MS OEM VP to IBM: dump Lotus and we'll cut a deal

Who's a naughty boy then, Joachim?

MS on Trial During a struggle over underpayment of royalties by IBM to Microsoft, MS OEM VP Joachin Kempin offered a deal if IBM would stop shipping Lotus SmartSuite for six months, according to trial testimony by Garry Norris of IBM. By bringing in SmartSuite Kempin was increasing the level of linkage, as the royalty issue was already entangled in IBM's attempts to secure a Windows 95 licence. In questioning Norris revealed that Kempin made the offer in August 1995, just three weeks before the launch of Windows 95: NORRIS: But during the audit period, Joachim Kempin did say, as a measure of something: We would agree to settle the audit if you don't ship SmartSuite for six months. PEPPERMAN[Microsoft attorney]: And IBM flatly rejected that proposal? NORRIS: Yes, we did. The settlement of the audit and the Windows 95 licence agreement were both signed on the same day: Windows 95 launch day - 15 minutes before the launch. Norris' deposition has brought to light some fascinating evidence about Windows royalty under-payment by IBM. In the Fall of 1994, Microsoft told IBM it wanted to conduct an audit of Windows sales. IBM had been saying publicly it had very good sales of OS/2 containing Windows licences, but Microsoft said it was not seeing this in the data that IBM reported. At the time there was also a certain amount of carpet bombing free copies of OS/2 going on. Microsoft claimed that IBM might have been under-reporting royalties for a couple of years. From Norris' perspective, there was no relationship between this allegation and his effort to negotiate a good price for a Windows 95 licence. Microsoft had decided to link settling the issue of the audit to IBM's Windows 95 licence negotiations, but Rick Thoman, an IBM VP, tried to get the audit issue de-linked. He wrote to Gates on 20 July and followed this with a conference call with Gates on 24 July 1995. Microsoft knew it was putting IBM under great pressure. Norris said: "A series of letters transpired back and forth, the net of which simply said: there's no reason to withhold the Windows 95 beta code, which you have begun to do because of the audit. The audit is unrelated to the Windows 95 license agreement. Please release the code." Pepperman asked Norris if he was aware that IBM ended up paying Microsoft $30 million to compensate Microsoft for under-reported royalties. Norris said he knew that IBM had offered $10 million in a settlement agreement, $5 million of which was to be held in escrow, as part of a move to speed up getting the beta code of Windows 95, and the licence. The escrow account was set up to give a measure of comfort against any under-reporting of Windows 95 sales, with interest and penalty payments being agreed in the contract should this happen. Pepperman said that Microsoft had ended up taking $30 million for what was claimed to be $50 million of under-reported royalties. Norris said he was unaware of this. Pepperman then asked Norris if he knew that an internal IBM audit had found that royalties were under-reported. Again, Norris said he was unaware of this. Pepperman indicated that the audit had taken ten months, and that a great deal of time had been taken up by IBM in negotiating a non-disclosure agreement with the auditors. Perhaps the most unexpected information was that, according to Pepperman, it was IBM procurement contracts manager Jim Miller who threatened in July 1995 to suspend negotiations of the Windows 95 licence until the audit was resolved. Norris confirmed that he had heard this too. Microsoft claimed to be upset at the discovery of the under-payment, but it could well be that it was pleased to have an excuse for making life difficult for its competitor. Pepperman asked "What was Jerome York's position at IBM at the time?" It was a question to which he clearly knew the answer, which was that he was CFO. Pepperman's follow up was to ask if Norris had heard in the Summer of 1995 that York admitted to Michael Brown, then CFO of Microsoft, that IBM's reporting system was outdated. York left IBM around this time, and Pepperman seemed to wish to float the suggestion that this was related. Pepperman did not know all the details, it seemed, since he asked Norris: "Did IBM fire the person who was determined to be responsible for the underpayments?" which suggested that it was an individual who had orchestrated the underpayments, rather than it being a deliberate policy by IBM. Norris said that he did not know. The details of this under-payment of royalties could have accounted in part for the presence of the large IBM legal team at the deposition. ® Complete Register trial coverage