Hard Drive: Bill Gates and the Making of the Microsoft Empire (41 page)

In an attempt to counter that attack Novell engineers thoroughly tested LAN Manager, trying to find a way to make the program “blow up” from a remote work station.

“It didn’t take very long,” said the ex-Novell executive.

I m sure it was less than a week. Not .only could we blow up the server, we could virtually put it into Never-Never Land, where you had to reboot and reinstall the whole operating system again. Once we found that, we packaged that up and went on a road show and actually went to the industry analysts, and we said, ‘You may hear some issues relative to reliability. What we’d like to demonstrate to you is that no system is protected, no matter what you do.’ And we would set up the LAN Manager and commence to blow it up. We’d do it right in their offices.

“We heard from the rumor mill that Microsoft did in fact go back in to the analysts three or four weeks afterward. And they did begin to open up the issue of reliability. The analysts, from what we understood, said ‘Oh yeah, watch this,’ and they blew up LAN Manager. They said, ‘Don’t talk to us about system reliability.’

“We’d always heard (Gates) was emotionally attached to LAN Manager. We always thought we could turn the tid
e against them, because we didn’
t have a rational businessman competing against us, we had a guy who was emotionally attached to a product that couldn’t compete.”

Microsoft had a tough sell on its hands with LAN Ma
na
ger for other reasons. OS/2, introduced in December 1987, was not moving well, as noted earlier.

“They made OS/2 and LAN Manager appear to be inseparable,” said an industry expert. “That was a mistake. They forgot the most important common denominator, and that was all of the DOS users. The DOS user was a second cousin in this LAN Manager environment. It was expensive to migrate from DOS to OS/2, and they felt they were being abandoned.”

3Com, meanwhile, had become by far the largest seller of LAN Manager, selling more than seventy percent of the copies. But the company was getting killed, because of the licensing agreement it had signed to seal the deal with Microsoft. 3Com, gambling that LAN Manager sales would soar, agreed to pay Microsoft a minimum monthly royalty payment, no matter how many of the products were sold. When the market didn’t develop, 3Com found itself paying Microsoft for thousands of unsold copies. LAN Manager had been licensed to numerous companies to sell. With the various companies jockeying for position, customers were confused. Frustrated with the slow sales, Microsoft took a drastic step—it decided to sell LAN Manager directly, and did so through 3Com’s own well-developed network dealer channels. That meant Microsoft was now competing with its own partner.

Metcalfe felt the move was nothing less than a double-cross, although the contract didn’t specifically prevent such a move.

“The response that I got,” said Metcalfe, “was, ‘You ought to negotiate your contracts more carefully. You were stupid.’ ”

“We were adults,” Kessler said. “We were big boys and girls when we signed the contract. There may be some provocative things you can say about Microsoft, but it’s also appropriate to say that this was a legal, binding document, and we signed it. We signed it on the belief that certain things were going to happen to the OS/2 market, they did not happen, and it was not incumbent on Microsoft to give us relief. If I were them I would have, but I’m not them. They chose to enforce the letter of the agreement.”

In late 1990, 3Com managed to negotiate its way out from under the crushing minimum royalty agreement and terminate the relationship. Nonetheless, in its fiscal quarter ending in February 1991, 3Com took losses topping $40 million, mostly due to the Microsoft partnership and a reorganization sparked by the ill-fated deal. Metcalfe believed 3Com had been victimized by the falling-out between Microsoft and IBM as OS/2 faltered and Windows sales grew, and by the “rapaciousness” of Microsoft’s cadres of young, zealous deal makers.

“The arrogance of Microsoft in this partnership was unbearable, it drove our people crazy,” Metcalfe said. “It’s just bad business when your customers and your partners emerge damaged from deals with you. Microsoft is a billion-dollar company growing fifty percent a year. That creates a lot of pressure on people, especially young, inexperienced people, to perform and deliver. And sometimes those pressures set aside the niceties.”

Despite the disagreement, Metcalfe still likes Gates. “I think the world of him. What’s happening is a bit out of his control. He’s created a monster.
...”

In January, 1988, Microsoft set out to capture another segment of the network market with Ashton-Tate, the top database software publisher, and Sybase, a California minicomputer software publisher. Ashton-Tate and Microsoft planned to share development responsibilities creating an OS/2 version of SQL Server, a program that manages network databases. For AshtonTate, the partnership represented a chance to co-opt Microsoft, which had not yet come up with a database program to challenge Ashton-Tate’s leading product, dBASE. It also represented an offhand endorsement of dBASE, since the product’s anticipated upgrade, dBASE IV, was to be used in SQL Server.

The deal took an inordinately long time to work out. The negotiators deadlocked frequently, which required Ed Esber, head of Ashton-Tate, and Jon Shirley to intercede and get talks moving again.

Esber recalled later that it was a complicated agreement.

“In a complex relationship, it’s very hard to capture the essence in a contract on a piece of paper,” Esber said. “You have to approach it in two styles. The way I approached it was, we’ll have a partnership and in the spirit of the partnership we’ll resolve issues. The way Microsoft approached it was, we will get on paper every loophole we can get, and the legal document is the relationship.

“That was the difference,” he said. “I viewed the relationship as something between two people that, as in any relationship, would require the two parties to work together to resolve issues that weren’t anticipated. I think they viewed the relationship as the contract, the exact legal language in the contract, and nothing more.”

A few hours before the January announcement of the deal with Ashton-Tate and Sybase, Gates placed a call to his chief competitor in the languages arena, Philippe Kahn of Borland. There had been rumors that Microsoft was going to buy AshtonTate—in fact, the firms had talked about merging previously. Gates, evidently not wanting to upset his Borland rival, allayed Kahn’s fears of the Microsoft/Ashton-Tate alignment.

“We’re making a deal with Ashton-Tate, but you don’t have to worry,” Gates told Kahn.

“Bill will only do things that give him an advantage, but this was one of the rare times he was boasting about it,” said Kahn of the phone call from Gates. “It became a joke for him to see Ashton-Tate give away the store that way.”

On that note, the partnership formally began. It was not an auspicious beginning. It ended on an equally bad note. AshtonTate thought Microsoft had promised to deliver a server that would work with NetWare, so the product would reach the largest possible customer base. Gates, naturally enough, wanted his own LAN Manager to be boosted, rather than Novell’s product. Less than a year into the project, Ashton-Tate engineers discovered that SQL Server wouldn’t work well with NetWare. Novell would need to modify its product to make it work.

Esber believed Microsoft had broken the spirit of the agreement. Fearing SQL Server would flop if it were captive to the relatively puny LAN Manager market, Esber went to Novell. The two companies negotiated a joint marketing and sales agreement for a server product that would work with NetWare, since SQL Server did not.

Just days before the Novell and Ashton-Tate partnership was to be announced Esber ran into Gates at a software conference, who had gotten wind of the Novell deal. In a crowded hallway, he tore into Esber, calling his deal with Novell stupid, ranting that it couldn’t be done under the contract Ashton-Tate had with Microsoft. Gates threatened to sue.

In deference to Microsoft, Esber called off the Novell deal at the last minute, but the rift between the companies could not be mended. Microsoft had an escape clause in the contract that allowed it to break the deal if dBASE IV were late. The software was late, and Microsoft terminated the contract.

“Both parties walked into the agreement with certain expectations and promises from the other side,” Esber said. “Both sides failed to meet the expectations of the other . .. but there certainly was one party trying harder to make it work than the other.”

Microsoft has become notorious in the industry not just for capitalizing on the technological advances of others, but, as some claim, for predatory pilfering. They complain that Microsoft repeatedly approaches small companies developing promising new products, ostensibly to talk about a partnership. After Microsoft is given a glimpse of how the software works, it suddenly loses interest in the deal—only to announce later that it has been working on surprisingly similar, but competing, software.

“If I’ve got an innovative product and I show it to Microsoft,” Esber said, “I have to understand they will at some point in time appropriate some of the ideas—in a legal manner—and it will show up in their products.”

Micrographx, a Texas company which develops graphics software for PCs, founded by Paul and George Grayson with $5,000 borrowed on a credit card, had just such a problem. Micrographx had a long history with Microsoft. The company was one of the few that hung with Gates and Microsoft during the lengthy delays in bringing the first version of Windows to market. Micrographx was a big Windows booster, and the relationship was symbiotic. Microsoft even loaned the tiny company $100,000 to help it survive the delays and programming changes, which the Graysons
paid back 18 months later. Mi
crographx was the first independent software company to put a product on the market for Microsoft Windows—In-A-Vision, a drawing program released in July 1985, six months before Windows was shipped.

When Microsoft and IBM shifted development efforts from Windows to OS/2 and Presentation Manager, Micrographx had to change its applications software to run under the new operating system. To ease that labor-intensive task, the company came up with special software, called Mirrors, that essentially translated Windows programs into programs for OS/2. Microsoft liked the potential of Mirrors, and a Microsoft executive was sent to Texas with an offer. Microsoft wanted to pay Micrographx for the right to use Mirrors to modify its own Windows applications for OS/2. Micrographx would license Mirrors to other companies, and Microsoft would help promote it through technical seminars.

“It was going to be a real cooperative thing,” said a software industry official who was familiar with the deal. A tentative agreement was reached with Mike Maples, Microsoft’s vicepresident for applications software, and a letter of intent was signed by both companies.

Immediately upon signing the letter of intent, Microsoft demanded to see the source code for Mirrors—in essence, they wanted to look at the very guts of the program. Paul Grayson balked at first, but finally sent it. He became more uneasy when Microsoft assigned an operating systems engineer to evaluate the product. Only the applications side of the Microsoft house was supposed to see the code; operating systems engineers, if they saw it, could write their own program and promote it in competition with Micrographx.

Grayson called Maples to protest. “Don’t worry, he’s working for me,” Maples said of the programmer. “He’s going to be the technology guy helping all the applications people use Mirrors.”

A few weeks later, a Micrographx developer was talking to the Microsoft engineer. He was summarily informed of some bad news: Microsoft had decided to write its own Mirrors-like software. The engineer who had been evaluating Mirrors was shifted immediately back to report to Ballmer, head of operating systems.

The Graysons were stunned, then angered, convinced Microsoft had deliberately set out to appropriate their product. But after a year of complaining, they got no satisfaction from Microsoft. Maples told them there was nothing he could do, a sentiment Ballmer reiterated. Even Gates refused to acknowledge their complaint.

One Micrographx official, who did not want to be named, said of Microsoft: “Their attitude basically was, ‘We’ll pay you what we said, other than that go away and leave us alone, and by the way, are you going to sue us?’ They didn’t believe Micrographx would sue them, and didn’t seem to care if we did. Their attitude was basically, ‘Screw you.’ ”

Micrographx was planning to go public, and felt it couldn’t afford a blow-up with Microsoft. The Graysons swallowed their pride and let the matter drop. Eventually, Microsoft placated the Graysons with a cross-licensing deal that Gates said was unusually generous. Nonetheless, the Graysons felt used and manipulated by Microsoft.

“I characterized it at the time as date rape,” said the industry official familiar with the deal. “Micrographx went out with Microsoft in good faith, and they took advantage of them, and then they wouldn’t return their phone calls in the morning.” Paul Grayson was later quoted as saying: “I half-jokingly say there is only one person with fewer friends than Saddam Hussein. And that’s Bill Gates.”

A company that ran into a similar problem with Microsoft was the Go Corporation, a tiny startup company in Foster City, California, developing software to control small computers that recognize handwritten words. This cutting-edge technology is known as pen-based computing. Hoping to convince software companies to develop applications for its product, Go showed its secret software to several companies in confidential demonstrations, including a team from Microsoft.

In January 1991, just a week before Go was set to announce its innovative product to the press, Microsoft made a preemptive strike with its own announcement. Gates said his company was developing handwriting-recognition software called Pen Windows. Microsoft’s design team included an engineer who had been briefed by Go. A few weeks later, Microsoft said 21 computer makers were “considering” building hardware around the Pen Windows software.

Go officials were stunned.

“Anybody who shows Microsoft confidential information is taking a risk,” said J. Jerrold Kaplan, Go’s founder and chairman.

Keith Toleman, marketing director for a Florida software company, told
PC Week
magazine, “It’s gotten to the point where companies won’t go in and undress in front of Microsoft” in order to secure a joint development agreement.

In a
Fortune
magazine interview that included Steve Jobs, Gates denied pilfering from Go.

Gates: I contend technology breakthroughs can happen by extending what we already have. Let’s take handwriting computers. ... The software will come either from Microsoft or from a U.S. competitor named Go Corporation. That’s going to be a major breakthrough, and who do you give credit to?

Jobs: I think everybody gives credit to Go, but Go will be crushed.

Gates: That’s one of the nastiest comments I’ve ever heard. I’ve been working on handwriting since long before there
was
a Go Corp.

Jobs: Really? I didn’t know that. Most people would say that Go is the company that first tried to commercialize that technology.

Gates: Well, Go hasn’t shipped anything yet, and I’ll ship

my stuff before they ship theirs.

)
■

Microsoft’s Ballmer dismissed complaints that Microsoft has taken advantage of software companies. “Number one, we’ve never stolen anything from anybody,” he said in a
PC Week
story. “But do we, like every other smart company, look at the works of others and try to get smarter by understanding what our competitors do? That we do.”

Few companies, other than Apple, have dared sue Microsoft (although Go Corporation is reportedly considering legal action).

“If you are a software developer, you would think twice about taking Microsoft on,” said Tim Bajarin, executive vicepresident of Creative Strategies, a market research and consulting group that works with many of the leading players in the industry on strategic planning. “Microsoft has a massive legal department, and you still need them. You don’t bite the hand that feeds you. You need their technical support. And if you are a hardware developer, you better have good relations with Microsoft because you need that operating system.”

One competitor that did sue Microsoft was Z-Nix, a Pomona, California, hardware company that makes a mouse device for computers. In November 1990, the same month
Business Month
printed
an
article on Gates entitled “The Silicon Bully,” Z-Nix filed a $4 million lawsuit against Microsoft in federal court in Los Angeles. Tiny Z-Nix, with a mere $6 million in annual sales, dared to accuse giant Microsoft of violating the Sherman Act, which prohibits a company dominating one market from using its position to control another market. A 98-pound weakling had hit the biggest kid on the block with brass knuckles.

The story of Z-Nix’s suit hit the papers the next day. Frank Yeh, Z-Nix’s vice-president of sales and marketing was quoted as saying, “It’s time for us to stand up to Microsoft’s unfair trade practices and stop the slow death of innovation in this industry.”

The suit claimed Microsoft dominated computer operating environment user interfaces for the PC with its best-selling Windows 3.0 program, and it was using that control to run Z-Nix out of the mouse business. Z-Nix is one of a handful of U.S. firms that manufactures computer input hardware, including a device called the “Super Mouse.” It competed with Microsoft for a share of the mouse market. Microsoft had been the dominant mouse maker for the PC since 1983, selling 500,000 of the
mouse’s
by mid-1987. But by 1990, its market share of more than fifty percent was eroding, partly because of companies like Z-Nix.

The introduction of Windows 3.0 had fueled a burst of mouse sales, and Z-Nix had wanted to capitalize on that increased demand. In a not atypical alliance, Microsoft and Z-Nix struck an agreement that allowed Z-Nix to bundle its Super Mouse with Windows for resale. In return for the license to sell Windows, Z-Nix agreed to pay Microsoft a royalty of $27.50 for every copy of Windows it sold.

The California company had been marketing the package when Microsoft changed its mind about letting competitors ride along on the wave of Windows popularity. Without warning, Microsoft informed Z-Nix that the royalty had doubled to $55. At that price, Z-Nix officials said, the
company
would lose money. Having poured the equivalent of a year’s profit into the Windows promotion, Z-Nix had its back to the wall. Finding itself cornered, the company bared its teeth. The result was its antitrust suit.

The suit was settled just hours after Microsoft’s legal people learned of the suit in the Seattle newspaper. An attorney for Microsoft flew to Pomona to meet with Z-Nix. That same day, Microsoft proclaimed victory, saying Z-Nix agreed to retract allegations that the Redmond company used its marketing muscle to force Z-Nix to redesign its Super Mouse. Terms of the agreement were never publicized, but Z-Nix officials said they got what they wanted—the Super Mouse/Windows bundles stayed on the shelves of software dealers.

Having tangled with Microsoft, Z-Nix attorney Thomas Chan, a Los Angeles lawyer seasoned in computer law, had this to say of Microsoft:

“This is one of the few companies where the businessman wants to drive a harder bargain than the lawyer. They are really the toughest negotiators I’ve encountered in the industry. Small guys, they don’t even talk to you. It’s just take it or leave it. With big guys, they push and push and push and push, and at the last minute they up the stakes. That’s got to be because of Bill Gates.”

One reason Gates pushes so hard is fear—he is always looking over his shoulder. “You always have to be thinking about who is coming to get you,” he told the
Wall Street Journal.
It’s a message and attitude that filters down through the company. A couple years ago, Gates said his products managers ought to wake up thinking about their main competitor. He even suggested they go so far as to get to know the names of their competitor’s children and birth dates.

“It is a competitive edge we try and hone,” said Jeff Raikes, then manager of Microsoft’s word processing division, of the chairman’s remarks about knowing the competition. “Bill expected me to always be thinking about my competitor. If you just say ‘We’re No. 1, that’s good enough,’ that kind of com- lacency will lead to failure in a business as dynamic as ours.” A week after Gates made his remarks about knowing one’s competitors, Raikes has a photo of WordPerfect’s executive vicepresident’s children on his desk. And he sends them birthday gifts.

Perhaps as a result of this attitude within Microsoft, Microsoft Word, for years trailing far behind WordPerfect as the industry’s best-selling word processing application for personal computers, has steadily closed the gap. Twice a year, Gates personally visits WordPerfect’s best customers, demanding to know why they continue to buy WordPerfect when Microsoft Word is so much better.

Pete Peterson, WordPerfect’s executive vice president, has said he would love to see Gates mellow out. “I wish he’d get married and have a couple kids so he couldn’t work as many hours as he does.”

It’s a plaintive cry from many in the computer industry today.

A few years ago, Pete Peterson described Microsoft as the “fox that takes you across the river and then eats you.” He was making the same complaint others in the industry have made many times since, that Microsoft has a huge advantage over its software rivals because of DOS. The resentment has been festering like an open sore since the deal with IBM more than ten years ago which gave Microsoft control of Big Blue’s operating system. The person who controls the operating system, many feel, controls the direction of the industry, and at the moment that is Gates. Microsoft has forced a generation of software developers to write applications that conform to its standard.

WordPerfect may have decided it was time for someone to shoot the fox. When Microsoft announced in April of 1991 that the FTC investigation of the company had been expanded, the
San Jose Mercury News
quoted several industry sources as saying the folks at WordPerfect played a “lead role” in lodging complaints against Microsoft. Officials of the Utah-based company acknowledged they had talked to the FTC, as had a lot of others in the industry.

At the heart of the FTC probe is not Microsoft’s aggressive style or the way it does business, but whether or not Microsoft’s dominant position has chilled competition and thus hurt consumers. Proving that Microsoft has engaged in anticompetitive practices would be very difficult and could take years of litigation, according to many legal experts. The federal government had a much stronger case against IBM and was unable to beat the computer giant after a bruising and costly ten-year court fight. The FTC would have to walk a fine legal line in trying to make a case against Microsoft. Antitrust laws are intended to keep companies from engaging in conduct that generally tends to hurt competition. But it’s difficult to determine the difference between aggressive business practices and anticompetitive behavior. Has Microsoft abused its position or just out-hustled and outfoxed others in the industry? The computer business is so complex that some legal experts don’t believe the FTC even understands the issues well enough to contemplate a suit, much less win one. It’s also considered unlikely the government could mount much of an attack against Microsoft, since the company does have competition in operating systems. AT&T has a small part of the market, and two years ago Digital Research, long since having given up on CP/M, came out with an operating system called DR-DOS. Although DR-DOS has not yet gained a real industry foothold, it is cutting into Microsoft’s market for DOS. More to the point, Apple Computer has its own operating system for the Macintosh. The only applications area where Microsoft clearly dominates is in applications for the Mac, and that’s because Gates took a risk in 1981 that Apple’s new computer, then only a prototype, would survive in a very competitive industry. The Mac might well have failed had it not been for Microsoft applications like Excel.

In 1991, Microsoft controlled about a quarter of the applications market. Although application products accounted for fifty-one percent of Microsoft’s revenues in 1991, the bulk of the company’s profits come from the systems side. Microsoft does not come close to dominating the Big Three of applications—word processing, databases, and spreadsheets. WordPerfect is far ahead of Microsoft Word, Lotus 1-2-3 is still ahead of Excel, and Microsoft has nothing to compete against AshtonTate’s dBASE.

The reason so many companies have complained about Microsoft, however, is that they feel it crosses the line in the separation of church and state. Competitors like WordPerfect and Lotus, as well as many others, suspect Microsoft gives “sneak previews” of changes in its operating system to its applications people so they can be out the door first with products. Microsoft’s application programmers, they fear, get information on a new feature in DOS or Windows far in advance of outside application developers. Still, even if this occurs, there is probably nothing illegal about Microsoft’s applications group benefiting from knowledge of the company’s systems developments, according to legal experts familiar with antitrust laws. And Microsoft
does
invite its competitors to Redmond to be briefed on any changes in its operation system. The company even hired an ombudsperson to keep watch over the systems and operations people to appease outsiders.