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By Rajiv Chandrasekaran
Washington Post Staff Writer
Wednesday, January 27, 1999; Page E01

In March 1997, computer maker Hewlett-Packard Co. had what it considered to be a serious complaint against Microsoft Corp.: The software giant was refusing to let Hewlett-Packard change the series of screens that computer buyers see the first time they switch on machines that run Microsoft's Windows operating system. So Hewlett-Packard fired off a strongly worded letter of protest.

"From a consumer perspective, [the restrictions] are hurting our industry and our customers," Hewlett-Packard executive John Romano wrote to Microsoft management. "This situation must change."

But unlike disgruntled customers in most industries, Hewlett-Packard didn't threaten to take its business elsewhere. It needed Windows, which runs on about 90 percent of the world's personal computers, and there was only one place to get it: Microsoft.

"If we had a choice of another supplier, based on your actions in this area, I assure you would not be our supplier of choice," Romano wrote.

Romano's gripe eventually found a sympathetic ear -- among antitrust enforcers at the Justice Department and in 19 states. They have submitted the letter, along with similar complaints by other computer makers, to the federal judge conducting the Microsoft antitrust trial to try to demonstrate that the software maker has a monopoly in the operating system market and has been using that clout to impose illegal contract restrictions on PC makers.

The documents offer a rare look at a years-old conflict between Microsoft and its biggest customers. For the PC makers, it has long been taboo to publicly kvetch. Not only do Microsoft's contracts contain stringent confidentiality clauses, but the computer firms often have worried that overt comments could lead Microsoft to retaliate by raising Windows prices or cutting back on financial help in promoting their products. In the PC business, where profit margins are microchip-thin, such actions can hammer a firm's profits, industry executives and analysts say.

Most of the e-mail messages and depositions were obtained by government investigators only after they issued subpoenas to the PC firms, according to sources familiar with the matter.

Over the past four years, the documents show, PC makers have privately voiced repeated complaints about the price of Windows and restrictions on modifying it. Microsoft has blocked manufacturers from removing Microsoft's Internet browsing software, changing the "first screens," modifying the software's customer registration process and deleting the "channel bar" on the software's electronic desktop.

Microsoft maintains that its contracts' terms are legal and that the restrictions are designed to ensure a consistent "look and feel of the Windows experience" on every machine, regardless of brand.

A Microsoft attorney dismissed many of the issues raised by the computer firms as standard negotiating tactics. "PC makers are all tough negotiators, and in their discussions with Microsoft they always seek any competitive advantage they can get relative to their competitors," said Thomas W. Burt, a Microsoft associate general counsel.

E-mail messages between Microsoft executives that have been admitted as evidence at the trial detail the company's frustration with some of the manufacturers' requests.

When Hewlett-Packard, for instance, asked again last year to change the first-time start-up process to reduce "confusion and frustration," a Microsoft account manager commented to a colleague that one specific change -- to eliminate the "Welcome to Windows" background music -- was a "Weird request!" Hewlett-Packard's desire to remove the desktop icon for Microsoft's "In Box" from the Windows desktop was deemed an "odd request."

A Hewlett-Packard spokeswoman, Anne McGrath, refused to comment on the documents other than to say: "Microsoft is a partner of ours, and we are constantly in discussions with them about ways we can make the user's experience better. We have, like many other computer makers, tried to experiment with different user interfaces and, at times, we have had discussions with Microsoft along those lines."

Government lawyers have argued that the start-up restrictions violate antitrust laws because they discourage PC makers from installing "shell" programs, which provide a simple way to perform basic computing tasks such as sending e-mail or starting a word processor. Microsoft, the government believes, fears that the shells could become sophisticated enough to compete with Windows.

Microsoft's Burt said the documents introduced by the government largely reflect PC makers' complaints in early 1997, when the start-up restrictions were first imposed, but before Microsoft had fully explained to the firms the flexibility they still had to customize certain elements of Windows.

"It's Microsoft's understanding that most PC makers no longer have the concerns raised in those documents," Burt said.

Some of the conflict revolved around the software that computer makers use in their own offices. A February 1997 e-mail that circulated among executives at PC maker Gateway 2000 Inc., including chief executive Ted Waitt, noted Microsoft's displeasure at Gateway's selection of a rival Internet browser, made by Netscape Communications Corp., for use on Gateway's internal computer network.

Message author Kathy Skidmore wrote that the Microsoft executive acting as "account representative" to Gateway said the software giant would not engage in joint marketing efforts "if they see GW [Gateway] is anything but pro-Microsoft." Skidmore said the Microsoft representative, Brian Fujiwara, also told her that another large PC maker, Dell Computer Corp., "turned Netscape down because they did not want to hurt their relationship with Microsoft.

Perhaps Microsoft's most tense relationship over the last several years, according to the documents and industry sources, was with Gateway, largely because of Gateway's efforts to make changes in the Windows start-up process and to ship computers without Microsoft's Office package of software. In a July 1997 memo briefing Waitt for a meeting with Steve Ballmer, then Microsoft's executive vice president, Gateway executive Penny L. Nash wrote that the company was suffering "obvious negative treatment due to our differences regarding Office." Nash complained that Gateway, unlike several other PC makers, was not invited by Microsoft to draft specifications for a new generation of "Net PC" machines.

The memo also took issue with Microsoft's restrictions on altering Windows. Microsoft "dictates how GW should deliver product to our customer even when supplied with compelling proof of our customer needs/frustrations on their product[s]," Nash wrote.

Nash's memo, which was given to the judge under a court seal but was inadvertently released to reporters by the Justice Department, also complained that Microsoft was "penny pinching our relationship," and it expressed concern about the prices Microsoft was charging Dell and Compaq Computer Corp. for Windows 95. The government contends that ability to discriminate in pricing is a sign of monopoly power.

In response to pressure from Gateway and others, Microsoft last summer began to allow PC makers to make slight modifications to the Windows start-up process, allowing the manufacturers, for instance, to more prominently promote their own Internet access services.

A Gateway spokeswoman, Angela Peacock, refused to comment on company documents introduced at the trial. A Microsoft spokesman called the memo "highly speculative and inaccurate."

Other documents, however, show that Gateway wasn't alone in thinking it was facing discrimination. Microsoft's billionaire chairman, Bill Gates, noted in an October 1997 e-mail to his lieutenants that his company "will never have the same relationship with IBM that we have with Compaq, Dell and even [Hewlett-Packard] because of their software ambitions. I could deal with this just fine if they weren't such rabid Java backers," he wrote, referring to programming technology that allows software to run on a wide variety of operating systems.

Microsoft, according to the government, worried that International Business Machines Corp.'s version of Java could eventually lessen computer users' dependence on Windows.

Even Microsoft's closest corporate friends have expressed displeasure at the Windows start-up restrictions. Dell, for example, complained that the inability to run other programs until the user closes the "Welcome to Windows" screen will complicate the set-up process for a new PC, leading to an increase in technical support telephone calls to Dell. The restrictions, wrote Dell's manager of software that is put on computers before they are shipped to their buyers, would "reduce system integrity and system performance."

In 1996, according to several documents, the software giant threatened to withdraw Compaq's license to install Windows on its machines after Compaq announced its intention to delete the icon for Microsoft's Internet Explorer browser from the Windows 95 electronic desktop.

Compaq finally backed down when Microsoft sent it a formal "Notice of Intent to Terminate the Agreement" of licensing. In a letter responding to Compaq's reversal, a Microsoft manager concluded by saying: "We appreciate our relationship with Compaq and look forward to continued opportunities to work with you."