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Roberts. “That’s how they played it, and it played pretty well
I told Pertec they needed to deal with Gates hard. But they didn’t. It was a fatal mistake. He won everything.”
But Gates would not win the Stac case. Time and again during the trial, lawyers for Stac emphasized to the jury how important the data-compression feature was to DOS 6.0. At one point, they showed the jury a videotape of Gates at the launch of DOS 6.0. He was wearing u T-shirt that said, “We came, we saw, we doubled.”
When testimony finally ended, the seven-member jury deliberated for six days before returning its verdict on February 23. It awarded Stac $120 million in damages, the largest judgment ever assessed against Microsoft, amounting to almost four times Stac’s 1993 revenues. It was a stunning and unprecedented legal setback for Microsoft. With more than $2 billion in cash reserves, it could easily afford to pay the judgment, but its image of invincibility had been punctured. And the verdict came at a time when there was growing speculation that the Justice Department was preparing to bring an antitrust action against Microsoft.
Jurors said later that they calculated the damages based on about $5.50 per unit of the 20 to 25 million copies of DOS 6.0 that had been shipped with DoubleSpace since March 1993. Stac’s lawyers had argued that Microsoft willfully infringed on Stac’s patent, which would have resulted in trebled damages. But the jury did not agree.
The jury did, however, find for Microsoft on one of its counterclaims: that Stac illegally used access to Microsoft’s trade secrets to make Stacker compatible with DOS 6.0. The jury awarded Microsoft $13.6 million in damages. After the trial, Stac CEO Clow admitted that his company used what is known as reverse engineering to make Stacker run smoothly with DOS 6.0. Reverse engineering was a common industry practice, and most software executives did not consider it to be illegal. Nevertheless, Microsoft was clearly the loser.
Stac’s victory was widely hailed in the industry as a triumph for small companies trying to compete against Microsoft. Said Clow: “What I think we’ve shown is a prototype for how small, innovative companies can effectively compete with Microsoft. We’ve been vindicated....”
Microsoft agreed to remove the infringing features in DoubleSpace immediately. But it also vowed to appeal the judgment. A day after the jury ruled against Microsoft, Gates spoke at a computer conference in San Francisco that was sponsored, in part, by Microsoft. In an attempt to be upbeat about the costly verdict, Gates wise-cracked: “I had a pretty bad day yesterday,” he told the audience. “My lawyers told me we might have to pay $120 million—which is a serious amount of money.” He also said that software patent disputes were too complicated for juries to understand and that juries usually sided with the underdog rather than “Goliaths” like Microsoft.
Gates apparently was having another bad day a couple of weeks later when he abruptly walked out of an interview with well-known TV anchorwoman Connie Chung after she dared to ask about the Stac case. The interview was part of a segment on Gates for her Eye to Eye series. A CBS camera crew already had spent time with Gates on the road and had filmed him carrying his luggage through Seattle’s Tacoma-International Airport and stopping at a Wendy’s for a cheeseburger and Diet Dr. Pepper—just a regular guy, this 6-billion-dollar man!
On the afternoon of March 16, Chung sat down with Gates in his office, with the camera rolling. Gates was not in the best of moods. He was preparing for an important trip to China, where he planned to meet with Jiang Zemin, Communist Party chief and the country’s president, to lobby for better access to China’s emerging software market. Gates had just returned from a trip to Europe, and earlier that morning he had tangled with a television crew from the BBC. Nevertheless, Gates reluctantly obliged when Chung asked him to demonstrate, on camera, his trademark knack for jumping over a chair from a standing start. Gates even answered irritating questions from Chung such as “Do you think you’re successful?” When Chung asked Gates whether he considered himself to be a nerd, he replied, “If nerd means you can enjoy understanding the insides of a computer and sit in front of it for hours and play with it and enjoy it.”
But the interview quickly turned tense when Chung ventured into a sensitive area: Gates’s reputation as a bully in the computer industry. Before sitting down with Gates, Chung had interviewed Gary Clow, president and CEO of Stac, who had told her, “A lot of people make the analogy that competing with Bill Gates is like playing hardball. I’d say it’s more like a knife fight.” Chung repeated Clow’s remark to Gates. “I’ve never heard any of these things,” Gates told her, his voice rising and his words etched with anger and irritation. At that point, Gates turned to an off-camera assistant and said, “I’m done.”
“Can I ask you one more question?” said Chung.
“No, I don’t think so,” Gates replied. He then stood up and yanked off his microphone.
With the television camera still rolling, Gates jabbed his finger at Chung, scolding her for repeating the Clow remark. Then he walked out of his office and into an anteroom. He closed the door and would not come back out until Chung and the CBS crew had left. The interview was broadcast on Eye to Eye two months later, on May 19,1994.
Ironically, by then, adversaries Gates and Clow were on their way to becoming business partners. Rather than appeal the Stac verdict, as it had threatened to dp, Microsoft decided to negotiate an $83 million settlement. It agreed to pay Stac royalties of $1 million a month for a period of 43 months, as well as purchase $39.9 million of convertible preferred stock in Stac, or about 15 percent of the company. The new partnership gave Microsoft the right to license, for a royalty, any of Stac’s existing or future technology unrelated to data compression. In addition, Stac received a license to some of Microsoft’s technology in DOS 6.0. The settlement replaced the court award.
Said Clow of his new partner: “This agreement immediately ends our conflict with Microsoft and ushers in a new era of cooperation between the two companies. Having Microsoft as our ally will help us with new business opportunities and be a far better situation for our company. It puts an end to our burdensome legal fees, creates a royalty stream, puts money in the bank and, most important, aligns Microsoft’s interests with the interests of Stac
The “grandfather from hell,” Raymond J. Noorda was approaching 70; his memory was failing, and his days as the president and chief executive of Novell were numbered. He looked around the room at the more than two dozen corporate officers, lawyers, and investment bankers gathered in a cabin in Utah’s snow-covered Wasatch mountain range outside of Provo. The leaders of Novell and WordPerfect, they had come to this mountain hideaway for secret talks about merging the two companies, a blockbuster deal that they thought would shake up the computer industry and create a software powerhouse, a new Zion that would rise out of the Utah desert able to go toe-to-toe with Microsoft. Only by combining forces to increase their firepower, Noorda believed, did they have a chance to slow Microsoft’s growing industry dominance.
It was the afternoon of March 16, 1994. Seven hundred miles away, in Redmond, Bill Gates was walking out of the interview with Connie Chung after she asked if competing with him was like being in a knife fight. In Utah, at the mountain cabin owned by Alan Ashton, one of the founders of WordPerfect, Noorda and the others who were planning their conquest of Microsoft knew all too well about the dangers of competing with “that little squirt,” as Noorda had recently taken to calling Gates. Both companies were hurting, losing market share to Microsoft. Listening to the merger discussions among those gathered in what was known as the Great Room of Ashton’s palatial wilderness retreat, Noorda reflected on his years at Novell and his battles with Gates, past and present.
Novell Data Systems of Provo had begun as a manufacturer of personal computers, an offshoot of the failed Beehive Computer. Noorda had arrived in 1982, at age 58, almost by accident.
Having wandered into a Las Vegas hotel room that Novell had rented for its programmers to demonstrate prototype software they had developed, he was soon hired to turn the company around. Noorda, a tight-fisted manager who ate at budget restaurants and required company executives to share hotel rooms when they traveled, took Novell out of the hardware business and into networking, where it became established as the industry leader, leaving Microsoft in its wake. (Losing the networking market to Novell topped a written list that Gates kept to remind himself from time to time of the most critical mistakes Microsoft had made.)
Noorda’s dislike of Gates went back to 1988, when Gates, concerned about the competition, blocked a pending buyout by Novell of database software maker Ashton-Tate. In front of reporters, Gates delivered an ultimatum to the chairman of Ashton-Tate: if the deal with Novell went through, Microsoft would destroy Ashton-Tate. The deal collapsed, and Borland International later purchased Ashton-Tate. It was the beginning of the end for Borland when Microsoft, in retaliation, purchased Fox, which made a rival database product.
The failed $10 billion merger with Microsoft in late 1991 had left Noorda even more bitter toward Gates. He believed that Gates had led Novell on. “They are snakes,” he said of Microsoft to a reporter from Business Week. Noorda was determined to get even, but his obsession was costing the company dearly. Novell was mired in debts caused by Noorda’s unwise anti-Microsoft shopping spree. Noorda had wanted Novell to have an operating system that would compete with Microsoft’s, but the acquisition of Digital Research had turned into a financial disaster. So had Novell’s $350 million purchase of UNIX.
“Microsoft has developed a personal conviction that they are anointed to run this industry,” Noorda, a Mormon, told writer Richard Rapaport for an article in Forbes ASAP in late 1992. In the article, Unpuport described Noorda’s hatred of Gates and Microsoft as a Latter Day Saints-style “Blood Atonement.”
By late 1993, Noorda was convinced that Novell’s lead over Microsoft in networking was threatened because of Windows NT, which had networking features that might eliminate the need for Novell’s Netware. About 85 percent of Novell’s business was its networking software. The latest version of Netware, however, was not doing well. Neither was Noorda. Two years earlier he had undergone heart bypass surgery and now wore a pacemaker. He had recently acknowledged to reporters what friends already knew, that he was suffering from recurring memory losses that affected his ability to make operational decisions. Noorda had said publicly he would step down as Novell’s president by his 70th birthday on June 19, 1994. The merger with WordPerfect would be Noorda’s last chance to try to stop Microsoft and avenge himself on his old enemy. And he had seized the moment with missionary zeal.
Like Novell, WordPerfect was suffering at the hands of Microsoft and had recently announced that it would lay off 17 percent of its workforce, more than 1,000 workers, because of slowing sales. Profits were flat. The company’s two founders wanted to cash out.
WordPerfect was a private company. All the stock was in the hands of Alan Ashton and Bruce Bastian, who had founded the company in 1977. Ashton had been a computer science professor at Brigham Young University in the early 1970s, and Bastian had been director of the marching band. When Bastian was fired from the band because he did not have his doctorate, he finished his master’s in computer science. In 1977, he and Ashton founded Satellite Software International and created a word processing application they called WP. The company was located in the foothills above Orem, about 10 miles from Novell’s headquarters in Provo. In 1980, Pete Peterson, a former BYU psychology graduate and Hastian’s brother-in-law, was hired to run the company, which later was renamed WordPerfect.
For years, WordPerfect dominated the word processing market, though it gradually lost market share to Microsoft Word. Then WordPerfect made a costly mistake. It failed to develop a version of Wordperfect for Windows 3.0, which was released to great excitement and record sales in 1990. WordPerfect management was complacent, believing it held an insurmountable lead over Microsoft. Gates pleaded with Peterson to develop WordPerfect for Windows. Peterson refused; he considered Windows nothing more than a passing fad. After Windows 3.0 came out, WordPerfect’s lead over Microsoft quickly declined until Microsoft had more customers than WordPerfect. It would never regain its position. Peterson was replaced in March 1992, in part because he had not been aggressive enough toward Microsoft.
WordPerfect’s profits were further eroded in the early 1990s by the software price wars, which were part of Microsoft’s strategy to keep prices low in order to establish market share. Microsoft could afford the razor-thin profit margins that resulted because it had a steady revenue stream from DOS and Windows. Other companies, like Borland and WordPerfect, did not.
In 1992, Microsoft released its Microsoft Office suite, in which different applications were bundled together and sold at a bargain price not much higher than that of a single application. Microsoft’s suite strategy caught the industry off guard, although Lotus Development Corporation managed to counter with SmartSuite, which included its famous 1-2-3 spreadsheet, Notes, and the word processing program Ami Pro.
WordPerfect had no choice but to ally itself in a licensing deal with Borland, which produced the best-selling Quattro Pro spreadsheet as well as the Paradox database. Their suite offering was called Borland Office. But because the applications came from different companies, they did not work well together, and sales of Norland Office lagged far behind those of Microsoft’s and Lotus’s suites.
Microsoft Office was so successful that other companies were forced to slash prices of their applications in order to compete. Borland, for example, cut the price of Quattro Pro from $495 to $49. Microsoft Office brought in more than $500 million in 1993, compared to $175 million for SmartSuite and less than $50 million for Borland Office. The trend was clear: Microsoft was leaving little room for others in the applications market to go it alone. Only by increasing their firepower through mergers could Microsoft’s rivals have a chance to compete effectively.
WordPerfect was clearly at a crossroads and needed help. Before it initiated merger talks with Novell, it had put out feelers to Lotus. On January 10, 1994, new WordPerfect CEO Adrian Rietveld had met with Lotus CEO Jim Manzi at his office in Cambridge, Massachusetts. Rietveld, 40, who was known to his friends as Ad and spoke with a thick Dutch accent, had become WordPerfect’s chief strategist while he was senior vice president of sales and marketing. He took the company’s reins as CEO on January 1, after Ashton stepped down and joined Bastian as co-chair of the company.
Rietveld was on a press tour in Boston and had just finished talking with the editors of PC Week when he paid a call on Manzi. A possible buyout of WordPerfect held a lot of interest for Lotus because Lotus’s word processing program, Ami Pro, was the weak link in SmartSuite. Manzi believed that a suite that offered Lotus 1-2-3 and WordPerfect could be a Microsoft-killer; he also thought that Lotus could deal a blow to Microsoft in groupware by merging its popular Notes with WordPerfect.
A year earlier, in the fall of 1993, Alan Ashton had approached Noorda about a possible merger, and at the time Noorda said he was not interested. But by mid-January 1994, when Noorda had recently learned from Philippe Kahn about the talks between WordPerfect and Lotus, his attitude had changed. The last thing Noorda wanted was for Lotus to acquire WordPerfect. Lotus and Novell were battling for second place behind Microsoft in desktop software, and if Lotus bought WordPerfect, Novell would drop to third place. For Noorda, that was unacceptable. There also was bad blood between Noorda and Manzi from a failed merger in 1990, which had collapsed at the last minute because of disagreements over who would run the new company, which would have been twice the size of Novell or Lotus.
If Novell acquired WordPerfect, Noorda believed, Novell could build a business model similar to Microsoft’s by offering a suite of applications together with its powerful corporate networking software. But Novell would need a Windows spreadsheet to complete the applications package. It needed Borland’s Quattro Pro. Unless Novell could acquire Quattro Pro, the merger with WordPerfect didn’t make sense.
In December 1993, Philippe Kahn was attending a conference in Tokyo, listening to a speech by Microsoft’s Steve Ballmer. The conference was organized to promote better understanding between Japanese and American businesses. “It was typical Ballmer,” recalled Kahn. “He talked for three minutes on Japanese and American relations; the rest was an advertisement for Microsoft.”
About halfway through Ballmer’s talk, Kahn turned to Duff Thompson, general counsel for WordPerfect, who was sitting next to him. Both Kahn and Thompson were scheduled to speak at the conference, too. “You know Duff,” said Kahn, “maybe it’s time to come to grips with the fact that it’s going to be damn difficult to outprice Microsoft on word processors and spreadsheets and suites.”
Kahn then told Duff he was contemplating returning Borland to its roots—building software tools and languages—and reinvesting some of the Suites money Borland was pouring down the drain back into the company. “We’ve been splitting royalties and talking about a whole bunch of complicated things, like getting our products to work better together,” Kahn told Thompson. “Why don’t you just acquire the business [Quattro Pro] from us?”
Kahn was aware that his cash-strapped company could not survive unless it got out of the applications business, where it had to compete with Microsoft. Wall Street agreed. Borland’s stock had plummeted from a high of $83 per share in early 1992 to about $15 by the end of 1993. Kahn had even come up with a code name for his back-to-roots strategy: Project Boomerang. Only a handful of people inside the company knew about it. The first phase of Boomerang was to sell Quattro Pro, then Paradox and dBase.
WordPerfect had been interested for some time in a merger of the two companies, according to Kahn. “Frankly, we felt the cultures of the companies were pretty far apart,” said Kahn. “When we went to a meeting, there were two of us and eight of them. They were a little like IBM. We just didn’t feel that we could work together at the time. We had to learn more about each other.”
