Hard Drive: Bill Gates and the Making of the Microsoft Empire (39 page)

“If the story is true. . . ,” wrote
InfoWorld,
“it shows that Bill Gates is no diplomat. It also shows the depth of the troubles in the relationship between IBM and Microsoft.”

When George Gilbert read the story in
InfoWorld
about Gates trashing IBM after one too many drinks, he was shocked and disturbed. Not only was the magazine’s account wrong, but he couldn’t understand how his private memo about an evening spent with Gates, a memo which he intended
only
for the eyes of his superiors at Lotus, had fallen into the hands of Jim Cannavino at IBM.

The six-page, single-spaced memo had been written the first week in May just after the annual Computer Bowl, where the industry’s best and brightest get together to see who knows the most computer trivia. It’s a playful version of the old College Bowl that was so popular in the 60’s. In 1990, the Computer Bowl was held at the World Trade Center in Boston, not far from Cambridge and the headquarters of Lotus Development Corporation.

Gilbert, a product manager at Lotus, had met Gates the previous year when he spoke at nearby Harvard. Gilbert was a big fan. Gates was his hero, a fellow techie who had made good— a sort of
Revenge of the Nerds.
“He showed all those guys in suits who walk around saying ‘We know business and you’re just a nerd,’ ” said Gilbert. “What’s appealing about him is that his success has not gone to his head. Through it all, what still counts is making good products.”

When they met at Harvard, Gates had put Gilbert in touch with some of his people at Microsoft about a job, but after an interview Gilbert decided he was not ready to leave Lotus or the Boston area. Gilbert next saw Gates at the Computer Bowl, and when it was over he went up to him to say hello. His two young companions from Lotus, Mary Fenstermaker and Jenise Ellis, also wanted to meet
the
Bill Gates. None of the three were close to being “executives,” as the
InfoWorld
story would describe them. Gates asked the three if they would like to talk some more back at his hotel, the Boston Harbor. They met in the bar.

Contrary to the report in
InfoWorld,
no one got drunk, according to Gilbert. The bar closed less than an hour after they arrived, and the most anyone had was a couple of drinks. They talked for more than four hours.

“It was like we had gone to the mountaintop and heard the words of God,” said Gilbert.

Gates talked openly about himself until the sun came up, as he never does in interviews with journalists, where he tries to keep the focus on Microsoft or the industry. But that night in the bar of the Boston Harbor, Gates talked so much about himself that Gilbert and his friends had to keep steering the conversation back to industry issues—they were interested in insights on the industry from the industry’s leading spokesperson. Although Gates thoroughly enjoyed himself, he would come to regret that his candor that night was later used by his bitter enemy, Lotus Chairman Jim Manzi, to further drive a wedge between Microsoft and IBM.

Surprisingly, Gates told the three that developing a 16-bit version of OS/2 was one of the best moves he ever made, despite the widespread perception that it was a mistake. He felt it helped cement Microsoft’s relationship with IBM; but now “the forces were shifting so that IBM needed [Gates] more than he needed them,” as the memo stated.

Gates admitted that Microsoft had been dragging its feet on the next version of OS/2, which still had a lot of bugs in it. “What incentive does Microsoft have to get it out the door before Windows 3.0?” he asked. He predicted that six months after Windows 3.0 was introduced, Windows would have a greater market share than Presentation Manager ever would. “OS/2 applications won’t have a chance,” Gates said.

At the time, Lotus had invested heavily in developing applications to run on OS/2, as had others in the industry. These companies would later complain they were hoodwinked by Microsoft into staying with OS/2 long after Microsoft had secretly decided to give up on the new operating system and concentrate on Windows. According to them, this gave Microsoft a huge advantage when Windows 3.0 was released, a charge Gates would strongly deny.

Gates did not, as the
InfoWorld
article stated, mention Jim Cannavino that night, according to Gilbert. Nor did he “trash”

IBM. What he did say was that he believed IBM would “fold” in seven to ten years.

Gilbert and his friends were amazed by how much Gates knew about Apple and IBM at the highest levels. “We got the impression that
nothing
happens within IBM without his knowledge,” Gilbert wrote in his memo. “We also got the impression he knows everything going on at Apple.”

Gates went on to talk extensively about the culture and organization of Microsoft, and why it worked. The corporate hierarchy was flat, with few layers at the top, according to Gates, who didn’t believe in having a lot of vice-presidents. Too many companies, he said, handed out vice-president titles like “water to lambs.” At Microsoft, Gates had nine business unit managers—eight men and one woman. Some came out of MBA programs; others rose through the ranks. Each unit was organized the same way, with a product manager, development manager, program manager, and user editor. The program managers, Gates explained, had the most important jobs at Microsoft, because they were responsible for product specifications.

To make sure development groups remained on the cutting edge, the company resorted to Darwinian management methods—survival of the fittest. Every six months, developers were reviewed by their peers and those in the bottom five percent were fired. “There are other jobs out there,” Gates told Gilbert. “If they don’t have what it takes to work at Microsoft, they can go to Boeing or back East.”

Microsoft had managed to keep its development teams small, even as the company had grown, an accomplishment Gates was proud of. He said he had only 18 developers working on the company’s entire spreadsheet business, and he wanted to get that number down to no more than 14. Lotus, he pointed out, had about 120 programmers in its spreadsheet business. It takes discipline to stay lean, Gates told them.

Gates went on to talk about Microsoft’s “architects,” the seven software samurai who advise Gates and explore new technologies. The seven, who included Charles Simonyi and Gordon Letwin, are the heavy thinkers of the company, he said. (Each programmer is rated at one of six levels, from 10 to 15. When a programmer makes it to 15 and becomes an architect, it’s a little like being made a partner in a law firm. Huge stock options follow a huge party.)

Microsoft had been successful, Gates felt, because of the caliber of people it hired. Prospective employees must display ambition, intelligence, expertise, and business judgment. But it was intelligence that counted the most.

Gates pushed his people hard because he wanted them to be better. Each day, he said, they should come to work thinking “I want to win.” They also must understand the shifting priorities between work and family, which sometimes meant working weekends. The combination of ambition and wanting to win every single day is what Gates referred to as “being hard core.”

Shifting the conversation back to himself, Gates also described the new “home” he was building, a $10 million-plus affair with giant high-resolution screens on the walls of all public rooms, displaying images from a computer CD database.

Looking forward into the industry’s future, Gates predicted the software race would be over in 20 years. By then, he felt, computers themselves would be writing better software than people.

The day after their evening rap session with Gates, Gilbert and his companions from Lotus met at a beach and decided to write up as much as they could remember of the meeting. “It had been incredibly exciting,” said Gilbert, explaining why he wanted to record Gates’ thoughts. In addition, Gates had said some things that Gilbert felt was important information to be shared with others at Lotus. Gates, for example, had asked Gilbert why Lotus never sent any of its technical people out to Microsoft to hear about things the company was doing. Gilbert thought senior technical people at Lotus should know Gates had essentially extended them an invitation.

One of the three who had been present that evening, Mary Fenstermaker, didn’t agree with the decision to write the memo and refused to put her name to it. “I didn’t want to have anything to do with it,” she said. “My impression was that Bill Gates had no idea, nor did he expect, a memo to result from our chat.” Nonetheless, Gilbert went ahead, sending the memo to four people at Lotus. One of them, Bruce Johnston, sent it on to Lotus Chairman Jim Manzi, titling it “Notes from a Gates Date.” “The following report is blunt, unedited and liable to piss you off,” Johnston wrote of the Gilbert memo.

It was Manzi who told his secretary to send a copy to Jim Cannavino at IBM, according to a well-placed source at Lotus. Manzi had had a long, unhappy history with Gates. They had not spoken in three years as of 1990, nor have they spoken since (although they occasionally trade verbal jabs through the media).

A former journalist who rose through marketing to become the head of Lotus, Manzi took over as chairman in 1986 when Mitch Kapor left to pursue other interests. At the time, Gates and Kapor were negotiating a merger with a 50-50 split. Manzi blocked the deal, and he and Gates had avoided each other ever since. The fact that the merger didn’t go through was probably just as well for Microsoft, which overtook Lotus in 1987 as the world’s number one software company. On August 16 of that year, when Gates got the numbers from his business office for the previous fiscal year, he sent an electronic message to Microsoft employees telling them how excited he was. The company, he pointed out, was number one in every respect—sales, profits, units, leadership, and people.

Manzi, in sending the Gilbert memo to Cannavino, seemed to be attempting to fuel the fire smoldering between Microsoft and IBM. George Gilbert came to regret his decision to write it. “It was my misfortune and bad judgment to put myself in a situation where something I did could be used against Bill Gates,” he said.

Exactly one week after
InfoWorld
reported on the Lotus memo, Microsoft and IBM announced they were reaffirming their relationship by recasting it. In fact, it was double talk. Cannavino told reporters IBM would take over much of the OS/2 development, while Microsoft was free to push Windows. The
New York Times
likened the announcement to “an earthquake that rattles windows and breaks china but leaves the roof intact.”

As a result of their decision, Microsoft quickly shifted about 160 of its programmers who had been working on OS/2 over to Windows. The announcement that the two companies were going to follow separate paths left software developers more confused than ever about which direction the industry was headed. Who was going to set the standard? Would there even be a standard? Should they stick with Microsoft and its DOS and Windows or go with IBM’s OS/2 and Presentation Manager?

“It’s the Balkanization of the desktop,” said Jim Manzi in a much-quoted remark.

Executives at IBM and Microsoft continued to insist there was nothing fundamentally wrong in the relationship. They were still partners, Cannavino said. Few in the industry believed it. The general feeling was that Microsoft, not IBM, was now riding the crest of the personal computing wave.

There was certainly a lot more interest in Windows than OS/2 at the fall Comdex in Las Vegas two months later, where it was announced that Microsoft would cosponsor a new trade show called Windows World Exposition Conference in May 1991, to coincide with the spring Comdex. Gates was keynote speaker at the Las Vegas show. He recalled for the audience that when he had last addressed the group in 1983, he spent a total of ten minutes preparing his speech, and his father ran the slide projector. This time, Gates had a polished, Madison Avenue look. He wore an expensive black suit and used a $50,000 movie-quality video called “Twin Points,” a takeoff on “Twin Peaks,” the popular TV show shot in the Seattle area, to enhance his presentation. For this speech, Gates had rehearsed for about

12 hours with Jerry Weissman, the Silicon Valley speech doctor. Weissman had helped the chief executives of several computer companies get over their phobia of public speaking or, as in the case of Gates, taught them the elements of a more polished and forceful delivery. But Weissman could do little about Gates’ squeaky voice, which still cracked occasionally like a teenager’s.

One of Gates’ themes in his spring Comdex speech was what he called “information at your fingertips,” in which the personal computer becomes a high-tech supermarket, with customers able to choose from a range of text, voice, and video information.

A month after Comdex, IBM announced it was joining forces with Microsoft and other computer makers to develop multimedia technology. But IBM and Microsoft continued to square off over what should be the standard of the present—Windows or OS/2. At the end of January 1991, the
Wall Street Journal
reported that Microsoft was abandoning OS/2 entirely. It would be three more months before Microsoft admitted as much. The divorce was final.

“Microsoft is now driving the industry, not IBM,” Fred Gibbons of
Software Publishing
told the
Journal
in January. He added that Microsoft “won the game on fundamentals, not on Machiavellian techniques.”

Many people who had done business with Microsoft would soon publicly disagree with such a nice-guy assessment when another bombshell was dropped on the industry with the announcement that the Federal Trade Commission was investigating Microsoft for possible antitrust violations. Microsoft, it seemed, was in the same dilemma Big Blue had just gotten out of ten years before when the two climbed into bed together. Microsoft now had to contend with perhaps its most fearsome adversary yet, the might and muscle of the U.S. government.

The first public whiff of trouble regarding the FTC came not from Microsoft, the industry press, or the hordes of reporters from the national media who for years had been flocking to the Silicon Forest outside Seattle to write about the company. Instead, the news came from a Wall Street analyst.

Late on the afternoon of March 11, 1991, Rick Sherlund, an analyst at Goldman Sachs & Company, Microsoft’s investment banker and one of the principal underwriters for its public offering five years earlier, issued a report suggesting that a “probe” of Microsoft was underway.

Microsoft issued its own brief statement the next morning. The company admitted it was under investigation by the Federal Trade Commission, and it was cooperating fully. Bill Neukom, Microsoft’s vice-president for law and corporate affairs, said Microsoft had been notified by letter the previous June of the FTC probe. The scope of the investigation, Neukom said, was narrowly focused on the joint news release by IBM and Microsoft at the Comdex trade show in Las Vegas in 1989, a statement that was intended to clear up industry confusion between Windows and OS/2, and to squelch rumors of a serious feud between the companies. That five-page, double-spaced statement on IBM letterhead, issued on November 13, said Microsoft would hold back features for Windows in order to help industry acceptance of the OS/2 operating system. Neukom said the FTC was concerned that the statement indicated anticompetitive collusion. Neukom went on to say that Microsoft had quickly changed its mind about the strategy outlined in the news release and included the features in Windows 3.0.

As far as Microsoft was concerned, the FTC concerns now seemed moot. How could the company be accused of crippling the product when Windows was clearly a success? But it was just such a flip-flop that had competitors, especially those who had developed applications for OS/2, grumbling about Microsoft’s unfair trade practices.

As usual in such matters, the FTC had nothing to say publicly about what it was after. In an interview with the
New York Times,
Gates said he had talked with the FTC investigators, who assured him they were looking only at potential problems raised by the November press release. “Every question in the case, every document requested, related only to the IBM-Microsoft announcement,” Gates said.

But the din from the press was loud and damaging. Microsoft’s stock dropped nearly $7 a share to $95.75 in the two days following the disclosure, as nervous shareholders bailed out. “Antitrust” is one of the most feared words in the lexicon of American business. IBM had spent 13 years, created an entire legal department, and filed more than 200,000 pages of court briefs defending itself from antitrust action, all the while seeing profits decline. IBM won, but another company, AT&T, lost and was later dismantled. Of course, the Federal Trade Commission was not the Justice Department—the department that had instigated the IBM antitrust suit—but any government investigation was serious business.

The FTC investigation of Microsoft had not started within the agency; someone in the personal computer industry had complained. Which company or person had done it? There were enough suspects to fill a dozen whodunit mystery novels. The depth of resentment against Gates and Microsoft was so great that Microsoft had actually been booed when it won a prize at a recent software awards dinner.

Chairman Bill’s reputation could not have been more formidable. No one in the industry made a move without considering the likely counterresponse from Microsoft. Competitors feared him. Some had publicly admonished him. Others said that Gates misused his power in the industry to stifle innovation and quell challenges to Microsoft’s superiority.

A few months before the announcement of the FTC investigation, the cover of the last issue of a failing magazine called
Business Month
featured a picture of Bill Gates’ head—there was no mistaking the oversized glasses sandwiched between the mop of sandy hair and supercilious smile—resting on the torso of a beach-going muscleman, half-naked and posed like Charles Atlas. Beneath the armpit of the pumped right bicep was the caption: “The Silicon Bully: How Long Can Bill Gates Kick Sand in the Face of The Computer Industry?”

It was a question that had been asked throughout the industry many times before. As Microsoft’s hegemony grew, less influential software publishers and nervous computer manufacturers had asked some variation of that question with increasing frequency in the cocktail lounges of Silicon Valley and over lobster dinners in Boston restaurants. Many had personal tales of woe to relate: how Microsoft had bested them in a business deal, how Gates’ subordinates had appropriated a promising new technology, how Gates himself had subjected them to an embarrassing intellectual mugging in a business disagreement.

In the
Business Month
article, author James Henry compiled a damning indictment of Gates through the observations of two dozen of his computer industry peers. As if to underscore how careful competitors had become not to cross Gates, few of those interviewed agreed to be named. One unidentified IBM executive said he would “like to put an icepick in [Gates’] head.” Software luminary Mitch Kapor, founder of Lotus, implied Gates maintained power by suppressing the excellence of smaller rivals, all for the sake of market share. Gates, Kapor intimated, was a software Judas who sold out the industry’s shining promise for wealth and control.

“Gates has clearly won,” Kapor was quoted as saying, “the revolution is over, and the free-wheeling innovation in the software industry has ground to a halt. For me it’s the Kingdom of the Dead.”

Gates and Kapor were old friends, and Kapor's comments clearly hurt Gates. “Mitch is obviously down on me,” Gates would later tell
Playboy
magazine, which profiled him. “I mean, ‘Kingdom of the Dead?’ Where do I go from there?”

Stewart Alsop had told the
Seattle Post-Intelligencer
shortly before the
Business Month
piece hit the stands, “It’s remarkable how widespread the negative feelings toward Microsoft are. You now have not only software applications but hardware companies worried to one degree or another about Microsoft’s control of the business. That’s unheralded.”

Gates had his supporters, even among those who competed against him. They ascribed the industry attacks to that greeneyed monster—jealousy.

“Bill is not a nasty guy to compete with,” said Gordon Eubanks, one of the industry’s pioneers and president of Symantec, which makes database software. In the late 1970s, Eubanks developed a BASIC that competed with that of Microsoft’s. “I do know of instances where he used his influence, but who wouldn’t? This isn’t a race where there’s a handicap. Bill doesn’t go around carrying a 100-pound sack on his back. That’s what some people think should happen.”

Vern Raburn, Gates’ longtime friend and now a competitor with his own software company, said Gates is such an intense competitor that people often mistake his intensity for ill will. “I get angry about the bully stuff being written about Bill,” he said. “We all love the little guys and hate the big guys, but we all want to be the big guys. There are some people out there that are basically saying untrue things about Bill Gates, that he’s immoral, he lies, he goes over the edge. It’s just not true. . .. It’s not always fun competing with him, he’s a tough competitor. But he’s not immoral.”

Oft-quoted industry analyst Esther Dyson said Microsoft was hated because it was so successful. “They’ve gotten where they are by doing a good job,” she said. “Doing a good job isn’t illegal.”

But even friends felt Gates needed to work on his image as the industry’s bad boy. Ruthann Quindlen, who helped take Microsoft public and danced the night away with Gates at Annabel’s in London during the road show, said she thought Gates should become “less Machiavellian.” With every negotiation, she said, Gates and Microsoft have an “I-win” mentality. “They are the IBM of Software, but they are not taking the view that everyone can win with them.”

With so much “Bill bashing” going on in the industry, few believed the FTC investigation was as narrowly focused as Microsoft claimed. In the weeks after the announcement, more and more of Microsoft’s competitors emptied their spleen to the national press. Some of the bile was obviously starting to get to Gates. In an interview with
USA Today,
Gates fired back at those who claimed the FTC probe was much broader than Microsoft had acknowledged.

“There’s no truth to what they [critics] are saying,” Gates said. “And whenever someone asks me about this thing I say ‘Just get somebody who is willing to put their name in print with these lies, because they are just direct lies.’ You can slander people behind the scenes a lot. But this time somebody might be caught red-handed because this is just out and out baloney.” Gates was asked if he felt persecuted by all the anti-Microsoft sentiment: “No, I’ve developed a new view that being successful is not a fun thing sometimes. There is just a phenomenon where people don’t like a company as successful as ours.” Although the price of Microsoft’s stock was being hammered by the constant stream of negative publicity, Gates professed not to be concerned. He said Microsoft’s stock was probably too high in the first place and needed to come down to a more realistic figure. “Let’s say the stock dropped in half or a third. Big deal. I don’t have a short-term interest in that issue. Ask any Wall Street analyst which company never over promises what’s going to happen, always talks up the risks in their business and takes the long-term approach. It’s Microsoft. Besides, I have an infinite amount of money. I would still order the same hamburger. Believe me I’m not thinking about the stock price. I’m thinking about software products.”

The initial FTC investigation of Microsoft did indeed focus only on the November 1989 press release at Comdex from Microsoft and IBM, according to government sources. But as the FTC bloodhounds went sniffing around, visiting the industry’s major players, they heard over and over again similar complaints about the way Gates and Microsoft did business, about questionable business practices unrelated to the matter of the Comdex press release. The investigation began to grow.

Occasionally, the federal investigators came across dead ends or determined allegations made against Microsoft were unfounded. One such dead end came from a company called Intuit. Several people in the industry had told the FTC to look into what big bad Microsoft had done to Intuit, a Silicon Valley company of 250 employees with annual revenues of $18 million. The company’s success was due to a hit software product called Quicken, a money-management program that was outselling its leading competitor by five or six to one.

In October 1990, an FTC investigator approached Scott Cook, chairman of Intuit. Microsoft was poised to bring out its own money-management application for Windows 3.0, in direct competition with a product Intuit was readying. Cook knew he was about to face the fight of his life.

The tale Cook told the FTC investigator was a familiar one. Like others in the industry, Cook had done the slow dance with the Microsoft mongoose. It started in 1989 with some joint promotion efforts at retail software outlets. Then in early 1990, Microsoft’s Jeff Raikes approached Cook at a Software Publishers Association meeting. “We don’t see a lot of companies we really respect,” Raikes said. “You seem to be one that does things right. We might be interested in acquiring you. Do you have any interest in that?”

Cook thought it over and a week or two later told Raikes he was interested. But after some preliminary talks and the exchange of some financial information, Gates squelched the, deal as too costly. Several months passed and Microsoft returned with another offer. This time it wanted to work with Intuit to develop a personal finance product for Windows.

“They really liked the Quicken brand name because it’s so well known, said Cook. “So the arrangement they were talking about was that they would build the product, and just license our brand name. They also wanted our advice on how to build it.”