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MEET MICROSOFT'S ENFORCER

Joachim Kempin rules PC makers with carrots-and sticks

Theodor Lieven doesn't mince words when it comes to Microsoft Corp. or Joachim Kempin, the company's chief negotiator with PC makers. Lieven, the former chief Executive officer of German PC manufacturer Vobis Microcomputer, accuses Microsoft of using strong-arm tactics that prevented Vobis from selling software that competed with Windows. And Kempin? He made an offer for licensing Windows that Vobis couldn't refuse. ''What he said to us was: 'Take it or leave it,''' recalls Lieven. ''What he meant was 'Take it or die.'''

Those are harsh words coming from the former CEO of a PC maker that relies so heavily on Microsoft software. But there may be more. In the next few weeks, the Justice Dept. plans to introduce at least eight depositions from PC executives in the Microsoft antitrust trial, including statements from execs at Dell, Gateway, and Hewlett-Packard. The depositions are expected to lay open for the first time the complex and secretive relationships between Microsoft and PC makers who load their machines with Windows and other Microsoft software. Trustbusters are aiming to show that Microsoft has taken unfair advantage of its monopoly in PC operating software to extend its power into other markets--a charge the company denies.

Whether Justice will succeed is grist for water-cooler debate. But one thing is clear: Kempin, the55-year-old executive who has quietly worked for years as Microsoft's PC dealmaker, will be in the spotlight. Not only will his negotiations be dissected, but the Justice Dept. is expected to grill Kempin when he appears as a defense witness next month. ''The way Microsoft treats the PC makers is where the rubber meets the road in the raw exercise of their power,'' says Richard Gray, an antitrust lawyer in San Jose, Calif. He says the trick for Justice will be making a distinction between what PC makers have agreed to in their Windows contracts and any manipulations that aren't covered in the agreements.

NO INTERVIEWS. So who is this little-known Microsoft executive? In PC circles, Kempin is called Bill Gates's ''enforcer,'' a hard-driving German who has spent a dozen years turning Microsoft's PC sales unit into a money-minting machine. One-third of Microsoft's $4 billion in revenues last quarter came from sales to PC makers--fueled by royalties that analysts say average $45 per PC for Windows 98 and about $90 for Windows NT Workstation.

Intensely private, Kempin doesn't grant interviews. ''He doesn't like the limelight,'' says Carl Gulledge, a marketing manager in Kempin's organization. Instead, Kempin spends much of his time jetting around the world to keep tabs on his vast network of 150,000 customers. On the ground near Microsoft's headquarters in Redmond, Wash., he zips about in a Ferrari Maranello sports car. Fly-fishing is one of his few pastimes.

But Kempin hasn't had many moments to relax since he came to work for Microsoft in 1983, after stints at the European operations of Digital Equipment Corp. and Apple Computer Inc. He made his mark as Microsoft's manager for Germany, then came to the U.S. in 1987 to run PC sales. He took over world PC company sales in 1991.

While others laid the basis in the '80s for Microsoft's ties with PC makers, it was Kempin who persuaded Compaq Computer, IBM, andothers to install Windows on PCs before they shipped--which gave Microsoft the upper hand after its software became the dominant operating system. ''He's the engine that drives the close relationships with the PC makers,'' says Craig Mundie, senior vice-president for Microsoft's consumer platform group.

With gray-blond hair and a creased face, Kempin comes across as more the rumpled college professor than the enforcer. He's anything but easygoing, though. PC executives who face him across the negotiating table say he usually dictates terms--softly, forcefully, with little compromise. ''Hes the guy holding the four aces,'' says a PC executive. ''He doesn't have to make a lot of noise because he's got the winning hand.''

Kempin's success is crucial to Microsoft. Once a year, he and the PC makers negotiate Windows' license royalties--based on expected volume shipments and the mix of U.S. and foreign sales. PC makers can get discounts of a few dollars per computer by adding features that take advantage of technology in Windows. And they get cooperative marketing money for putting Microsoft logos on their PCs, shipping boxes, and Web sites.

ANONYMOUS GRIPES. Microsoft gains a tremendous strategic advantage from these lopsided arrangements. Because of its iron grip on the basic software, it can fold new features into Windows and compel PC makers to adopt it rather than an alternative--thus beating back threats from rivals such as browser maker Netscape Communications Corp. ''This guy deserves a big bonus,'' says Ken Wasch, executive director of the Software Publishers Assn., of Kempin. ''He has got them quaking in their boots.''

And gnashing their teeth. Few PC company executives will criticize Microsoft on the record, but anonymously they unload ample frustrations. Their latest gripe: Kempin isn't sharing their pain. While consumer PC prices have dropped by half in the past year, Microsoft's Windows' pricing has held steady, and some PC makers complain that their royalty payments have even gone up--something Microsoft denies. One executive at a top 10 PC company says his price rose from $53 for Win95 to $60 for Win98. And Windows now accounts for 6% of the average cost of a PC, compared with 3.6% two years ago, according to Dataquest Inc.

To keep PC makers in line, Kempin makes liberal use of both the carrot and the stick, say PC executives. For instance, to help corporate users move from Win98 to the more expensive Windows NT Workstation, he offers PC makers discounts if they increase the percentage of Windows NT-equipped machines they sell. One major PC maker says he was offered $3 off every copy of Windows if 15% of his company's machines carried NT.

But if a PC maker strays, watch out. Consider Vobis. In 1991, Lieven began shipping large numbers of computers with Digital Research Inc.'s DR-DOS operating system. But he claims Kempin threatened to more than double his price for Windows if he didn't stop selling DR-DOS. Three years later, he held his ground on selling PCs with IBM's OS/2. He says Microsoft responded by not letting Vobis test an early version of Win95 for three crucial months, threatening its ability to ship Win95 PCs on time. ''We had to give up,'' he says. Microsoft denies any wrongdoing and says Vobis chose Microsoft's software after finding scant demand for DR-DOS.

ALL CONTENT? Lieven admits that Kempin can be generous--but says it's only if things are going his way. For example, Lieven says Kempin assured Vobis that it would be the first in Germany to get Microsoft's MS-DOS 5.0 software--if it dropped DR-DOS. And after the DR-DOS victory, he paid Vobis roughly $50,000 to make up for copies of software it had paid for but wouldn't ship.

Win95 turned out to be a boon to most PC makers--driving a 25% unit sales increase that year, then 17% and 16% increases the two following years. So it's no wonder that some industry executives are genuinely friendly toward Kempin and Microsoft. Says James P. McDonnell, sales director for HP's commercial PC business: ''The relationship between Microsoft and the PC makers is pretty positive now--though, of course, we'd love to see a better deal on pricing.''

That doesn't mean PC makers are content. They don't relish being commodity producers whose role has been reduced to distributing Microsoft software. So they search for ways to differentiate their products by including the latest advances in hardware or software add-ons. In September, Dell Computer Corp. announced new entry-level PCs equipped with its own simplified browser. ''They haven't put up any roadblocks,'' says Paul Bell, senior vice-president for Dell's home and small-business group.

Indeed, PC executives say Kempin has been allowing them a little extra leeway since the antitrust case was filed. Still, they have to pLay by his rules--and that rankles some of them. The government has asked Judge Thomas Penfield Jackson for a ruling that would give PC makers--not Microsoft--control over what customers see when they first start their computers. And you can bet plenty of PC executives will be rooting for government lawyer David Boies when he gets Kempin on the witness stand next month.

By Steve Hamm in San Mateo, Calif., with Gail Edmondson in Paris and Peter Burrows in San Mateo, Calif.



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