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07.26.09

Antitrust: How Microsoft Came up with Windows Bundling

Posted in Antitrust, IBM, Microsoft, Windows at 8:44 am by Dr. Roy Schestowitz

Summary: A journey back in time shows Microsoft’s explanation of bundling

TODAY we take a look at some more fascinating Comes vs Microsoft exhibits. The first item, Exhibit PX00982 (1991) [PDF], shows how Microsoft was scheming to bundle with OEMs in order to block competition. That was almost 2 decades ago. Microsoft later compared OEMs to its "delivery people".

One of Microsoft’s most predatory people, Brad Silverberg [1, 2], suggests giving Windows for ‘free’ (bundling) and then sell it separately for an extortionate price. The same scheme continues to this date in order to artificially elevate the perceived value of Windows and virtually force people to buy Windows along with any computer.

>From: bradsi Sat Sep 28 10:56:44 1991
To: joachimk peterbre steveb
Cc: alean jeffl janre markbu richardb richardf ronh teresach
Subject: Re: Compaq Windows status

Date: Mon Sep 30 10:30:02 PDT 1991

you’re saying that when someone buys compaq dos for $99, they also get windows for free. but if you want windows alone, it cost you $150.

and compaq wants windows for free.

am I missing something why this is good for us?

don’t forget that today, retail is still 61% of windows revenue.

Joachim Kempin, who is also known for his predatory behaviour (see this for example), replies as follows:

From: joachimk Mon Sep 30 10:53:23 1991
To: bradsi
Subject: Re: Compaq Windows status
Date: Mon Sep 30 10:30:02 PDT 1991

Do not see this as a price issue. They will pay. Remember IBM did not pay for DOS, but see what happened?
See the strategic value: It will have lots of followers-OS1 can’t compete for now. IBM can only pitch OS/2 against it, but who wants this. The industry will rally even more around it and use it in every account against IBM.
Money: for six month thereafter no or very low impact. Next year we plan for it. Whereby WIN becomes over time -may be earlier than expected -a 90% OEM product.
Count Your profit, not the revenue.

One reader of ours explains that “this is important because it demonstrates that the prime reason for Microsoft bundling was to kill DR-DOS. They had to come up with the techno-waffle later on.” This is a reference to excuses like, “people can’t install it themselves” or “people love Windows because many people use it.”

The next exhibit, Exhibit PX00980 (1991) [PDF], was sent to Brad Silverberg and Joachim Kempin. It reveals what Microsoft had in mind when it conceptualised bundling.

On 9/25 Mark and I met with Clark and Alan. Among other issues that Mike brought up, he came up with an alternative way for Compaq to bundle Windows. On 9/26 we had a meeting with their Windows team.

[...]

Mike’s alternative way of bundling Windows would be that Compaq bundles Windows with MS-DOS. There would not be a seperate DOS SKU; there would not be any choice. When somebody buys the Compaq DOS product he gets Windows with it.

[...]

Compaq issues with bundle/preinstall that are addressed

1. The manufacturing preinstall problem
2. The updating of Windows when it is on the hard disk
3. Allows the end user the choice of installing Windows and allowing custom configuration of Windows according to specific requirements.
4. Simplify their localization issues.
5. Reduce cost – will not lose dos revenue with a preinstall and offset the cost of Windows by charging for it.
6. Still allowing the end user the choice to buy other operating systems for his system; not burden the end user with either the implicit cost of Windows or having to deinstall Windows and DOS.
7. It provides Compaq with a perceived leadership position with Windows by being the first oem to combine Windows and DOS.

For MS it does the following:

1. Compaq leadership position with Windows.
2. With slick technology, Windows/DOS can be installed quickly w/p much of the pain installing Windows today. Although it is not a pre-install, it will be much easier to get Compaq to preinstall in the future if they combine Windows/DOS now.
3. Gets many more Windows sockets out there. We believe that our attach rate today with Windows on Compaq 386 systems is between 25% and 35% based on their registration information. their current attach rate for DOS is 86%.
4. It raises the bar for other oems and makes it more difficult for DRI to compete.
5. Will increase our revenue from Compaq, depending on what we can get for the Windows royalty.

The intent to ensure a prevention of choice is hopefully evident based on the above.


Appendix A: Comes vs. Microsoft – exhibit PX00982, as text


PLAINTIFF’S
EXHIBIT
982
Comes v. Microsoft

File : c:\bradsi\mailbox.tld
Messages :

*******************************************************
From: joachimk Mon Sep 30 10:53:23 1991
To: bradsi
Subject: Re: Compaq Windows status
Date: Mon Sep 30 10:30:02 PDT 1991

Do not see this as a price issue. They will pay. Remember IBM did not pay for DOS, but see what happened?
See the strategic value: It will have lots of followers-OS1 can’t compete for now. IBM can only pitch OS/2 against it, but who wants this. The industry will rally even more around it and use it in every account against IBM.
Money: for six month thereafter no or very low impact. Next year we plan for it. Whereby WIN becomes over time -may be earlier than expected -a 90% OEM product.
Count Your profit, not the revenue.

>From: bradsi Sat Sep 28 10:56:44 1991
To: joachimk peterbre steveb
Cc: alean jeffl janre markbu richardb richardf ronh teresach
Subject: Re: Compaq Windows status

Date: Mon Sep 30 10:30:02 PDT 1991

you’re saying that when someone buys compaq dos for $99, they also get windows for free. but if you want windows alone, it cost you $150.

and compaq wants windows for free.

am I missing something why this is good for us?

don’t forget that today, retail is still 61% of windows revenue.

5671 C:\DN1LD2.MAI Thu Oct 03 08:50:14 1991

MS7090738
CONFIDENTIAL

MS-PCA 1179288
CONFIDENTIAL

PLAINTIFF’S
EXHIBIT
503
A. No. 2:96CV645B


Appendix B: Comes vs. Microsoft – exhibit PX00980, as text


Depo. Ex. 184
PLAINTIFF’S EXHIBIT
980
Comes v. Microsoft
HIGHLY CONFIDENTIAL

MS-PCA 1179286
CONFIDENTIAL

MS 5004035
CONFIDENTIAL

PLAINTIFF’S Exhibit
502
CA. No. 2:96CV645B

From peterbra Sat Sep 28 10:42:54 1991
To: bradsi joachimk steveb
Cc: alexn jeffl jonro markbu richab richardf ronb teresach
Subject: Compaq Windows status
Date: Sat Sep 28 10:42:26 PDT 1991

On 9/25 Mark and I met with Clark and Alan. Among other issues that Mike brought up, he came up with an alternative way for Compaq to bundle Windows. On 9/26 we had a meeting with their Windows team.

Mike’s alternative way of bundling Windows would be that Compaq bundles Windows with MS-DOS. There would not be a seperate DOS SKU; there would not be any choice. When somebody buys the Compaq DOS product he gets Windows with it. This is significantly different from there last try at a Windows SKU. It is the only proactive Windows Compaq has come up with since Stimac started thinking of their key disk approach.

The idea came from Jim Odon as a result of the number and quality of Windows questions that other oems asked at the OEM Briefing. This causes Jim to realize that Compaq’s Windows knowledge is slipping versus other oems. He feels the only way to regain this is to license Windows. In addition Odon sees this as a way to reduce his developement time and support of system utilities by having a Windows interface to them.

This Windows/DOS bundle has not been discussed internally at Compaq so it still unclear what the rest of their management thinks of it.

Although initially against this idea I think it does have some merits and should be looked at closely. For Compaq, it removes/reduces many of their objectives/problems with a Windows bundle. For MS, it makes a very strong Compaq statement for Windows and pushes forward DOS and Windows being one OS when we have some DRI problems.

Compaq issues with bundle/preinstall that are addressed

1. The manufacturing preinstall problem
2. The updating of Windows when it is on the hard disk
3. Allows the end user the choice of installing Windows and allowing custom configuration of Windows according to specific requirements.
4. Simplify their localization issues.
5. Reduce cost – will not lose dos revenue with a preinstall and offset the cost of Windows by charging for it.
6. Still allowing the end user the choice to buy other operating systems for his system; not burden the end user with either the implicit cost of Windows or having to deinstall Windows and DOS.
7. It provides Compaq with a perceived leadership position with Windows by being the first oem to combine Windows and DOS.

For MS it does the following:

1. Compaq leadership position with Windows.
2. With slick technology, Windows/DOS can be installed quickly w/p much of the pain installing Windows today. Although it is not a pre-install, it will be much easier to get Compaq to preinstall in the future if they combine Windows/DOS now.
3. Gets many more Windows sockets out there. We believe that our attach rate today with Windows on Compaq 386 systems is between 25% and 35% based on their registration information. their current attach rate for DOS is 86%.
4. It raises the bar for other oems and makes it more difficult for DRI to compete.
5. Will increase our revenue from Compaq, depending on what we can get for the Windows royalty.

Issues that need to be addressed to make this happen.

1. Length of time for Compaq to make a decision. How do we make this happen quickly so they can announce with Windows 3.1
2. Diminished value of Windows in the retail channel. Compaq would need to make sure that their SKU would not run on any other hardware. We might want them to charge some additional delta over and above their current price of $99 for DOS.
3. Lost retail Windows revenue – How much retail revenue will we lose against the gain of Compaq royalties.
4. What we will settle for for in a Windows royalty (of course Mike doesn’t want to pay anything additional for Windows).
5. Other customer issues if we do this


oem exclusivity slick technology for Compaq????
others that I can’t think of

I would appreciate any and all comments.

The following day Alex, Jon, Mark and I met with the Compaq Windows team to review and discredit their Windows preinstall focus group studies. In addtion we proposed a one SKU bundle/preinstall in conjunction with a MS/CPQ Windows 3.1 comarketing program commencing with the Windows 3.1 announcement.

Our attempts to discredit their focus group research back fired. We spent much of our time arguing over points in the focus groups with Andrea Morgan, their marketing research manager. because of her strong position, she is attributed for the timing success of the LTE line, Compaq management will continue to listen to her. The focus groups are much too subjective to refute the Compaq findings so Andrea is important to win over and not run over.

Compaq liked the idea of comarketing programs, but they did not see the need to license Windows to make this happen. They do feel that they are missing a very important message, Windows being optimized for Compaq systems. Their approach to this is a JIA Lan Man approach to it, however. They might even include a Windows optimization disk with their processors. In other words we did not get any closer to trying a one SKU approach.

With the upcoming exec review, I would like to move quickly on this Windows/DOS bundle. Is it viable for us and under what conditions.
Peter

HIGHLY
CONFIDENTIAL

MS 5004036
CONFIDENTIAL

MS-PCA 1179287
CONFIDENTIAL

Credit: wallclimber

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