Compaq-MS murky secrets II – an analysis

We piece together the story of how these two lovable companies conduct their business

Rose said in court that the issue was that AOL did not want any browser there except GNN, AOL's own browser, and that AOL objected to IE and the Netscape browser being present. Rose claimed there were some compatibility issues with Navigator, so that it might have been present or absent. It would be interesting to know if these "compatibility issues" were notified to Netscape at the time, or later.

9 November 1997: Rose made a Declaration [not subject to cross-examination] that had been carefully honed by lawyers (and almost certainly agreed with Microsoft) that "Our consumer customers expect that the personal computer systems they purchase from us will have the latest and most advanced features and functions. Based on consumer customer demand, we would not want to ship a personal computer system that did not include the most recent and advanced Internet browser. Based on our current understanding of the market, Internet Explorer meets these requirements."

It was an effort to undo what Decker had said earlier. 20 November 1997: Memorandum from Flannigan to Compaq CEO Pfeiffer, Compaq's general counsel, Rose and others. "Given Microsoft's concern that our agreement be, quote, defendable, closed quote, to other OEMs and the Department of Justice, we recently proposed an alternative structure where we would use side agreements to complement the client OS license and the MDA [market development agreements] and compensate Compaq for value-added activities that clearly distinguish us from the rest of the industry."

Rose waffled when he was asked about this, but the essence of his response was that Compaq wanted a five year agreement rather than a one or two year one [Although the consent decree of course allowed only one year, Compaq presumably thought that it could get a better deal from Microsoft with a longer agreement]. So far as the side agreement or MDA was concerned,

Compaq thought a longer agreement would require less administration. In addition, there had been leaks about the contents of the first Frontline Agreement, such as the terms and pricing. Compaq asked Microsoft for a side agreement.

5 December 1997: Microsoft responded to the proposals by Compaq for side agreements. January 1998: Boies produced a Compaq internal document that noted that "about 80 per cent of companies wipe or reformat the hard drives of new desktops" and that the most frequent reinstalled operating system was Windows 95 OSR2 and the retail version of Windows 95. Boies suggested that was the reason, but Rose wriggled when Boies asked why that should be and claimed he did not know whether the retail version had IE. Rose did not agree with Boies. The study also noted that about 70 per cent of businesses run a browser, which strongly suggests that Navigator is being used by many of these organisations.

26 March 1998: In court, Rose was shown two MDA agreements that came into effect on 1 April 1998. Both had been signed by the same person at Compaq, and the same person at Microsoft on 26 March. The Windows prices to Compaq were increased, but the amount of increase was not disclosed in open court. Boies characterised the Microsoft-Compaq relationship as being that of two companies joined at the hip. Rose said he hadn't heard Compaq characterised in that way. Boies left it at "a special relationship".

Pepperman wanted any discussion to be in closed session, as it had been with Fisher, the DoJ economist witness, when the documents were discussed. Boies said that one agreement succeeded the other, and that one was more favourable. Rose said that GX1438 [GX is a designation for exhibits accepted by the court] was the addendum, and agreed that GX464 was never intended to be the real agreement, since it was immediately succeeded by GX1438.

Rose admitted that the term of the agreements was two years. If these were licensing agreements for Windows, as seems likely, they would be illegal and unenforceable as they broke the terms of the consent decree that is in force in the USA until 2001. Rose then admitted that the side agreement had nothing to do with the five-year versus two-year issue.

14 October 1998: Decker was deposed. "I manage a group that works with the Compaq product divisions, and we negotiate the agreements, the license agreements, for products that we would ship with our systems as well as the materials that would go, you know, in the box shipped with the systems." Rose claimed this was not a complete description, and tried to diminish Decker's importance, but Decker had not claimed to lead the team.

Decker had elaborated in his deposition as to the negotiating team membership: "[It depends on the specific transaction that we're involved with. It would be representatives from the product division. We also have what we refer to as a 'Microsoft core team.' I am the director of software procurement, and the agreements flow through me from a negotiating perspective. I report dotted line to Steve Flannigan who has corporate strategic relations [and reports to Rose], and we work together on the strategy and negotiation with the various product divisions, depending on what the transaction would be."

9 November 1998: Microsoft business deals for a Compaq portal PC were the subject of an email from Jim Robinson to David Blizinski and Decker. There evidently was some discussion during the in camera sessions of what was happening about Compaq's portal PC. Robinson had written "The Microsoft-OEM business terms are indicative of what you would expect from a monopoly." Needless to say, Rose had not seen the email previously.

10 November 1998: A Compaq document under seal headed "Initial internal term sheet" (in effect a list of negotiating points for a meeting between Compaq and Microsoft) said: "Microsoft's OEM business terms are indicative of what one would expect from a monopoly".

Boies asked incredulously whether Rose was in court testifying for himself or Compaq. Rose claimed not to have seen the document before the trial. Boies brushed aside an offer of assistance from Coston, since he was not subject to cross-examination. As Rose still claimed not to know, Coston was allowed to represent that it was "a document authored by a Compaq employee David Blizinski, who had been with Compaq's consumer group for four days at the time he drafted the document. He had been with Compaq for several years prior to that in the networks product group and had never done any work with Microsoft.

In the chain of command in the consumer products group, Blizinski reported to Marc Warshawsky who reported to Trey Smith who reported to Rod Schrock. So he's four levels down from Mr Schrock. I talked to Mr Blizinski on the phone. The document is his creation. No one directed him to use those words, his impressions, and he's available for a telephone interview with your honour if the court is so inclined." This is but a beginning of an enhanced understanding of these matters. Register readers are invited to help fill in the gaps. ®

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