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Microsoft Memo
To: Chris Smith, Bernard Vergnes
From: Joachim Kempin
Date: July 11, 1991
Subject: OEM Sales Directions for FY'92 and Beyond
The attached memo was distributed to all OEM managers, to use at their
discretion within OEM Sales. I want to share the information with you,
but would like to keep the distribution as limited as possible.
OEM Sales Directions for FY'92 and Beyond
While the first half of FY'91 was dominated by an overpowering enduser
vote in favor of Windows 3.0 - disregarding DRI's new version of DOS
5.0, the last half of the FY could be named the breakthrough for Windows
applications and the breaking up of the 10-year MS-IBM alliance. With
Lotus, Word Perfect and Borland poised to introduce their key Windows
apps this FY and IBM pushing OS/2 2.0 as the new standard through newly
formed alliances, it is time to analyze the MS OEM situation and give
you some advice in how to win during the years to come.
The MS-IBM Relationship Revisited
Formed 10 years ago, this alliance created the largest compatible
computer market ever. Approximately 70M PCs and well over 400M units of
compatible software sold. At the same time, IBM's market share eroded to
less then 15% of the total PC market while Apple, through it's
MacIntosh, was able to defend 10% overall market share. While IBM
allowed competitors to clone their architecture, Apple kept its
proprietary. MS' role in the compatible PC business grew from the
language and OS supplier in the beginning into the number one
applications supplier for both compatible IBM PCs and Macs while
enhancing its number one position as the key OS supplier for PCs in
introducing Win 3.0.
Neither UNIX nor OS/2.1 x ever gained critical mass on IBM compatibles
with combined sales of less then 1.5M units compared to 5M units of
Windows and close to 70M units of MS DOS. The Mac with approximately 8 -
10M units installed taking and overall second place. Win 3.x run rate
for this FY is predicted to add another 6 - 8M units to its installed
based and should therefore - assuming a 2 0M unit run rate for the Mac -
gain second place in FY92 in overall PC OS installations. This outlook,
which will put us even more clearly into the OS driver seat, cannot
please IBM or Apple understanding that both companies are making most of
their money by selling proprietary solutions.
Back in 1987, MS and IBM announced the next generation of operating
systems called OS/2. This new OS was supposed to take over from DOS and
Win 2.x by allowing ISVs to develop more complex and sophisticated
applications to enable PC architectures to compete successfully with
mini-systems. OS/2 was plagued from the beginning by the late deliveries
and poor code, demonstrating again that excellent software can only be
written by small teams, at a single site, sharing a similar culture.
DOS, Windows and the Mac OS are prominent examples of this. In
understanding this best, MS convinced IBM to change the OS/2 development
method by giving IBM the responsibility for OS/2.1.x and 2.x, while
retaining the ownership of DOS, Windows, and OS/2 3.0
When Win 3.0 success demonstrated to IBM that the endusers were drifting
away from OS/2 even further - the IBM culture could not cope with it.
They started to throw more people (estimated to be 1000) at its standard
and extended edition development and at the proprietary application
efforts still to be delivered. OS/2.1.x and 2.x for IBM were meant to
regain control over the overall computer industry and the Win 3.0
success was blamed for their eroding market share and was seen as
loosing control over their customer base. Apple answered with a lawsuit
and drastic price reductions, enabling them to hold onto their market
share at the cost of their profit margins. IBM reduced prices as well -
not as aggressively as Apple - and decided to throw even more good money
after bad money by flexing its marketing muscle in promoting the next
vapor-version of OS/2 more aggressively. Instead of actively selling
Windows and riding the wave as a lot of clone manufacturers did
successfully, they decided to go to war and terminate the MS-IBM
alliance in public.
Knowing that if you can't win a war with a better strategy, th second
best way to win as by alliances. IBM started to search for them. Early
signs go two years back when they acquired rights to NEXT software
technology followed by the Methaphor joint development agreement. During
the last 12 months, the pace of new alliances increased by endorsing GO
and Novell, teaming up with Micrographix, Borland, and Lotus, and more
recently, with Apple. During my 20 years in this business, I have seen a
lot of comparable announcements being made without any success. Just
look at IBMs situation to understand the nearly impossible tasks they
are facing.
The users are routing for Windows and DOS, IBM is promoting OS/2 2.0 and
while promising to make this new OS successful in integrating Apples'
Mac technology, Borland's object technology, Novell's networking, and
Lotus' groupware hooks, they want to keep AIX alive and are announcing a
new portable and scalable OS they want to develop together with Apple to
dominate the industry once again. All this Will be done by integrating
the Patriot object work as well as migrating to three different
architectures, the 68040, 386, and RS6000. Sure enough, Micrographix
will guarantee Windows 3.x compatibility to make the user transition
easier than ever. Who is going to believe that mighty IBM can do all
this and deliver on time? And again, it contradicts our belief that
successful OS are written by closely knitted teams, in single site, and
not by companies with completely different cultures - being competitors
at the same time - and large integrated committees who take longer to
decide than to develop.
Common sense is telling me they will not succeed - but nevertheless,
lets stay alert to make it even harder for them to win even a single
design-in. MS OEM Sales is the only sales force out there who can stop
their efforts right from the beginning by being nice to our customers
and strengthening our bonds. All of the clone manufacturers, as well as
the ACE consortium, will need us to defend their market position and
should see us as their natuaral ally. The IBM alliance has nothing to
offer than FUD (Fear Uncertainty, and Doubt), and be assured they will
try to seed a lot of it until they have something to sell Our action
plan of action is straight forward!
1. DOS 5.0
Secure long-term contract with OEMs, whereby the standard contract
length should be three years instead of two to deny entry to any attempt
of IBM to license DOS directly. Never lose on price - escalate fast in
case you see some competitive pressure. This should ensure a steady
revenue flow to enable us to invest in advanced OS development.
Growth areas for DOS remain to be in penerating more smaller
manufacturers, the embedded system market, and manufactures in
development countries. For al lthree market segments we will introduce
new pricing policies to help you gain share.
2. Windows
Agressively pursue long-term licensing oppurtunities - in particular,
for 386SX systems and beyond. The more happy users we will have, the
harder it will be for any other OS to prevail. In addition to the basic
system, we need to explore licensing of Pen Windows and MM Windows
Extensions to deny any other architecture to be more popular. Remember,
GO is an alliance partner of IBM, and both Apple and IBM have announced
that they will license their MM technology. Any activity of these
competitive offerings in your accounts should be reported immediatly.
Windows pricing - because we do have a retail sales alternative - will
not be as aggressive as DOS pricing, meaning it will remain your
personal challenge to convince PEMs to bundle and pre-install it as an
integral part of their offering. We will start to offer incentives for
pre-installations ot OEMs to reduce both our support cost. Try hard -
never give up on OEMing Windows!
During Q4/92 we will introduce a Windows networking component, as a
peer-to-peer instant network solution - without a need for dedicated
network servers. As soon as product plans get further developmed, we
will aggressivly promote this solution through the OEM channel, whereby
the target OEMs will be te ones who sell to the small and medium
business customers. This should compliment our LAN MAn offering through
a new concept and enable portables and desktop systems to wirk in a more
efficient way than today by sharing files and linked models
transparently. Please di not discuss this with OEM's until further notice.
Windows 4.0 is probably two years away and needs DOS 6.0 to run. It will
be developed for todays DOS/Win 16-bit user and enable him to run 32-bit
applications an Intel OCs. Expect both systems to be more integrated
than today and to enjoy installable file systems. As soon as development
plans get further developed, we can use the information to give our OEMs
a better understanding of the future for DOS and Windows for the Intel
architecture. I am willing to give customers rights to both version for
signing up for more than 3 years with us.
3. NT for RISC and 386/486/586
In its ultimate destination - say beyond the year 2000 - this advanced
OS kernel technology with its possible DOS, Windows, and OS/2 subsystems
is designed to be the "DOS of the year 2000", enabling us to return to
one standard. To position it this way today would be a mistake, like it
was with OS/2. The first goal for this new system is to establish it
with its Windows subsystem as the dominant workstation architecture for
MIPs and high-end Intel PCs and to compete against SUN's UNIX
workstations. It is therefore important to sell it on a per-system to
all ACE manufacturers and leave the SCO or possible SUN UNIX offerings
to the retail channel. I am convinced that certain system features like
3-D graphics will be brought first to NT mode Windows before you will
see them in Win 4.0. Expect the NT kernel - over time - to contain
network server calls as well to truly compete with Novell's offerings
beyond Windows instant networking features. While ddevelopment plans get
firmed up, we in OEM should focus on licensing NT to the ACE community
on a per-system basis without speculating on the future development.
4. Networking
The effort to sell LAN MAnager 2.x to OEM should continue, complimented
by our retail efforts. We no longer believe that IBM's LAN Server will
be sold seperatly from EE and be based on 2.1 code. The next step in
FY93 will be to sell NT server technolohy bit our product plans need to
settle further before we should spend any time on this today.
5. OS/2 3.0
The development of this OS as contractually agreed upon between MS and
IBM will continue as planned. It will be based on the NT kernel, support
32-bit aplications written for OS/2 and Windows, and will probably have
a DOS emulation subsystem as well. Under the currrent situation it is
completely unclear if IBM will ever use this OS or if we will eveer
activly market it. We therefore will currently make no attempt to seel
its component beyond the kernel and the WIn subsystem to OEMs.
6. OS/2 2.0
We will start licensing the OS starting this quater aggressively.
Despite the fact that we do not believe in it's sucess - it is still
better for us to take the lead and get the design-ins instead of IBM
getting an inroad into our OEMs. Undeer the current agreement with IBM,
we have the rights to binary and the source codes and are getting weekly
"software updates". We believe that the software will be released by the
year end, but will lack a lot of promised features and will not be
properly tested.
We are planning to pass the software through to our OEMs without adding
additional value. An exception wil lbe the inclusion of the LADDR
drivers. The same will be true for the documentation. The IBM original
wil lbe delivered as is and all localizaton will be done by IBM without
any IPG involvment. I expect our OEMs not to be too pleased with this,
but at the same time all blame should be directed towards IBM - as
promises not kept, and as a result of their non-cooperation with the
industry.
Note: Please leave the discussion of the IBM/Apple-MS relationship to
the MS executives. Do not bash IBM or Apple in front of customers, they
will hurt themselves by not delivering anyway. Instead, tell your
customers that it is time to get even closer to us when being threatened
by the "big boys" and that we will take care of them. Reflect this "take
care" attitude in dealing with our OEMs to help us form new alliances to
replace the old ones.
And on a more practical basis, you should compare the IBM/Apple
"openness" with the SUN situation. Who do you think will spec any new
system, or get its hand on new chips and new software first? IBM/Apple's
competitors - you know better, stay with us!
http://edge-op.org/iowa/www.iowaconsumercase.org/011607/4000/px04528.pdf
--
court documents in the case of Comes v Microsoft.
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