, like jumping over chairs—which he sometimes demonstrated and did astonishingly well—he would have become the agent of change the company needed. The empty void would have been filled up with character.

  The genius in him, however, pleaded for love and admiration and responded with intellectual righteousness, signaling defiance. As a response, the Feds and our conspiring competitors accelerated their attacks by taking extra shots directly at him—the weakest point in the net he had concocted. He could not stomach it. His befuddlement signaled to the world that he was no longer willing or able to steer the ship. Crushingly disappointing to all employees working for the company—a sad moment of reckoning!

  Sea changes were occurring not only inside MS. A number of founders and pioneers had made serious money by now and were becoming distracted. The charitable foundation race was on. Bill had established his in ’94 and was promptly followed by Michael Dell and Gateway’s Ted Waitt, as if they were competing even here. As much as these foundations were doing wonderful things for the world of the needy, they nevertheless stole valuable executive time. In the case of Bill Gates, our public relations people considered his charitable giving a great new way to portray him favorably in the public eye. Bill took their advice to heart, and under the guidance of his wife and father, he transferred most of his wealth into his foundation. Animated by their enthusiasm, Bill threw himself increasingly into guiding its strategies and began traveling extensively—now in his own private jet—to lead his newly minted philanthropic missions. Steve tended the shop at home.

  The sudden surge of interest in the world of charity signaled an escapist flight from reality into a distracting new realm where he hoped to reestablish a permanent and reaffirming legacy. The public relations people loved the heartwarming drama his unprecedented charitable activities created and zealously depicted him as an incredibly caring man—the polar opposite of the now-out-of-fashion, shrewd, and scheming business Buffalo Bill. As I saw it, he had not changed one iota. His razor-sharp intellect combined with his desire for world domination remained unaltered. Through family and outside influences, he merely redirected his ambitions, as people working within his foundation confirmed. A fascinating image transformation was underway, a fresh path into an on-the–surface, meaningful, and altruistic life combined with a steady retreat from MS’s day-to-day business affairs.

  In addition to Bill’s highly visible makeover, the company stepped up her efforts to do what most of her competitors had been doing effectively all along: proactively shaping the political landscape. In the United States, most companies affect legislative outcomes by tendering politicians direct campaign donations and funding lobbyists, promoting company-specific agendas. Like pouring legislative octane over political wildfires—not always successful, but without trying, prospects look even dimmer. In my mind, these direct donations made within legal parameters constituted nothing short of bold-faced bribery. Lobbying activities, to me, constituted a more ethical attempt at shaping political outcomes. Naturally, the recipients of the former would find ample reasons to disagree. Corrupt as the system seems, it remains legal.

  Until ’94, MS had been totally naive about how to buy favors from politicians. The consent decree increased awareness, and as a result, a political action committee (PAC) was formed. Four years later, it had increased annual donations eightfold from the $30,000 in ’94. When I left the company in ’02, that amount had climbed to over $1.3 million. Derived from employee contributions, the money was dedicated to specific causes or politicians by the donors, though most were simply contributions to a general fund. A closer analysis reveals that the contribution pendulum was having wide swings between Republicans and Democrats. This lack of loyalty to a particular party was both due to our collective desire for a favorable outcome of the upcoming trial and our proclivity to support the party who was more likely to lean toward a tax-friendly legislative climate. You can’t buy political influence in the US in the open market?

  What bugged me was how the PAC contributions were collected—supposedly a voluntary affair. But each year I got phone calls asking for donations to the PAC by people who claimed they were directed by my boss to do so. Steve and I never talked about these solicitations. I resisted the pressure or gave only to a specified candidate of my choice. The one year giving $5,000 to the general fund, I was deeply disappointed on learning how the PAC leadership had allotted contributions. Believing the wrong people or causes had gotten them gave me a perfect excuse to never contribute again. The trend into politicking represented a troubling shift in our business matrix—from the purist pursuit of serving PC users to serving the makers of laws with their vapid and purchasable attention spans.

  Changes were not limited to MS. After fifteen years, the PC clone industry stars from the past were overtaken by newcomers. One of the early victims was Beny Alagem, Packard Bell’s (PB) CEO. I saw him a last time in his Sacramento, California, headquarters. An old army depot that he had leased for a pittance back in ’95 after an earthquake had struck and partially destroyed his old site at Northridge. My first visit to the new location late that year impressed me, as he proudly toured me through his 370-acre kingdom. During the same year, he had sold a 20 percent stake in PB to Nippon Electric Company (NEC)—the beginning of the end.

  On my next trip to Tokyo, our friends at NEC took me aside, telling me they were watching Beny carefully and, if I should observe anything odd, I should feel free to inform them in strictest confidence. This was a clear first sign of suspicion and discontent between the new partners! I never made use of their invitation. The cautious and circumspect Japanese would no doubt have issues with the boldly aggressive former tank commander. All of Japan was watching their move. This substantial investment was a first for any Japanese company outside her homeland. If not, successful heads would roll and NEC’s management would lose considerable face.

  When the investment came about, PB was in peak form, having just been named the highest-volume PC seller in the United States by Dataquest. The company that the Compaqs, Hewlett-Packards, and IBMs of this world had long waved off as being too low-end to be taken seriously had beaten them all. With his industry-shocking success, Beny was now the undisputed king of retail, and in order to finance his ambitious expansion plans, he had let NEC’s capital in the door. The Windows 95 launch gave him another jolt as he successfully expanded into Europe, filling the gap Amstrad had left to be explored.

  Even after the initial NEC inf
usion, PB continued having difficulties financing Beny’s expansionist’s dreams. A ’96 merger with Zenith, owned by the French company Groupe Bull, had brought an additional investor into the company. Now my friend had to maneuver between both of them. Beny, a shrewd negotiator, was by no means a diplomat. Quite accustomed to running the show as he saw fit, receiving a 650-million dollar capital infusion nevertheless meant losing part of his cherished freedom. A year later, he became disengaged and out of sorts. He had to devote considerable time and energy to cope with his new pseudomasters who were watching him closely, particularly as PB inched into unprofitability. As the losses mounted, so did their disagreements. Retail marketing in ’98 was getting tougher. To maintain his market share, he had to counter companies like Hewlett-Packard, Compaq, and IBM, strafing PB with shock-and-awe price skirmishes. The newest entry, eMachines, a Korean-investor-backed company, created a tsunami atmosphere when offering PCs at record-setting low-price points.

  The last time I met Beny as CEO of PB, he was a changed man, though still with a roaring fire in his belly. He told me he was no longer willing to put up with the prescriptive BS the board was throwing at him and would take his money and leave. The old warrior exercising Auftragstaktik expected the same from his board members. Living in an ancient world of inflexible mandates and egocentric myopia amid the ossified ruins of lost empires and forgotten armies, they simply could not find it in themselves to oblige. Shortly thereafter in ’99, he tried a comeback after buying the assets of AST, another PC manufacturer who had not survived the onslaught. Unfortunately, he did not succeed a second time and decided to venture into other areas of interest. I missed wrestling with the shrewd tank commander and relentless warrior; he was an impressive character—smart, inventive, and to the bitter end ever true to his own best interests.

  With the Feds attacking us in court over the legality of protecting the copyright for Windows, our OEMs got increasingly bolder in asking for total configuration freedom. Solid relationships began to erode as a result—best explained by exploring the Gateway (GW) conundrum. In early ’98, CEO and cofounder Ted Waitt moved GW’s headquarters from the wind-scoured plains of South Dakota to San Diego, California. As I remember it, from down-to-earth prairie life to southern California glitz! The proffered reason: he could no longer attract the appropriate level of management to the less-than-thrilling setting despite a by-now paved parking lot. The local community was at first little impacted, with most manufacturing operations remaining in place. My suspicion was that his new wife was behind the move, unenthused about life in the chilly, dreary, flyover country of the noncosmopolitan Dakotas and having to tolerate the stench of a nearby meatpacking facility. This may explain the purchase and remodel of an expensive new homestead in La Jolla, competing with Bill’s $60 million mansion on Lake Washington.

  Simultaneous with the move to the glamour coast, tensions between the two companies accelerated sharply. I experienced it myself when we renegotiated a new contract for bundling our Office applications. To smooth feathers, I had to personally get engaged and meet Ted at Denver International Airport. The mile-high oxygen-deprived atmosphere was at once outright hostile. He asserted that our original agreement to sell Office application bundles was solely responsible for the dominance we had gained in that product category. Then he imploringly complained that we should have been far more grateful to him after giving us that opportunity. I could only shake my head as he refused to acknowledge that GW already had the best deal between OEMs in regard to Office. I personally was his staunchest fan. In the end, though, none of my arguments convinced. He looked like he possessed a kind of sad, delusory logic, not trusting me any longer. No wonder it took hours to arrive at a reasonable agreement; in this case, it was accomplished by me personally breaking the deadlock and making an essential price concession after talking to him at length one-on-one—a rare occurrence indeed.

  Hotly contested issues developed over the Windows desktop configurations between me and Jim Collas, his man in charge of product procurements. Being an ex-Apple employee, he probably didn’t have too much sympathy for MS from the get-go. Initially, our relationship was cordial at best; now he veered sharply into the anti-MS camp and made an unending flurry of demands. My way of responding to the most outrageous ones had grown simple. “The matter is before the courts, and I’m not willing to relent until the case is decided upon.” I considered using the current legal dispute to leverage truly far-reaching entreats nothing short of blackmail.

  More irritations were caused when GW bought all of Amiga’s patents, making our patent-assertion clause harder to negotiate. We never understood why Ted acted upon this specific patent portfolio, though we learned that he later sold it to Escom in Germany. Neither company ever developed plans to produce Amiga PCs.

  Influenced by advice from insiders and outsiders, Ted slowly but surely refocused his allegiance and realigned his stance toward MS. I blamed it on the brilliant SoCal sunlight. Had the down-to-earth boy from the Dakota plains gotten too much of it, or had his obvious success finally gotten into his head? After briefing Steve about the changing relationship, he asked if I had heard anything about Ted secretly dealing with the Reback group or the Feds. Nothing direct, I replied, just rumblings through the grapevine. To get to the bottom of these rumors and dispelling or confirming them, we invited him to meet with us. Emphasizing his status as chairman and CEO, he made his attendance conditional to having a solo audience with Bill.

  I let him have his twenty minutes in eternity. Not surprisingly, Bill told me afterward that they mostly talked about their foundations. Then he joined us. At the end of our talk, Steve asked him point-blank if the alleged rumors had any foundation. Friend or foe? Reacting with extreme evasiveness, Ted was not about to be forthcoming, avoiding eye contact and denying any behind-the-back dealings. After accompanying him to his waiting limo, I went back to recap our examination. Steve told me straight off the bat that he felt Ted had deceived us. I just nodded. Taking a deep breath, he said, “I never want to see this guy again!” Ted missed a golden opportunity of redemption by airing any grievances openly. Steve, having an admirable capacity for compromise and forgiveness when confronted directly by customers, was always ready to make amends.

  Later that year, Ted groomed Jeffry Weitzen for the CEO post and stepped away from day-to-day business while retaining the chairman title. Having grown tired of running the place, he wanted to spend time with his family, enjoy his fortune, and tend to his foundation. Cloning Bill? By ’01 he was back in the saddle, running the company after the appointment hadn’t worked out. The rest of the GW story is not a pretty one. After buying a low-end supplier (eMachines) in ’04, the once-phenomenal company went into a sudden and colorful financial tailspin. In ’07, the Taiwan-based Acer acquired what was left. Having obtained substantial wealth in the process, Ted resigned. I wish him all the best in his new endeavors, and I hope he remembers a lesson learned!

  The other company going through a lot of change was behemoth Compaq. In early ’97, her CEO Eckhard Pfeiffer finally made an attempt to explore the mail-order channel by trying to purchase Gateway. As Bill and I departed a meeting with Compaq’s upper brass, we observed a line of stretch limos idling up to her headquarters. Despite the gleaming smoked-glass windows, I spotted a Gateway VP in one of them. Bill and I exchanged puzzled looks. The Compaq crew had been quiet about the happenings, but a few days later, Eckhard called Bill before he could read about it in the papers. However, the deal never closed despite Compaq’s generous $3.5 billion offer. Friends in Compaq later told me that Ted had gotten cold feet after recognizing the changes in store, particularly for his top management team and the South Dakota facilities. Ever the country boy, he later confirmed to me that he had no desire to put his existing hometown employees in danger of being laid off. While the deal did not materialize, its due diligence did, and soon thereafter, I took calls from Compaq execs asking for the same Office deal we had extended to their acquisition tar
get. Confidentiality had again gone out the window. True to form, my answer was swift: “Give us an identical commitment, and I will give you the same treatment.” The bitter truth was understood though totally underappreciated.

  Instead, Compaq bought Tandem, the NonStop computing server company—the last manufacturer to ever launch a computer system with a proprietary OS. Gary Stimac, Compaq’s SVP, had been on her board since March of ’97, just three months before the takeover offer was extended. Loving her technology, he was the main driver behind the acquisition. The Tandem purchase was a clear sign of Compaq renewing her enterprise’s customer focus. Her obvious plan was to take on IBM.