A US government witness from IBM in court Monday described the challenge of negotiating a Windows license agreement from Microsoft, which pressured IBM to delay or abandon its competing products.
At one point, a Microsoft vice president had urged IBM officials to delay shipping its Smart Suite "for six months to a year," said Garry Norris, program director of IBM's network and hardware division, testifying in the antitrust trial against the software giant.
IBM refused to delay Smart Suite, acquired when it bought Lotus Development. The company also declined to abandon OS/2, its competing operating system. But IBM offered to pay Microsoft $US10 million and promised to pay interest and penalties if Windows royalties weren't properly accounted. Also, IBM officials wrote personally to Bill Gates, trying to resolve a stalemate in negotiations.
Norris was IBM's lead negotiator with Microsoft from 1995 to 1997. Despite IBM's efforts, the company did not sign a licensing agreement until 15 minutes before Microsoft's Windows 95 launch event. IBM was the only PC manufacturer that hadn't reached a licensing agreement with Microsoft for Windows 95, and the delay cost IBM sales in the post-launch spurt and back-to-school season. IBM systems running Windows 95 were even late for the Christmas season.
'No viable alternative'
Phil Malone, attorney for the US Department of Justice, asked Norris whether IBM considered shipping its PCs with an alternative operating system, such as its own OS/2.
"We did our own studies," Norris replied. "We would lose 70 to 90 per cent of PC volume sales."
Malone then asked whether there was "a commercially viable alternative" to Windows.
"There was no place to go -- without Windows 95 you couldn't be in the PC business," Norris said.
The IBM executive's comments paired with a colleague's earlier testimony about Microsoft's attempts to thwart OS/2 and gave the Justice Department a missing component that is key to its case. Although other PC manufacturers jockeyed with Microsoft over restrictions in Windows 95 licenses, as documents entered into evidence have shown, only IBM has testified. Previously, the only computer manufacturer to testify was John Rose of Compaq, who was called by Microsoft.
IBM's negotiations with Microsoft differed from other PC manufacturers' because IBM also markets software, including the underdog OS/2 operating system. Microsoft charged that IBM had failed an audit of royalties it owed for operating system licenses. In mid-July 1995, during negotiations to license Windows 95, Microsoft demanded a multimillion dollar audit settlement from IBM contingent to granting a Windows 95 license.
Inside look at talks
Norris's testimony offers a glimpse at Microsoft's license prices and practices. Microsoft's opening proposal was to charge IBM $US75 per machine for Windows 95, a sharp increase from the Window 3.11 fee of $US9 per machine, which Norris called "favourable." Microsoft agreed to lower the fee if IBM met certain conditions, including a pledge to "adopt Win 95 as the standard operating system for IBM." That would bring a $US3 per machine discount, Norris said. Through negotiations, IBM and Microsoft eventually agreed on a fee of $US60 per machine.
During licensing negotiations, Microsoft executives stopped returning phone calls, and communications slowed. Norris attributes the delay, in mid-June 1995, to IBM's hostile bid for Lotus the same month.
Microsoft also feared that IBM would bundle the Lotus Smart Suite on its own PCs and license it to other PC manufacturers for $US5 per unit, according to internal IBM e-mail messages. That could cut into Microsoft's profits licensing its Office suite.
Negotiations resumed in July only after a Microsoft senior vice president wrote directly to Gates, Norris said.