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Microsoft Bullied IBM, Court Told

By Rajiv Chandrasekaran
Washington Post Staff Writer
Tuesday, June 8, 1999; Page A1

Boasting that it was "the only game in town," Microsoft Corp. repeatedly bullied computer giant IBM by raising the price of Windows software and withholding crucial technical assistance because IBM refused to stop distributing rival software products, an IBM executive testified yesterday at the Microsoft antitrust trial.

The executive, Garry Norris, said IBM's resistance so angered Microsoft Chairman Bill Gates that he screamed at a high-level executive of International Business Machines Corp. during a July 1995 phone call. Asked how he knew what Microsoft's billionaire leader was saying in the private call, Norris said he was in the same room at the time and though there was no speakerphone, Gates could be heard. "He was pretty loud," Norris testified.

Out of court, Microsoft yesterday denied the key points of Norris's testimony. Mark Baber, who was alleged to have made the "only game in town" remark, said in an interview that that phrase was not part of his vocabulary.

Norris's allegations, which spilled forth in a packed Washington courtroom, appeared to transfix U.S. District Judge Thomas Penfield Jackson, who studied documents carefully as they were introduced, piped in with questions and scribbled copious notes. Sitting in front of him, Microsoft's attorneys appeared grim-faced, while government lawyers could barely contain their smiles.

The government hopes that Norris's testimony, the focal point of one of the most dramatic sessions of the eight-month-old antitrust trial, will strongly bolster the central allegations in its lawsuit: that Microsoft's Windows operating system for personal computers is a must-have monopoly product, and Microsoft can use it to push around even the world's largest computer company.

"It was crystal clear that we had no commercially viable alternative," Norris told the court. "We needed them to remain in the PC business."

Norris also sought to shore up what many legal experts view as the biggest weakness in the government's case, the question of whether consumers have been harmed by Microsoft's actions.

In detailed testimony, Norris said that in 1997, Microsoft prevented IBM from adding a program that would run on top of Windows in an effort to help novice computer users learn how to work the mouse and perform other basic system functions. Microsoft's obstruction "made the system harder to use and confused consumers," argued Norris, who said that Microsoft was worried that such "shell" programs running atop Windows could eventually compete with the operating system.

Although Microsoft and IBM once were close business partners -- Microsoft provided the disk operating system, or DOS, for the original IBM PC -- relations between the two firms began to fray in the 1980s, when Microsoft decided to stop working on OS/2, an operating system the two companies were jointly creating, and focus instead on Windows.

In 1994, as Microsoft was readying Windows 95 for release, Norris said, the software giant tried to get IBM to pull the plug on OS/2, which it viewed as a Windows competitor.

In exchange for agreeing not to install OS/2 on its PCs, Norris said, Microsoft offered IBM a "front-line partnership" that included a low price for Windows 95, joint promotions and technical assistance. One of IBM's chief rivals, Compaq Computer Corp., had signed such a deal.

IBM, however, rejected the offer because it wanted to continue distributing OS/2, in addition to Windows, on its machines. Shortly thereafter, Norris said, Microsoft informed IBM that it would have to pay $75 per copy of Windows 95, which Norris believed was significantly more than other large companies were paying. Norris, who was responsible for negotiating IBM's contracts with Microsoft, said he was told by his counterpart at Microsoft, Mark Baber, that "IBM can have Compaq's deal when it quits competing."

Norris said that Baber, who has since left Microsoft, made it clear that the software company could set whatever terms it wanted because it knew IBM eventually would have to comply. "Baber said, 'Where else are you going to go? This is the only game in town,' " Norris testified. Without Windows, Norris said, "the IBM PC company would be out of business" in less than 12 months.

Microsoft attorneys, who will cross-examine Norris today, will argue that Microsoft never required IBM to completely stop distributing OS/2 as a condition of getting a low price for Windows. Microsoft also will contend that the strains in the firms' relationship were the result of actions IBM took, including making disparaging comments about Windows and failing to properly compensate Microsoft for its software.

To support Norris's argument, however, the government introduced as evidence a copy of the 1995 contract between Microsoft and IBM. According to the document, IBM could have received an $8 discount if it agreed to terms that would limit the promotion of OS/2. Norris said the discounts could have saved IBM as much as $48 million in 1996, but he added, "We could not agree to those provisions."

Microsoft acknowledges that IBM would have gotten discounts had it limited sales of OS/2 but contends that it was eligible for -- and took advantage of -- other price breaks while continuing to offer OS/2.

Norris said he attempted to renegotiate the contract in mid-1995 but Microsoft broke off the talks a few days after IBM acquired Lotus Development Corp. The acquisition irked Microsoft, he said, because Lotus's SmartSuite office software competed with Microsoft's Office package.

Norris said that Microsoft executive Joachim Kempin told IBM officials at a dinner meeting that Microsoft was concerned about IBM's plans for SmartSuite. Microsoft "is definitely worried about SmartSuite being given away and eating into their 'Office heartland,' " according to the notes of an IBM employee who attended a dinner with Kempin.

Kempin, Norris said, subsequently urged IBM not to include SmartSuite on its machines for at least six months, a request IBM refused. Eventually, Norris said that IBM agreed to pay the higher royalties and signed the new contract with Microsoft 15 minutes before Windows 95 was released.

Copyright 1999 The Washington Post Company

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