Sample text for The Microsoft file : the secret case against Bill Gates / Wendy Goldman Rohm.


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Counter MICROCOSM

Bill Gates' personal and business strategies all over the world were being played out in microcosm in Germany, where the largest computer manufacturer in Europe was still not under Gates' control. Gates was about to turn an entire country market around. He would stop at nothing, including paying "reverse bounties" to a company in exchange for an agreement that it would never sell another copy of a rival's product.
The old castle had belonged to royalty and was a favorite haunt of members of Parliament. Stefanie Reichel could not believe that she was here, at the Hotel Cliveden, just outside London, with Bill Gates.

Cliveden, which had been Lord Astor's estate, had become known as a place of intrigue in the 1960s, when a young woman named Christine Keeler inadvertently brought down Britain's conservative government. Members of Parliament and British aristocrats had used the place for orgies until Keeler squealed after a love affair with a defense minister and a military attaché from the Soviet embassy. (It had become known as the Profumo affair.)
The place was still breathtakingly beautiful, with its hunting grounds and gardens. The dining rooms and meeting rooms were palatial. Microsoft had rented it for its annual board meeting in August 1992. There had been traditions for this summer board meeting; it was always held in an exotic place, and Gates' mother and father usually attended.

Gates had first spotted Stefanie Reichel, wearing a striking red suit, in April 1992 during a business meeting with computer makers in Monte Carlo; he couldn't take his eyes off her. He canceled his flight back to the States for a chance to get to know this beautiful young woman, who spoke three languages and was an employee of Microsoft Germany.

Just the previous day Gates and Reichel had arrived at Heathrow and had a rendezvous at the Sheraton Heathrow hotel. From there they continued to London's Park Hyatt. That night they had tickets to see Miss Saigon and dined at the British actor Michael Caine's Indian restaurant.

Now Gates stepped into the Cliveden's richly appointed library, where a predinner cocktail hour was unfolding, with Reichel on his arm.

All found it unusual that Gates had not taken a room at the Cliveden like the rest of the Microsoft entourage, who had flown in from Seattle. But Mary Gates was happy to notice that her son had a pretty young blond with him. "Ohhh, hi! Who are you?" she asked Reichel.

The two spoke at some length, and Mary, who was known to light up a room, made every effort to include the young woman. "Oh, we should invite you more often to these things, Stefanie," she said.

Gates was slightly embarrassed by his mother's attentiveness to his new girlfriend.
The board members were filtering in, and many of the men were lighting up cigars. There was CFO Frank Gaudette and President John Shirley and his wife. Microsoft's cofounder, Paul Allen, was not present. Bill Neukom meandered into the room. Reichel's presence startled him. He had heard that Gates was intrigued by a woman in Europe, but later Neukom told Reichel that his heart sank when he realized it was she. He had met her months earlier at headquarters and been taken with her himself.

Earlier this day Gates and Reichel had had a lunch meeting with Theo Lieven, the chief of Europe's largest computer maker, Vobis Microcomputer. In a "Microsoft secret" report, one executive had months earlier provided a snapshot of what was going on at the Vobis account. "It looks like DRI is urging them to focus on DR-DOS," it stated, adding that "Lieven is complaining about the per processor license-he does not want to pay $9 with every computer system and thinks about shipping both DR-DOS and MS-DOS."

Before the Vobis lunch meeting at one of London's best restaurants, Nico at Ninety, Reichel and Gates had sat in a limo together. She had prepared a detailed briefing on the Vobis account for the big boss and handed it to him in a neat binder. Gates was impatient. "Just tell me what it says," he told her. Reichel laughed, a bit flustered. Gates had been sending her e-mail and love letters since he met her the previous April.

"Du." From the beginning, Stefanie Reichel was struck that she was being addressed as du.
German citizens knew there was something different about the American company from their first day on the job. Microsoft Germany was operating much as the company operated in the United States. That is, the sensibility of Bill Gates had filtered across the ocean with great intent.

Despite the influence of Western culture around the globe, inside most German companies, employees addressed each other using formal names. Sie, the formal version of "you," was the correct usage. The informal Du was reserved for after-hours socializing and personal relationships. An internal directive instructed Microsoft Germany employees, however, that "we do not address each other formally." It was one of the first things Reichel was told when she joined Microsoft in 1991.

Now she was helping to orchestrate in Germany a microcosm of how Microsoft operated and took over markets worldwide.

Reichel, though raised in Germany, had lived for many years in the United States, where she attended an Ivy League university and worked in Silicon Valley for several years. One of the first things she noticed as an employee of Microsoft Germany was how most new employees found the company's informality uncomfortable.

Reichel and her colleagues worshiped Gates. Germany was very structured. People did not drop out of college and become billionaires every day; there was a clear path for every accomplishment. In that respect, to the German culture Gates was even more of a phenomenon. Also, it was still pretty much a chauvinistic society. There were no other women salespeople or managers in the OEM group in Europe. And all the customers Reichel worked with were male.

Her hiring was a leap for the division and Microsoft Germany. Reichel soon found it easy to charm the men she met in business-not by being flirtatious or sexual but merely by being a woman. It didn't hurt that she was strikingly attractive, along with being intelligent and knowledgeable about both German culture and the computer industry.

In fact, Juergen Huels, her boss, considered Stefanie Reichel his secret weapon. He would send her into the marketplace to find out certain things. She was simply doing what men had done for a long time.

The two had met at another software company. At Microsoft, Huels, his boss, and his boss's boss had interviewed her. They were skeptical because she was female. But he was intent on hiring a woman to handle the most difficult, and strategic, account.

From day one Reichel was told that it would be like "mission impossible" to turn around the Vobis account. Vobis was the largest computer manufacturer in Germany-all of Europe for that matter-and at the beginning of 1991 , 100 percent of the computers it sold were being shipped with DR-DOS.

The edict had been handed down from Gates through the ranks: We want DR-DOS not to exist in this account. They had even set a date for her to meet the goal that the company be selling "no DR-DOS" but all Microsoft DOS and at least 50 percent Windows. "You make this happen, and you make us both stars," Huels told her. That meant more stock options for one thing.

Months earlier Gates had walked into a Vobis store to see only DR-DOS posters. He was enraged.

Gates and his top executives knew full well the strategic importance of signing up computer makers for "per processor" licenses, which would essentially require them to pay royalties to Microsoft for every computer shipped-of a particular processor type-regardless of whether the machine was running Microsoft software. In e-mail messages to a reporter, he would refute the impact of this type of licensing. "Whenever someone ships other software, that would be a system that they don't pay us for," he said. "People get to choose which is the most effective license type for them."

In the meantime, Theo Lieven had earlier been outraged at the per processor scheme but wanted to get the best prices he could. Margins were paper thin in the PC business. He recognized DR-DOS as the superior product but realized that he would end up paying twice for using an alternative to Microsoft's software. Gates would deny this as well, in e-mail to a reporter. He wrote, "I don't understand your argument that people can't afford to offer another operating system. They are NOT paying twice-who gave you that impression? It's silly. People license the way they choose based on the demand they see."

As to "who" gave that impression, in country reports circulated to Gates, his own senior executives noted that they had been pressuring computer makers to stop shipping DR-DOS, especially because they were bound by per processor licenses to pay Microsoft regardless. One report, circulated throughout the executive offices at Microsoft, stated about one computer maker, "He was advertising a system bundled with DR-DOS. This was quite an embarrassing situation, because we did not know this at that time. Novell was offering him a good deal. . . . We hear this from different customers right now. . . . We mentioned to [the CEO of the company] that this system is a system he is paying Microsoft royalties for."

Indeed, DR-DOS was such an attractive product that some computer makers were willing to pay twice in order to offer it to customers, despite the fact that Microsoft was reminding them that they were locked into paying royalties to Microsoft, and so offering other products did not make sense.

But Lieven, who had in October 1991 begun some shipments of MS-DOS 5.0, was still selling DR-DOS. Gates was about to help Stefanie Reichel turn him around.

The e-mail message that appeared on Reichel's computer screen in April 1992 was from Bill Gates. She had never before received a personal e-mail from him.

Gates explained that he had come to Monte Carlo with a lot on his mind, including talking to lawyers in the United States about lawsuits and helping Microsoft Europe president Bernard Vergnes make lots of decisions. (He did not specify what those decisions were about.) Meeting Reichel had "energized" him, he said, adding, "I hope I didn't stare or anything . . ."

The Microsoft chairman had no idea whether Reichel spoke English or whether she was married or "interesting," he said, noting that he is "somewhat shy," and so he didn't approach her and introduce himself.

Jeff Lum had nevertheless introduced Gates and Reichel, and Gates now noted that "it was great there was a topic of significance to discuss-our friends at Vobis."

As Gates was leaving the hotel to catch a plane with Vergnes, he told Vergnes that he wished to stay another night on the off chance he could talk with Reichel some more. Gates indeed did not take his scheduled flight for this reason, even though he had not booked any alternate hotel or made plane reservations to ensure that he could return to London for his meeting the next day. "I didn't worry about it," Gates wrote. "Believe me, this is not normal behavior."

Gates wrote at some length. "If you are coming to the US let me know," he wrote. "I mean a chance when no one from Microsoft is around at all," and went on to suggest dinner and to note that it had taken him a few days to figure out Reichel's e-mail address.

Gates had asked Reichel out on a date. She couldn't believe the correspondence Gates was having with her, and confided in Huels, who read the e-mail with relish.

In early summer another e-mail message from Gates appeared on Reichel's computer screen. A number of weeks earlier he had met her during a business trip to San Francisco.
He recounted their visit together in a litany of the passing sights of the night he had spent with her and their first kiss.

He was waxing poetic, nothing like his business e-mail, Reichel thought.
Gates apologized for not e-mailing Reichel sooner, noting that he'd been busy, with a trip to Washington to see President Bush. He went on, "We had an OEM review yesterday and of course Vobis came up. Steve [Ballmer] asked if the account manager was a German or an American, and I said nothing since I'm not even supposed to know how to spell [your name]. It was very hard not to smile."

Gates concluded, assuring Reichel that they would find a way to spend more time together.
There was a part of Gates that was quite romantic, Reichel was surprised to learn. Huels, who'd read everything along with her, loved it.

Now Gates was really going to help her get the biggest deal of all. She still could not believe how interested he was in her. It also frightened her; she was drawn to Gates' intelligence but wasn't sure she wanted anything romantic. From the beginning, courting the largest computer manufacturer in Europe had been a challenge.

She remembered the day Heinz Willi Dahmen, a Vobis manager, had greeted her on one of her first visits to the company. His massive physical presence (he must have been approaching three hundred pounds), combined with the light that tended to reflect off his shiny head, gave him the aspect of an aurora borealis.

At first, CEO Lieven refused to meet with her or anyone else from Microsoft. After doing some research, Reichel discovered Lieven was a wine connoisseur, and sent him a bottle of a California cabernet. Soon she was in his office face to face. He complained that Microsoft had threatened to cut off technical support and access to information if Vobis continued to sell DR-DOS.MICROCOSM

Bill Gates' personal and business strategies all over the world were being played out in microcosm in Germany, where the largest computer manufacturer in Europe was still not under Gates' control. Gates was about to turn an entire country market around. He would stop at nothing, including paying "reverse bounties" to a company in exchange for an agreement that it would never sell another copy of a rival's product.
The old castle had belonged to royalty and was a favorite haunt of members of Parliament. Stefanie Reichel could not believe that she was here, at the Hotel Cliveden, just outside London, with Bill Gates.

Cliveden, which had been Lord Astor's estate, had become known as a place of intrigue in the 1960s, when a young woman named Christine Keeler inadvertently brought down Britain's conservative government. Members of Parliament and British aristocrats had used the place for orgies until Keeler squealed after a love affair with a defense minister and a military attaché from the Soviet embassy. (It had become known as the Profumo affair.)
The place was still breathtakingly beautiful, with its hunting grounds and gardens. The dining rooms and meeting rooms were palatial. Microsoft had rented it for its annual board meeting in August 1992. There had been traditions for this summer board meeting; it was always held in an exotic place, and Gates' mother and father usually attended.

Gates had first spotted Stefanie Reichel, wearing a striking red suit, in April 1992 during a business meeting with computer makers in Monte Carlo; he couldn't take his eyes off her. He canceled his flight back to the States for a chance to get to know this beautiful young woman, who spoke three languages and was an employee of Microsoft Germany.

Just the previous day Gates and Reichel had arrived at Heathrow and had a rendezvous at the Sheraton Heathrow hotel. From there they continued to London's Park Hyatt. That night they had tickets to see Miss Saigon and dined at the British actor Michael Caine's Indian restaurant.

Now Gates stepped into the Cliveden's richly appointed library, where a predinner cocktail hour was unfolding, with Reichel on his arm.

All found it unusual that Gates had not taken a room at the Cliveden like the rest of the Microsoft entourage, who had flown in from Seattle. But Mary Gates was happy to notice that her son had a pretty young blond with him. "Ohhh, hi! Who are you?" she asked Reichel.

The two spoke at some length, and Mary, who was known to light up a room, made every effort to include the young woman. "Oh, we should invite you more often to these things, Stefanie," she said.

Gates was slightly embarrassed by his mother's attentiveness to his new girlfriend.
The board members were filtering in, and many of the men were lighting up cigars. There was CFO Frank Gaudette and President John Shirley and his wife. Microsoft's cofounder, Paul Allen, was not present. Bill Neukom meandered into the room. Reichel's presence startled him. He had heard that Gates was intrigued by a woman in Europe, but later Neukom told Reichel that his heart sank when he realized it was she. He had met her months earlier at headquarters and been taken with her himself.

Earlier this day Gates and Reichel had had a lunch meeting with Theo Lieven, the chief of Europe's largest computer maker, Vobis Microcomputer. In a "Microsoft secret" report, one executive had months earlier provided a snapshot of what was going on at the Vobis account. "It looks like DRI is urging them to focus on DR-DOS," it stated, adding that "Lieven is complaining about the per processor license-he does not want to pay $9 with every computer system and thinks about shipping both DR-DOS and MS-DOS."

Before the Vobis lunch meeting at one of London's best restaurants, Nico at Ninety, Reichel and Gates had sat in a limo together. She had prepared a detailed briefing on the Vobis account for the big boss and handed it to him in a neat binder. Gates was impatient. "Just tell me what it says," he told her. Reichel laughed, a bit flustered. Gates had been sending her e-mail and love letters since he met her the previous April.

"Du." From the beginning, Stefanie Reichel was struck that she was being addressed as du.
German citizens knew there was something different about the American company from their first day on the job. Microsoft Germany was operating much as the company operated in the United States. That is, the sensibility of Bill Gates had filtered across the ocean with great intent.

Despite the influence of Western culture around the globe, inside most German companies, employees addressed each other using formal names. Sie, the formal version of "you," was the correct usage. The informal Du was reserved for after-hours socializing and personal relationships. An internal directive instructed Microsoft Germany employees, however, that "we do not address each other formally." It was one of the first things Reichel was told when she joined Microsoft in 1991.

Now she was helping to orchestrate in Germany a microcosm of how Microsoft operated and took over markets worldwide.

Reichel, though raised in Germany, had lived for many years in the United States, where she attended an Ivy League university and worked in Silicon Valley for several years. One of the first things she noticed as an employee of Microsoft Germany was how most new employees found the company's informality uncomfortable.

Reichel and her colleagues worshiped Gates. Germany was very structured. People did not drop out of college and become billionaires every day; there was a clear path for every accomplishment. In that respect, to the German culture Gates was even more of a phenomenon. Also, it was still pretty much a chauvinistic society. There were no other women salespeople or managers in the OEM group in Europe. And all the customers Reichel worked with were male.

Her hiring was a leap for the division and Microsoft Germany. Reichel soon found it easy to charm the men she met in business-not by being flirtatious or sexual but merely by being a woman. It didn't hurt that she was strikingly attractive, along with being intelligent and knowledgeable about both German culture and the computer industry.

In fact, Juergen Huels, her boss, considered Stefanie Reichel his secret weapon. He would send her into the marketplace to find out certain things. She was simply doing what men had done for a long time.

The two had met at another software company. At Microsoft, Huels, his boss, and his boss's boss had interviewed her. They were skeptical because she was female. But he was intent on hiring a woman to handle the most difficult, and strategic, account.

From day one Reichel was told that it would be like "mission impossible" to turn around the Vobis account. Vobis was the largest computer manufacturer in Germany-all of Europe for that matter-and at the beginning of 1991 , 100 percent of the computers it sold were being shipped with DR-DOS.

The edict had been handed down from Gates through the ranks: We want DR-DOS not to exist in this account. They had even set a date for her to meet the goal that the company be selling "no DR-DOS" but all Microsoft DOS and at least 50 percent Windows. "You make this happen, and you make us both stars," Huels told her. That meant more stock options for one thing.

Months earlier Gates had walked into a Vobis store to see only DR-DOS posters. He was enraged.

Gates and his top executives knew full well the strategic importance of signing up computer makers for "per processor" licenses, which would essentially require them to pay royalties to Microsoft for every computer shipped-of a particular processor type-regardless of whether the machine was running Microsoft software. In e-mail messages to a reporter, he would refute the impact of this type of licensing. "Whenever someone ships other software, that would be a system that they don't pay us for," he said. "People get to choose which is the most effective license type for them."

In the meantime, Theo Lieven had earlier been outraged at the per processor scheme but wanted to get the best prices he could. Margins were paper thin in the PC business. He recognized DR-DOS as the superior product but realized that he would end up paying twice for using an alternative to Microsoft's software. Gates would deny this as well, in e-mail to a reporter. He wrote, "I don't understand your argument that people can't afford to offer another operating system. They are NOT paying twice-who gave you that impression? It's silly. People license the way they choose based on the demand they see."

As to "who" gave that impression, in country reports circulated to Gates, his own senior executives noted that they had been pressuring computer makers to stop shipping DR-DOS, especially because they were bound by per processor licenses to pay Microsoft regardless. One report, circulated throughout the executive offices at Microsoft, stated about one computer maker, "He was advertising a system bundled with DR-DOS. This was quite an embarrassing situation, because we did not know this at that time. Novell was offering him a good deal. . . . We hear this from different customers right now. . . . We mentioned to [the CEO of the company] that this system is a system he is paying Microsoft royalties for."

Indeed, DR-DOS was such an attractive product that some computer makers were willing to pay twice in order to offer it to customers, despite the fact that Microsoft was reminding them that they were locked into paying royalties to Microsoft, and so offering other products did not make sense.

But Lieven, who had in October 1991 begun some shipments of MS-DOS 5.0, was still selling DR-DOS. Gates was about to help Stefanie Reichel turn him around.

The e-mail message that appeared on Reichel's computer screen in April 1992 was from Bill Gates. She had never before received a personal e-mail from him.

Gates explained that he had come to Monte Carlo with a lot on his mind, including talking to lawyers in the United States about lawsuits and helping Microsoft Europe president Bernard Vergnes make lots of decisions. (He did not specify what those decisions were about.) Meeting Reichel had "energized" him, he said, adding, "I hope I didn't stare or anything . . ."

The Microsoft chairman had no idea whether Reichel spoke English or whether she was married or "interesting," he said, noting that he is "somewhat shy," and so he didn't approach her and introduce himself.

Jeff Lum had nevertheless introduced Gates and Reichel, and Gates now noted that "it was great there was a topic of significance to discuss-our friends at Vobis."

As Gates was leaving the hotel to catch a plane with Vergnes, he told Vergnes that he wished to stay another night on the off chance he could talk with Reichel some more. Gates indeed did not take his scheduled flight for this reason, even though he had not booked any alternate hotel or made plane reservations to ensure that he could return to London for his meeting the next day. "I didn't worry about it," Gates wrote. "Believe me, this is not normal behavior."

Gates wrote at some length. "If you are coming to the US let me know," he wrote. "I mean a chance when no one from Microsoft is around at all," and went on to suggest dinner and to note that it had taken him a few days to figure out Reichel's e-mail address.

Gates had asked Reichel out on a date. She couldn't believe the correspondence Gates was having with her, and confided in Huels, who read the e-mail with relish.

In early summer another e-mail message from Gates appeared on Reichel's computer screen. A number of weeks earlier he had met her during a business trip to San Francisco.
He recounted their visit together in a litany of the passing sights of the night he had spent with her and their first kiss.

He was waxing poetic, nothing like his business e-mail, Reichel thought.
Gates apologized for not e-mailing Reichel sooner, noting that he'd been busy, with a trip to Washington to see President Bush. He went on, "We had an OEM review yesterday and of course Vobis came up. Steve [Ballmer] asked if the account manager was a German or an American, and I said nothing since I'm not even supposed to know how to spell [your name]. It was very hard not to smile."

Gates concluded, assuring Reichel that they would find a way to spend more time together.
There was a part of Gates that was quite romantic, Reichel was surprised to learn. Huels, who'd read everything along with her, loved it.

Now Gates was really going to help her get the biggest deal of all. She still could not believe how interested he was in her. It also frightened her; she was drawn to Gates' intelligence but wasn't sure she wanted anything romantic. From the beginning, courting the largest computer manufacturer in Europe had been a challenge.

She remembered the day Heinz Willi Dahmen, a Vobis manager, had greeted her on one of her first visits to the company. His massive physical presence (he must have been approaching three hundred pounds), combined with the light that tended to reflect off his shiny head, gave him the aspect of an aurora borealis.

At first, CEO Lieven refused to meet with her or anyone else from Microsoft. After doing some research, Reichel discovered Lieven was a wine connoisseur, and sent him a bottle of a California cabernet. Soon she was in his office face to face. He complained that Microsoft had threatened to cut off technical support and access to information if Vobis continued to sell DR-DOS.

John Teagle of Cleveland, Ohio, was not one to make a fuss or stick his neck out. The last thing he wanted was to find himself embroiled in a controversy.

George Rice had stood up before a congressional committee a year earlier. Rice had said a particular agent of one mammoth corporation had been "threatening the trade that if they bought of me they would sell them any more."

Now it was Teagle's turn to speak up. "They would have their local man, or some other man, call upon the trade and use their influence and talk lower prices, or make a lower retail price, or something to convince them that they'd better not take our oil, and, I suppose, to buy theirs."

The year was 1898, and John D. Rockefeller had ushered in a new age; he believed that all the oil business was rightly his. Gates had ushered in the information age and believed that all of it should continue to belong to him.

It had been said of Rockefeller that he was "the victim of money-passion which blinds him to every other consideration in life." For Gates, making money and getting 100 percent of all markets that he targeted was about winning, and there were no black or white areas in winning. It was an all or nothing deal. "Your mission is to get Microsoft system software on every personal computer," stated the secret "OEM Business Manual" distributed to account managers.

Rockefeller stopped oil shipments by sending telegrams to agents who had already made deals with independent suppliers and offering them further discounts. One such telegram read, "If you can stop car going to X, authorize rebate to Z [name of dealer] of three-quarters cent per gallon."

In Microsoft's case, a dollar here and a dollar there, even when computer makers had already spent cash buying competing products, meant a lot to their razor-thin margins, especially when tens of thousands of computer shipments were involved.

Earlier on August 19, that day of the board meeting, the Vobis chief, Theo Lieven, had flown in on his personal plane from Belgium, tickled that the Microsoft chairman would be meeting with him. Reichel explained that Lieven wanted to meet Gates before finalizing a deal that had been discussed weeks earlier.

Gates, Lieven, Reichel, and Huels dined for about four hours at London's Nico at Ninety.
The German OEM group would become one of the most profitable in the world. Huels and Reichel had turned it around, creating a cash cow that strategically influenced what was happening throughout the European PC market. The German market was a bellwether for
the continent and was six to eight months behind the U.S. market.

Reichel noticed almost immediately that things happened at a much faster pace at Microsoft than at other software companies. After all, it was addressing a low-end consumer market, versus the high-end market at her previous job. The sales cycles were completely different. Reichel had always been a Mac enthusiast and used the PC for the first time at Microsoft. Huels had coached her closely on the strategic importance of OEM licensing, which Gates and Kempin understood well.

Between bottles of wine, Gates, Lieven, Huels, and Reichel now discussed, among other things, an agreement to "get DRI/Novell out of Vobis," a strategic partnership between the two companies, and a commitment that Vobis would agree to sell "no Novell NetWare Lite" but instead would contract for 25,000 copies of Windows for Workgroups-a new product for Microsoft in the market for computer networks in which it had no presence.
These agreements to cease selling competing products would be finalized weeks later when Lieven flew to Seattle.

Reichel was thrilled at how well the meeting had gone. Now the Microsoft board members were led into an enormous dining room of the Cliveden with a spectacular chandelier. A five-course dinner was served. Gates was seated with Reichel at his side. Across the table from her was Neukom. At her other side sat CFO Gaudette, who, along with Mary Gates, grilled Reichel on where she was from and how she had come to know the Microsoft chairman.

Mary Gates kept leaning across the table to compliment her new friend. She said to Reichel, "Why, you remind me so much of Bill's old friend Ann Winblad. So smart and cute!"

Reichel was doing just fine fitting in with Bill Gates' clan. She would soon head back to Germany. Gates would stay on for additional meetings with the board.
Reichel noticed that across the table from her, Bill Neukom was being particularly attentive. Toward the end of the dinner, he grinned incessantly at her, a cigar dangling from his mouth.

"At my sailing club, men and women alike smoke cigars,"
Reichel said, keeping up a sociable banter. "I like them myself."
Neukom grinned some more. "I bet you like cigars," he said.
Days later, at her office in Munich, Reichel received an e-mail message from Neukom. He was coming to Munich the next week and invited her to dinner.

In the ensuing weeks the e-mail was flying among Microsoft vice president Kempin,
Reichel, Vergnes, and Gates, going over the details of the Vobis deal that Reichel and Gates had made with Lieven. It was standard for Joachim Kempin to come to Germany every quarter to make sure things were on track. He had been the star general manager of the country. Huels knew that Neukom and his legal team were reviewing every deal Kempin made. On the other hand, inside the company the joke was that Neukom's philosophy had become that of Gates: if a law is not clearly defined, you can write it yourself. A sterling bit of Neukom's wisdom remembered by his colleagues was "It is better to ask for forgiveness than to ask for permission."

Kempin, Lum, and Huels would talk informally about their concerns that the feds might find some "funny" stuff in their computers about the dealmaking that had gone on.
Kempin knew of the concern about DR-DOS at the highest levels of the corporation. Back in March 1991, it had been his goal to get a per processor contract with Vobis before MS-DOS 5.0 shipped. (By October 1991, Vobis would indeed be locked into a per processor license for the product.)

He, like Gates and other top executives, knew the impact on the market of per processor licensing. In fact, in an October 1990 memo, Kempin was shown to be pushing computer makers like Hyundai to sign such agreements. "This will block out DR once signed," the memo said.

In December 1990, Microsoft vice president Brad Chase sent an e-mail to Jeff Lum that emphasized Steve Ballmer's concerns about turningVobis around. "Steve told me to eat, sleep and drink Vobis, so I will be on everyone to let me know what's going on with this account," Chase wrote. Other Microsoft memos acknowledged that winning Vobis over to MS-DOS would "lead other OEMs" in product endorsements. Vobis had enormous influence in Europe, like IBM did in the U.S.

In a January 1991 memo, Lum instructed Kempin of the need to "kick DRI out" of Vobis. The only obstacle, he said, was "Lieven's personal commitment to DRI." Lieven had been selling about 15,000 copies of DR-DOS a month, at the price to Vobis of $13 a copy.
Microsoft had been insistent on Lieven signing a per processor license, despite the fact that he said he would sell it on only half of his systems, as he was determined to give customers a choice.

Kempin offered to undercut DRI's price with a per processor price of $9 a machine. His price for Vobis selling half of its shipments with MS-DOS would be $18, twice as much.
When Lieven protested that he wanted to keep selling DR-DOS in addition to Windows, Kempin told him that he would have to pay a higher price for just DOS than for a DOS/Windows combination. He threatened that if Lieven did not take a per processor license, with DOS at $9 a copy and Windows at $15 a copy, then his price for Windows alone would be $35. (Under oath, Lieven would later say that that threat was the reason he agreed to the deal.) Microsoft would also give him the stated per processor prices if he agreed to a minimum commitment of 200,000 copies. That is, regardless of whether he sold that many computers, he would owe Microsoft for selling a minimum of 200,000 units.

In October 1991, Brad Chase sent an e-mail to other Microsoft executives that discussed Microsoft's strategy of putting competitors "on a treadmill." Such deals as the one now unfolding at Vobis would do just that, in the case of DRI.

By now, the feds were more than a year and a half into their investigation, which seemed to keep changing shape and focus. The European Commission had informally started its own scrutiny of the software giant's business practices.

Within Microsoft's domestic and country offices, senior executives were clearly worried. Informal discussions between Microsoft Germany's top brass took place in German beer gardens. They were convinced that while Microsoft could easily be viewed as having achieved a monopoly position in operating systems through legitimate means, it clearly had a cloudy conscience about how it had maintained that position, and about what was now going on in the applications market. "We were leveraging control of the operating systems market to get ahead of Lotus and Borland in the applications market," one executive mused. The e-mail between senior VPs could not have been clearer on this count. Bernard Vergnes, who had regular briefing sessions with Gates, said in an e-mail message, "It is key to keep Lotus out of that customer [Vobis] but still maintain reasonable profitability."
There had been some discussion about this among U.S. and German Microsoft executives, but most were heartened by the fact that the feds seemed to be totally on the wrong track.

The word was that the feds had been too stupid to make sure they'd received backup tapes, and they seemed to be ignoring evidence at Microsoft branch offices altogether. Indeed, in Germany it was normal procedure to purge data when individual computers became full. It was the Ollie North scenario. The truth about North's activities had been found in the backup files in a basement computer at the Old Executive Office Building-originally no one had thought of looking there for evidence. Likewise, the full document record resided on the archived backups of Microsoft's servers, through which all company e-mail passed.
Indeed, the feds were a bit slow in understanding the impact of personal computers on the way people communicated within corporations. As a result, not all the evidence seems to have been produced.

On September 24, 1992, Theo Lieven met at Banner's Restaurant, in Seattle's Sheraton, with Steve Ballmer; Bengt Akerlind, director of European OEM sales; and Stefanie Reichel. The meetings that had begun in London were nailed in a dinner meeting that night at the Seattle Hunt Club, in the Sorrento Hotel. In attendance were Lieven, Kempin, Akerlind, Huels, and Reichel.

Lieven was made a modest proposal. Kempin promised that if he agreed to stop shipping DR-DOS, even though he had earlier ordered and paid for 250,000 copies of it, Microsoft would issue him a credit of $50,000. (Lieven had $50,000 worth of the product left to sell.) Of course the company would not pay him cash, and the whole deal would be off the books; Microsoft knew how far it could go with the law. But they could easily say the $50,000 was for returned goods. (By 1998, catching Microsoft in similar instances of paying companies to stop doing business with competitors, the Justice Department defined such payments as "reverse bounties" used to induce companies to refrain from doing business with others.)

The Microsoft OEM master negotiator Kempin, former head of Microsoft Germany, was present and greeted Reichel warmly. There was Reichel's boss, Huels, and Bengt Akerlind, a tall Swede who was very ambitious.

The chemistry among the men was fascinating. Huels was ambitious and independent. Kempin easily controlled him. Huels coveted Akerlind's job, and Akerlind was his boss. But up until recently they had been peers. Huels and Kempin on the other hand got on splendidly.

Kempin said the deal would be agreed to verbally but would not be put in writing. He knew-as he and Gates had been advised by Neukom on many occasions-that such deals tread at the edge of the law. "We're not stupid. We know how to walk a fine line," one executive told another when the issue of legality came up.

It was standard practice for OEM contracts not to line up with Microsoft's own guidelines for pricing. "Deals would always be made if people agreed to also take the applications software," said one Microsoft manager involved.

In addition to an unheard of distributor agreement, the Microsoft executives offered a special "white box bundle" that would kill many birds with one stone. (A combination of Microsoft products would be put in a plain white package.) Not only would it keep DR-DOS out of the market but it would deal a blow to Lotus and Borland, as well as Novell, in that the largest computer manufacturer in Germany would now be bundling applications software for free. Vobis was promised it would get the applications software for virtually nothing if it would restrict both DR-DOS and Novell's NetWare Lite from the market. The German company was given the price of $9 per machine for DOS and $12 for Windows. "If you don't sell NetWare Lite, your pricing will be far below the pricing in our own internal guidelines," Lieven was told.

Microsoft would also be killing two birds with one stone in that it would also be getting a leg up on Lotus and other applications software makers. For Vobis, naturally, it would be more advantageous to sell Microsoft applications than to sell Lotus because doing so would mean a discount on DOS and Windows. It would also work handily just in time for the competitive Christmas season.

It had been customary for Borland and Lotus to cut deals with computer makers on applications to be shipped with their hardware, but Microsoft would then waltz in and undercut their deals, using the operating system prices for leverage. "Don't think we didn't talk about it," Microsoft sales vice presidents from around the world would joke with their account executives. But this was one area Huels and others were a bit squeamish about. While they felt Microsoft had legitimately won the operating system market, even given its lock-in licensing practices, using the OS dominance to take over the applications market was something the regulators had reason to yell about.

Essentially, Gates gave Vobis what no one else in Europe had-a bundle of Microsoft Word and Excel, along with Windows. But Lieven had to promise that, even if customers asked for it, he would not ship a single machine with DR-DOS. Microsoft senior vice president Steve Ballmer's involvement also had great impact on inducing Vobis to cease shipping the competing product in the early stages of its contracts with Microsoft. It set the stage for the deals Gates would finally help close. In April 1991, Ballmer and Lieven had met in Nice. Ballmer had discussed other "inducements," as Lieven would testify, involving bundling Microsoft applications software with an operating system deal. A Microsoft Word/Excel combination was suggested as part of the DOS/Windows deal.

As the icing on the cake, Kempin offered to buy all Vobis' DR-DOS holograms, which were like currency as they were used for authentication when Vobis or other OEMs shipped a copy of DR-DOS. He added, "I'll wallpaper my wall with them!" and laughed a great laugh. "Even if you have per processor licenses, and even if you've already paid for DR-DOS, we don't want you selling it," Lieven was told. In sworn testimony, Lieven would later say that he did not ship any more DR-DOS because Kempin had "purchased" the rest of his holograms. Plus, he noted, he had promised Bill Gates that he'd never ship any more DR-DOS.

The "white box" deal-along with a "finished goods" distributor contract, marketing funds, and special in-store Christmas promotions funded by Microsoft--had been arranged to make Lieven happy. Gates was willing to offer almost anything as long as DR-DOS was dead. Kempin would always say he refused to lose any deal on price.

Among the e-mail messages not produced to the feds from the computers of Microsoft Germany was one that Bernard Vergnes sent to a number of other Microsoft executives on September 7, 1992. Along with documenting the Vobis deal, it showed Microsoft's intent to use its DOS contracts to leverage computer makers into buying Microsoft applications software in place of that from Lotus and others. It said, "Congratulations. Germany is also negotiating a deal with Vobis. It is key to keep Lotus out of that customer but still maintain reasonable profitability." He attached to his message an e-mail message from Reichel and Haink, summarizing the deal. After noting the success of Gates' meeting with Lieven, and the strong market presence of Vobis-number one in market share, over IBM-the memo said: "Lieven . . . is willing to no longer offer DR-DOS or Network Lied [sic]. . . . As you know, Lotus and Borland have been aggressively approaching our OEMs, and Vobis is no exception."

An exclusive applications software bundle would be offered, it went on, and based on this Lieven "is ready to commit to us exclusively and to throw DR-DOS and Novell out and also commit to 25K WFW [Windows for Workgroups]."

Under oath, Lieven would later say that Microsoft's "inducements" had nailed the deal. "After all, DRI has no Word, no Excel, and no Bill Gates," he said. Later in 1992 Microsoft was readying itself for a visit from EC investigators, who were collaborating with the feds. It had arranged for an internal audit to check out what it had in its files.

Soon thereafter, Reichel and her colleagues were given new computers and their old computers and files were taken away. They were told they were being upgraded.

The tone of Microsoft's habitual way of doing business-passed on from the personal style of Bill Gates-was not unlike the "Viking" dinner held during one meeting of Microsoft executives around the time of the Vobis negotiations, in which those present dressed as Vikings with horns on their heads and gloried in the roles of legendary aggressors who pillaged and conquered their foes.

That such an attitude was business as usual at Microsoft could also be seen in one broadly distributed Microsoft memo describing a bizarre joke played after a car accident. It described the circumstances under which a Microsoft account manager had sped off down the German autobahn after an incident in computer maker Amstrad's parking lot.

Amstrad, like Vobis, was another European computer maker that was selling DR-DOS. The memo explained that the Microsoft executive had backed into the Mercedes of Alan Shivvers, an executive at Amstrad. After bashing the vehicle, the Microsoft executive had left a note on the damaged car with DRI's address on it.

Over the months, Reichel, Huels, and other account managers were present in meetings in which Neukom briefed Kempin and others on how they should conduct themselves given the federal investigation. This included the need to retain documents. He'd asked Kempin to get OEMs to testify that Microsoft did not strong-arm them. Kempin had reassured him: "Don't worry. We have them in control."

In little more than a year, Vobis had been turned around from selling no MS-DOS and 100 percent DR-DOS, to selling no DR-DOS and more than 90 percent of its computers with MS-DOS.

Microsoft had won a new per processor agreement, with an eighteen-month commitment for $18 million worth of MS-DOS and Windows preloaded on 400,000 Vobis computers. It had also nailed the biggest commitment by a computer maker for Microsoft applications. It was the largest single contract from a computer maker in all of Germany, and Europe, at the time. Vobis had further agreed to bundle 25,000 copies of Windows for Workgroups long before the product was launched.

It had all been spelled out in Reichel's performance goals, an official Microsoft document. In a November 1992 review, she would be commended for increasing Vobis' "MS-DOS penetration to over 90 percent of their processors along with committing to a per processor contract for 400K units annually," and getting Vobis to "no longer offer DR-DOS." She was rewarded as well for gaining "Windows penetration of 90 percent" of Vobis processors and for the "exclusive bundling deal with Vobis on a European worldwide basis for White Boxes of Excel and Word . . ." products that were posing fierce competition to Lotus and Borland and other application software makers, given that Microsoft was making deals and leveraging its operating system to get computer makers to also preload its applications software.

While Lieven thought he'd made out like a bandit, the document bragged that "the price negotiated was the highest price attained in Europe for such a deal and will bring a revenue of more than USD $6 million of unforecasted money and higher market penetration for [Germany] alone."

With Gates on her side, Reichel had accomplished quite a feat in a short time.

By 1994, after DR-DOS was pretty much dead, Microsoft had doubled the price for DOS. There was no alternative on the market. Like a classic monopolist, once it had eliminated competition, prices soared.


Library of Congress subject headings for this publication: Microsoft Corporation, Gates, Bill, 1955-Computer software industry United States, Competition United States