MESSAGE
| DATE | 2003-05-14 |
| FROM | Dave Williams
|
| SUBJECT | Subject: [hangout] For future reference
|
Perhaps someone will forward this to the next person who invites
Microsoft to an Open Source Event (according to this, they'll sneak in
anyway):
"For Microsoft, market dominance doesn't seem enough"
Thomas Fuller/IHT International Herald Tribune
Wednesday, May 14, 2003
- Discounts for biggest users are aimed at keeping software rivals at
bay
BRUSSELS: More than 90 percent of the world's personal computers run on
Microsoft software. For Orlando Ayala, that was not enough.
Last summer, Ayala, then the top sales executive at Microsoft Corp.,
sent an e-mail titled "Microsoft Confidential" to senior managers laying
out a strategy to dissuade governments across the globe from choosing
cheaper alternatives to the ubiquitous Windows operating system.
Ayala's e-mail told executives that if a deal involving governments or
large institutions looked doomed, they were authorized to draw from a
special internal fund to offer software at a steep discount, or free, if
necessary. Steve Ballmer, the Microsoft chief executive, was sent a copy
of the e-mail.
The memo, which focused on system software for desktop computers,
specifically targeted Linux, a still small but emerging competitor.
"Under NO circumstances lose against Linux," Ayala said.
This memo as well as other e-mails and internal Microsoft documents
obtained by the International Herald Tribune offer a rare glimpse into
the inner workings of a company with so much cash - $43.4 billion, as of
December - that it can aggressively discount its products in a bid to
protect its huge market share amid the wreckage of the technology
sector.
The documents show the muscle that the world's largest software company
is prepared to use to protect its dominance, including a relatively
benign form of corporate spying and discounts to capture "big plays" - a
Microsoft term for deals involving the world's biggest clients.
Yet these sales tactics also come with risks. The covert intelligence
gathering - including one case where a Microsoft employee attended a
Linux trade show pretending to be a consultant to an elementary school -
raises questions about whether Microsoft has pulled back from the
aggressive business practices that got it into so much trouble with
antitrust regulators in the 1990s.
Perhaps more importantly, certain discounts may run afoul of European
market regulators, who are currently investigating claims that Microsoft
violated antitrust laws.
Discounting is a normal corporate practice. But under European law,
companies that hold a dominant market position, such as Microsoft, are
prohibited from offering discounts that are designed to block
competitors from the market.
Microsoft has been concerned with the legality of its discounts in the
past, at one point consulting a London law firm on a specific discount
plan.
But in an interview Wednesday, the chairman of Microsoft operations in
Europe, Africa and the Middle East, Jean-Philippe Courtois, defended the
use of the special fund described in Ayala's e-mail, saying it was part
of a strategy to be "competitive" and "relevant" in the market for big
government and educational deals.
"Linux is obviously a key competitor," Courtois said. Rivals use similar
tactics, he said.
Sun Microsystems Inc., for example, "is giving away StarOffice to
basically governments and schools," he said. The suite of programs runs
on both Windows and Linux systems.
Courtois also said Microsoft sometimes gave away software to "very low
income countries." He cited a program where Microsoft donated software
in South Africa and helped train teachers to use it.
Ayala's memo says the discounting fund could be used for "developed and
developing countries" but says an "initial focus" was being put on Latin
America, Africa, the Middle East, India and China.
In his e-mail, Ayala focused on governments and large institutions. A
separate memo obtained by the IHT shows a discounting program for
corporate customers worldwide. Two days after Ayala sent his memo, Mike
Sinneck, head of Microsoft's services department, sent an e-mail giving
details of what he called Business Investment Funds, established to
provide corporate clients with discounts on the hourly rates charged by
Microsoft's consulting business.
The memo said nearly $180 million had been allocated for this purpose in
the 2003 financial year, which ends in June; $140 million of that was
earmarked for consulting services for server software, where Microsoft
has a leading market share but still faces lively competition.
Servers are the powerful computers corporations use to store data,
manage Web sites or perform other network tasks. The software that runs
servers is the subject of one of the two antitrust cases now open
against Microsoft in the European Union. European antitrust laws are
generally more strict than those of the United States. In broad terms,
Microsoft is accused of illegally leveraging its overwhelming dominance
in the PC software market into the server market.
Among the documents obtained by the IHT is an e-mail from outside legal
counsel to Microsoft that offers a precise interpretation of EU law on
the question of discounts, including his view that short-term
discounting would be more likely to escape EU scrutiny. The lawyer's
e-mail advised Microsoft that its discounts should not be
"discriminatory" among clients. The e-mail also said discounts could not
be designed to exclude competitors from the market.
"Discounts are not per se unlawful," Charles Stark, a former antitrust
official at the U.S. Justice Department and a partner at Wilmer, Cutler
Pickering in Brussels, said in an interview. "It depends on the market
circumstances and how they use them and what their impact is."
Stark, who has not seen the documents, added: "But pricing behavior can
be viewed differently by a dominant firm than by a nondominant firm."
Asked whether the discounting program for server software consulting was
legal in Europe, given Microsoft's dominant position, Courtois, the
Microsoft executive, said consulting was a "break-even" business for the
company.
"We are not a global services company," he said, adding at a different
time: "We need to compete against the big guys." Courtois cited
International Business Machines Corp. and Oracle Corp. as companies with
large consulting businesses, unlike Microsoft, which he said was a "pure
software company."
- Battling the 'open-source' threat
The Microsoft documents show a particular preoccupation among top
managers with the so-called open-source movement, made up of programmers
who believe the software that runs computers should be freely available.
The code behind open-source software is available to the public,
allowing companies to customize their programs. This is in stark
contrast to Microsoft, which keeps most of its source code secret -
although governments and some corporations are increasingly allowed to
view the code, but not alter it.
Linux, the biggest open-source threat to Microsoft, has a tiny share of
the market for personal computer software. But Linux was installed with
26 percent of the server hardware sold to corporations last year,
according to International Data Corp., a market research company.
Windows was shipped with about 44 percent of servers, according to IDC.
The server market is one area where Linux has momentum. As economic
gloom persists in most developed countries, the use of Linux is being
encouraged by many governments, especially in Europe, as a cheaper and
perhaps more secure alternative to Windows software. The French
government, for example, has a Web site that recommends Linux systems
for its departments.
Ballmer once referred to Linux's licensing as "a cancer that attaches
itself in an intellectual-property sense to everything it touches."
In the face of this competition, the Microsoft documents show the
significant resources the company devotes to combat Linux, and the
unconventional tactics it sometimes uses.
Chris O'Rourke, a Microsoft employee, has described attending Linux
World, a trade fair in California, where he "purported to be an
independent computer consultant working with several K12 school
districts," according to his e-mail, which was sent on Aug. 20 last
year. K-12 schools include students from ages to 5 to 18.
"Ha!" O'Rourke wrote in the e-mail to his colleagues, referring to his
assumed identity. "In general, people bought this without question ...
hook, line and sinker."
O'Rourke said his goal was to glean intelligence about the competition.
His guise, he said, "got folks to open up and talk." O'Rourke did not
respond to a fax and voice-mail message seeking comment.
Another employee, Todd Brix, said he attended a Linux conference in June
2001 in San Jose, California, pretending to be an "ambivalent OEM."
Original equipment manufacturers, or OEMs, are companies such as
Hewlett-Packard Co. and Dell Computer Corp. that buy Windows software
licenses.
Reached at his office Tuesday, Brix said that when attending such a
show, "you don't broadcast that you're a Microsoft person."
"You don't disguise that fact," he said. "You just don't lead with your
chin."
The Microsoft documents also show a sophisticated and complex lobbying
program aimed at getting governments on their side. A confidential
document titled "Open Source Software Government: World Wide Initiative"
outlines the company's lobbying objectives.
One aim, the document says, is to "prevent adoption of procurement
policies favoring OSS," or open-source software. Legislators in several
European countries, including Denmark, France and Germany, have proposed
laws that would encourage or require government offices to adopt
open-source software.
Part of the company's strategy, the Microsoft document says, is to
emphasize to customers the pitfalls of the open-source movement.
The document says Microsoft employees lobbied ministries in Germany,
sought out favorable coverage in the French press and built "alliances"
with opinion leaders in Denmark.
But of all the tactics described in these documents, the two discount
programs appear to be the most aggressive - and perhaps most legally
questionable.
- A strategy to 'tip the scales'
Ayala sent his memo at 8:17 a.m. on Tuesday, July 16, 2002. In addition
to Ballmer, the recipients included the heads of major departments - Jim
Allchin and Jeff Raikes, both vice presidents - some of the company's
top lawyers and the general managers of Microsoft operations in Asia,
Europe, Africa and the Middle East.
Ayala said in the memo that in the "difficult economic environment,"
some institutions and companies were focusing on cheaper software.
Ayala said, "it is important that we have a way to address large PC
purchases that involve low-cost/no-cost competitors in the education
(and government) sectors, especially in emerging markets."
The solution, he said, was to "tip the scales" toward Microsoft in these
deals by using the special fund that he called the "Education and
Government Incentive Program."
The fund was to be used "only in deals we would lose otherwise," Ayala
said.
Ayala gave what he called an "example scenario" of a government that was
advocating using open-source software "in order to keep 'x' dollars
inside the country and save the taxpayers millions of dollars."
In his example scenario, the government was considering buying 50,000
PCs installed with locally produced software that cost $5 per computer.
(Microsoft software, by contrast, typically retails for hundreds of
dollars.)
"In order to compete more effectively against Linux and other providers
on these deals, we can now leverage the Education and Government
incentive [EDGI] program to help tip the scales to MS in the deal,"
Ayala said.
The discounts were "not to exceed" the royalties that Microsoft received
from the makers of the PCs, he said. In other words, managers could give
away the software free, if necessary, but were not authorized to offer a
discount amounting to more than Microsoft was actually receiving in
royalties.
The "effectiveness" of the fund would be evaluated at three-month
intervals.
When he wrote the memo, Ayala was the No. 3 executive at Microsoft, in
charge of sales and marketing and responsible for roughly 22,000 of the
company's more than 50,000 employees.
In March, Ayala was transferred to lead a new division that focuses on
small and medium-sized companies. This new push is one of Microsoft's
top priorities, the company has said. Ayala was not available for
comment.
- Serving up discounts on consulting
At 9:08 a.m. on July 18, two days after Ayala sent his e-mail, Sinneck
sent his memo. It was sent to a handful of the top managers in
Microsoft's consulting business.
The memo included a table that showed how much Microsoft had earmarked
for discounts on its consulting services in each market: $65.7 million
in the United States, $8.9 million in the Asia-Pacific region, $13.7
million for Canada and Latin America, $8 million for Japan, $5.4 million
for Germany and $2.8 million for France. In addition, $22 million was
earmarked for other parts of Europe, the Middle East and Africa. The
accompanying table showed that the discounts specifically targeted
consulting services for servers.
Sinneck said that the fund would be used to cover the difference between
the "discounted customer rate and the standard services billing rate per
hour."
Reached this week, Larry Meadows, marketing manager for Microsoft's
services group at its Redmond, Washington, headquarters, said the fund
could be used "anywhere it needs to be. There's not really a limit to
say that you can use it only in certain geographies. We want to use it
worldwide."
He said the funds would be used again in the company's next financial
year, which starts in July.
- Learning the letter of the law
In 1998, Microsoft, which works with several major law firms in
Brussels, sought legal advice on the question of what kind of discounts
are legal under European law.
Microsoft asked Bill Allan, a lawyer at Linklaters, a London-based firm,
about the legality of a particular discount program covering bulk sales
to dealers. Their e-mail exchange, a copy of which was obtained by the
IHT, is significant both because it shows Microsoft was concerned about
discounts and because Allan set out a broad interpretation on discounts
in general.
Allan said that according to European law, discounts should not be
exclusionary - "liable to exclude competitors or restrict their
expansion," he said. Discounts should also not differentiate "without
objective justification" among customers, Allan said.
"If the European Commission has to take a formal position in relation to
any case," Allan said, "it states quite dogmatically that
market-dominant companies may only offer long-term discount schemes
which are justified by cost savings or other countervailing benefits."
In other words, Microsoft would have to show that it could offer
discounts because they generated internal cost savings, rather than
because the discounts were designed to exclude competitors from the
market.
The "likelihood" that the European Commission would actually challenge a
discount, Allan wrote, depended on whether a competitor actually issued
a complaint to the commission.
Two years later, the commission announced an antitrust investigation
against Microsoft, spurred by a complaint from Sun Microsystems, a
competitor in the server software market.
The complaint did not pertain to discounts but something known in the
computer industry as interoperability: The European Commission
investigated allegations that Microsoft refused to supply essential
information on its Windows operating systems to competitors. Because
Microsoft had "undisputed market dominance" in operating systems for
personal computers, the executive panel said, competitors in the server
market were at a disadvantage because their servers could not operate
properly with networks of PCs running on Windows.
"All companies that want to do business in the European Union must play
by its antitrust rules," Mario Monti, the commissioner in charge of
competition, said when the investigation was announced. "I'm determined
to act for their rigorous enforcement."
A year later, the commission accused Microsoft of violating antitrust
law by bundling its Media Player software into its operating system.
Both investigations are ongoing. Sources at the European Commission said
a decision in the cases would not be announced until late this year at
the earliest.
Microsoft has said on several occasions that it is fully cooperating
with the commission in the antitrust investigations. But Allan's 1998
e-mail offered clues as to how Microsoft might defend itself if accused
of illegal discounting.
The European Commission "would regard Microsoft as market-dominant" in
the field of software for personal computers, Allan said.
"Obviously, should any case be brought, we would contest that
assumption," Allan said. It was a remarkable insight into Microsoft's
possible legal strategy: Despite the widely recognized monopoly of the
Windows operating system, Microsoft would contest the idea that it is
dominant.
Allan seemed to acknowledge the difficulties in making this claim. He
said that "for the purpose of deciding our route forward," the
determination of market dominance was a "realistic assumption."
International Herald Tribune
Copyright © 2002 The International Herald Tribune
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