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our OS /2 and a new deal for IBM ..

From: billg Sat Apr 21 19:32:02 1990
To: billn; frankga; jeremybu; joachimk; jonl; jons; mikehal; paulma; russw
Cc: billp; johnsa; steveb; tonyya
Subject: IBM discussions
Date: Sun Apr 22 19:54:42 1990

Date: Sat Apr 21 19:31:59 1990

Our discussions with IBM have taken a new turn. A week ago Jim C. said he wanted a deal that gave them the same rights to Windows as they get to Os/2 -- in other words they didnt want one deal for windows and the other for Os/2 -- part of the reason for this is that they dont want to change out client Os strategy because of the structure of the deal with them - for example favouring windows over os/2 because we make more from IBM for windows.

In general our philosophy with IBM has been to get their marketing help in establishing our standards whatever that takes. This has meant:

1. We make basically $3m a year from them net at most

2. They like to help develop which hurts our speed, moral and quality. Amazingly enough their $100M/year of help is net quite negative.

3. They influence the specification without too little regard for market driven issues -- SAA is critical and requirements like national language support are not pragmatic.

4. They get rights to the source code of our future Os (os/2) and can compete selling it onto non-IBM machines after 3.5 years without paying us any royalty.

Our new deal attempts to fix these problems.

1. They will pay half of our client os development costs and a per system royalty of $15M to $25M per year. The development costs new should be around $25M per year in addition.

2. they will let us develop the client oses with less then 15 of their people here. Testing wild even be done here.

3. Their "customer team" is structured to be market driven and their "control" is greatly reduced.

4. We are saying they have to pay us a royalty of %12.5 of the client os SRP from us for any sales from them onto non-IBM systems. As long we are working together we have to pay the same for our sales onto their systems.

Divorce comes 2 years after one party asks for divorce (no-fault) -- at this time they stop paying us the money in #1 and we stop paying our royalty for sales onto their systems. We are still negotiating the period of time they pay us for sales onto non-IBM systems. We want at least 5 years but all we have said to them is perpetuity.

The reason I am sending this to you is not to tell you this is a done deal. Rather it is to get you think about some of the concepts in here. We would hire an accounting firm to go out and measure the cross-sales so we can computer who is leaking onto whom more. Our oems leaking onto IBM count against us. Likewise our retail sales of Windows onto their new and old machines would count against us. We would insist that they label their stuff for their systems and ask for a technical check - they will want a symmetrical provision for is and our oems (new contracts).

Issues include:

a. Define client os work. They get what we do. We get what they do if we want (if so we have to deduct half their development cost). How do we communicate to know exactly what they are doing?

b. If they stop pushing our stuff and start pushing AIX or bundling our only remedy is divorce

c. Define SRPs and make sure percentage is right.

d. Define measurement process.

e. Think about our cost to support them. What is the documentation and localization relationship?

g. Do we leak onto them today with DOS? How much will we with Windows?

h. Should we wait for a net relationship to do this deal? We think not but that part wont be easy.

	Privilege Material

We need to do at least a letter on intent before May 22 so Jim will come to New York and speak. He likes the idea of his doing the "keyboard" for me and then coming forward and saying he is doing some aggressive bundling type stuff (they have not figured out what they want to do).

j. Is management process clear? How much should be in the contract? (areas like multimedia, handwriting and network software get into the question of which development costs do they pay half of).

We are excited about this because we think it improves our position in every way -- even money. It will make IBM our friend again and get their help in promoting windows strongly. It makes it possible to negotiate a networking deal next. The main issues are thinking thru how this "channel conflict royalty" thing will work and make sure there are no loophole. Keeping the timeframe they have to pay us these royalties after divorce is critical otherwise we create a competitor with our own source codes.

We are interested in any feedback.


court documents in the case of Comes v Microsoft.

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