Overdrive, page 28
Although Microsoft would claim that it paid only a couple of million for “Start Me Up,” in fact, it paid six times that much. According to a source with firsthand knowledge, Geffen approached Jagger through his agent and asked what it would take to buy the rights to the song. Jagger told him $12 million. “Jagger was half kidding,” the source said. “But Microsoft was in a big hurry, so they took the deal, unlike anything else in the software industry, where they negotiate to death.”
Whatever the price, “Start Me Up” became the theme song of the Windows 95 advertising campaign. Microsoft did not, however, use the song’s refrain, “You make a grown man cry”—a judicious decision, as the tricky and time-consuming installation required by Windows 95 reduced many eager purchasers to just that state. Help lines that had been set up to assist Windows 95 customers were flooded with calls. Typical of the complaints was one from Philip, the owner of Steel City Bolt & Screw in Birmingham, Alabama. He spent some six hours on the phone over two days talking with Microsoft technicians while trying to get Windows 95 to work on his computer. “I’m ready to throw the whole thing against the wall,” he told the Wall Street Journal. “My phone bill is going to cost me more than I paid for this.”
Microsoft’s much ballyhooed on-line service also had its problems. Fears that the Microsoft Network would quickly dominate the market quickly dissipated. While customers purchased Windows 95 at a record clip, few clicked on the MSN icon to subscribe to the service—and those who did found it slow and buggy. By late fall, the service had fewer than 500,000 customers. Leader America Online had more than 3.5 million. It would be another year before Microsoft reinvented MSN for the Web and got it right.
By far the most serious complaint about Windows 95 was that Microsoft programmers had deliberately rigged it so that, once installed, competing Internet browsers would not work; Windows 95 defaulted to Microsoft Explorer 1.0. “Whenever you installed Internet Explorer, it effectively destroyed the other browsers on your system. And this change was made after the beta version had come out,” said Eric Schmidt, chief technology officer for Sun Microsystems. In other words, it appeared that Microsoft had added the destructive code to its browser after the final beta version had been tested publicly, but before the finished product shipped. Among the browsers that were disabled or broken by Windows 95 was Netscape Navigator.
“This was pretty serious skulduggery or whatever you want to call it,” said Schmidt. “I can’t tell you what the intent of these things were. I don’t know what decisions Microsoft made. I don’t know if they sat around and decided this or not. But, it’s indicative of what happens with a de facto monopoly when your competitor [Netscape] has 10 million users. I’m not arguing maliciousness here; I'm arguing power. It’s an example of the extraordinary power that Microsoft has.”
Microsoft eventually acknowledged that some browsers designed for earlier versions of Windows did not work well with Windows 95, but it angrily denied that it deliberately programmed the software to disable competing browsers. Nevertheless, the Justice Department quietly began another investigation of Microsoft based on the complaints.
It had been a long 12 months for Bill Gates. He had fought the Justice Department and won, then fought it again. Tiny Netscape had come out of nowhere to shove Microsoft into the unfamiliar role of underdog. And the push to get Windows 95, the Microsoft Network, and Microsoft Explorer all out the door had been draining. Gates was exhausted. In September, he left on a two-week vacation to China with his wife and several other couples. It had not been announced publicly, nor Would it be, but Melinda was pregnant. The baby was due late the following April.
The China group included Gates’s father, Bill Gates Jr.; Warren Buffett and his wife; Seattle Art Museum director Mimi Neill, a Chinese art scholar; and William Gerberding, former president of the University of Washington. Also joining the entourage was an international bridge master. Gates and Buffett loved to play bridge.
On his previous trip to China, Gates had been admonished by Jiang Zemin, China’s president and Communist Party boss, to come back and get to know China’s history, her culture, and her people. On his second visit, Gates did just that. He and his group were the first private citizens to ride across China on the “Mao Train,” named after the late Chinese leader Mao Tse- tung. During much of the train trip across the country, while others in the group took in the spectacular scenery, Gates and Buffett played bridge. The group also explored China by boat along the Yangtze River. Melinda organized various activities, including karaoke singing in the ship’s ballroom. During a visit to the Great Wall, Gates tried to fly a kite, but there was not enough wind. The trip also included a visit to a McDonald’s restaurant, where Buffett paid for the meal with discount coupons he had brought with him.
It was only the second real vacation Gates had taken since he and Paul Allen had founded Microsoft in 1975. The other had been to Africa in 1993, before he and Melinda were married. He made only one business stop during this trip, a quick visit to Microsoft’s office in Beijing. While in the city, Gates also met with Jiang, who greeted him more warmly this time. Gates, Melinda, and Buffett posed for pictures with the leader.
Among the souvenirs Gates brought back was a nine-foot clay replica of a warrior statue that had been unearthed near the city of Xian some 20 years before. Gates planned to put the terra-cotta relic in the yard of his new home, which was still under construction.
The vacation was something of an early birthday present for Gates, who would turn 40 on October 28, a couple of weeks after he returned from China. Before leaving on the trip, Melinda had organized a birthday party for her husband at their still unfinished $50 million home on Lake Washington. Gates had hoped to move in by his 40th birthday, but construction delays had made that impossible. Some of the delays had been caused by Melinda, who wanted significant changes after she and Gates married: she wanted her own bathroom, dressing room, and a study. She also hired a different architect for some of the interior design. The remodeling had pushed back completion until the spring of 1997. (The chief appraiser for King County estimated that once the construction was finished, taxes on the 45,000-square-foot home would run about $500,000 a year.)
So it was a work in progress that Melinda turned into an 18-hole putt-putt golf course. The 80 or so guests came in costume. Bill and Melinda dressed in old-fashioned golf attire. As a surprise, Melinda had four of Bill’s women friends outfitted as cheerleaders, with letter sweaters that spelled out B-I-L-L. The four included old flame Ann Winblad and Heidi Roizen of Apple, both of whom had been high school cheerleaders.
In his 16th-floor office in an aging building at 85 Broad Street in lower Manhattan, New York’s financial district, the software industry’s most respected and influential analyst, Rick Sherlund, was about to do the unthinkable. He was taking Microsoft’s stock off Goldman Sachs’s Priority Recommend buy list for the first time. The Firm, as Sherlund liked to call Goldman Sachs, had been Microsoft’s underwriter when the company went public in 1986. In the years since, Microsoft’s stock had never disappointed. Countless investors had grown rich by following the Firm’s simple advice: buy Microsoft.
Just days before Gates’s 40th birthday, the software giant had once again posted an impressive earnings report. The big boost in Windows 95 sales had propelled Microsoft’s profits in the quarter that ended September 30 to $499 million, an increase of 58 percent from a year earlier. Total sales for the quarter surged to $2.02 billion, a 62 percent increase. Microsoft’s quarterly profit of 78 cents per share had handily beat Wall Street estimates of about 70 cents. Since Windows 95 hit the market on August 24, an estimated 7 million copies had been sold, far above the predictions of industry analysts. Dataquest, a San Jose research firm, had recently announced that Microsoft had pushed its share of the $3 billion suites market to an astonishing 90 percent, leaving competitors Novell and Lotus with just 5.5 percent and 4.6 percent, respectively. And Microsoft’s lead in this area was expected to accelerate, since it was the only software company shipping a suites product that ran on Windows 95.
Microsoft was riding high as usual. But Sherlund was taking the long view, and he was concerned. Even though Gates had been preaching in memos that Microsoft had gotten religion about the Internet, his company had yet to publicly announce a strategy for competing with Sun, Oracle, Netscape, and other companies that had embraced the Internet earlier. Thus, on Thursday morning, November 16, 1995, Sherlund lowered the Firm’s rating on Microsoft stock, which had been selling for around $90 a share. And when Sherlund talked, Wall Street listened. He was ranked the number-one analyst by Institutional Investor magazine and was the acknowledged expert in a 15-company group that included all the top software companies. The market responded immediately: the company’s share price plunged 5 percent, which represented a $6 billion loss in Microsoft’s market value.
Less than a month later, on December 7, Bill Gates would give the most important speech of his life to reporters and analysts, laying out Microsoft’s Internet strategy and putting Netscape and other rivals on notice that they had awakened “a sleeping giant.” At the time, it appeared that Microsoft had hastily conceived its Internet strategy in response to the negative publicity following Sherlund’s November pronouncement. In fact, long before Sherlund lowered the boom, Microsoft was formulating its strategy, hoping to have it ready in time for Gates to make the big announcement on December 7. Even the “sleeping giant” remark was scripted to sound like a spur-of-the-moment thought.
But several pieces of the Internet puzzle had to fall into place before Microsoft could make its move. On November 16, the same day Sherlund sounded the alarm about Microsoft, Mike Tyrrell, executive vice president of business development for Spyglass, was meeting with Microsoft’s Thomas Reardon and John Ludwig in Redmond. Reardon was still program manager for Microsoft’s browser development group. Ludwig had been promoted from general manager of the Windows 95 group to one of the vice president spots. Over the next couple of days, they hammered out another licensing deal for Mosaic.
The negotiations had started earlier in the summer, after Reardon, lames Allard, and others had convinced Gates that Microsoft needed to build a browser for Windows 3.1 and the Mac. “We had been telling Microsoft all year that they needed to develop a multiplatform code base” said Tyrrell. “With Reardon and Allard and others at their level, we were simply preaching to the choir. And they were preaching inside Microsoft that a browser for Windows 3.1 and a browser for the Mac were paramount if Microsoft was going to stop the Netscape avalanche.”
The reasons were obvious. Windows 3.1 was the most popular operating system in the world, installed on as many as 100 million computers. The Mac had millions of users, too. Netscape had a browser that worked on both Windows 3.1 and the Mac. Microsoft did not. The licensing agreement that Microsoft had negotiated with Spyglass in 1994 allowed it to use the Mosaic code base only to develop the Microsoft Explorer browser for Windows 95 and for Windows NT, meaning that if Microsoft wanted to modify its browser to work on Windows 3.1 and the Mac, it needed a new licensing agreement with Spyglass.
During the spring and summer of 1995, Microsoft had watched helplessly as Netscape grabbed a bigger and bigger share of the browser market, convincing top executives at Microsoft that the company needed to build a cross-platform browser. “Microsoft is a paranoid company,” said Tyrrell. “And they were paranoid about Netscape. Guys like Allard and Reardon were respectful of what Netscape had accomplished. They would fight them tooth and nail, but they respected what Netscape had done. It’s just that when Microsoft finally decided they had had enough, Microsoft had a lot more firepower to draw from.”
Microsoft had refused to pay Spyglass royalties in its 1994 licensing agreement for Mosaic—it had paid Spyglass only a flat fee of $2 million. Microsoft tried the same tack again. But Tyrrell stood his ground, aware that his bargaining position was strong. Microsoft had to give in. It agreed to pay Spyglass something less than $1 per copy for every browser Microsoft sold for the Mac and Windows 3.1. But it did succeed in negotiating a royalty cap. Further, Spyglass was prohibited from revealing that it was getting royalty payments from Microsoft.
Once the preliminary details of an agreement were worked out at the November meetings, the two companies exchanged drafts for the next couple of weeks. The final agreement was signed at the Boston law firm representing Spyglass on the afternoon of December 6, the eve of Microsoft’s big Internet announcement. Tyrrell then jumped on a plane at Logan International Airport and headed to Seattle with Spyglass founder Tim Krauskopf. They wanted to be part of history.
The Spyglass deal was in the bag, but time was running out for Microsoft to complete a licensing agreement with Sun for its all-world Java product. Publicly, Gates was still bad- mouthing Java, even though he had authorized his staff to license the product from Sun before he stepped to the microphone on December 7. Gates was hedging his bets, just in case Java became an industry standard. He had recently told Business Week, when asked about Java, “What’s new about Java versus other programming languages? Why is Business Week writing about Java? Just having another computer language doesn’t change the dynamics of any of these things.” As an alternative to Java, Microsoft was pushing its own Web programming language, Visual Basic. In addition, Blackbird, containing the proprietary tools that Microsoft had created for its on-line network, was being reworked for the Web.
Sim had announced in San Francisco in May that it planned to license Java to Netscape. Subsequently, it completed licensing agreements with several other companies, including Oracle. “Of all the strategies that we thought about for Java, one involving Microsoft adopting Java was not even on the list,” said Eric Schmidt, Sun’s chief technology officer. But there had been some discussion at Sun about trying to convince Microsoft to license Java; at one point, Schmidt and Bill Joy considered Hying to Redmond to talk with Gates. But the idea was nixed. “We decided to do that later in the cycle,” said Schmidt. “In other words, we would solidify our position with Netscape and other partners like Oracle, which is what we did.”
The first contact between Sun and Microsoft about Java came on a cold winter morning in early November at Princeton University. Schmidt was a graduate of Princeton; so was Nathan Myhrvold, Microsoft’s technology guru. By coincidence, both were supposed to be at Princeton on Friday, November 10. Myhrvold was speaking at an alumni event, and Schmidt was there to review the computer science program. Schmidt’s secretary called Myhrvold’s secretary to find out which hotel Myhrvold was staying in. Schmidt then phoned Myhrvold’s room on Thursday night and left a message. Myhrvold, who did not arrive until 1:00 A.M., called Schmidt early the next morning. Schmidt said he thought it was time that Microsoft woke up and smelled the Java. The two agreed to meet in a lecture room called McCosh 10 at the university, where Myhrvold was supposed to make his speech. They talked for more than an hour about Java.
“I was in sales mode,” said Schmidt. “I told him Microsoft should license Java. Nathan had been impressively briefed. He knew everything there was to know about Java. I didn’t need to explain anything to him. Microsoft had clearly done a full evaluation of this situation. They had independently thought through what options they had ... Nathan was extremely focused on Netscape. He knew a great deal about a technology called Livescript, which Netscape had just acquired.” (Live- script would be later renamed JavaScript.)
It was agreed at the Princeton meeting that Myhrvold would brief Gates and Paul Maritz on the content of the discussion. On Monday morning the following week, Schmidt got a call from Roger Heinen, Microsoft’s vice president for languages, who worked for Maritz. Heinen and Schmidt knew each other from their days in the Silicon Valley, when Heinen was Apple’s vice president in charge of the Mac operating system. “We want to license Java,” Heinen told Schmidt. “Send us your contracts.”
Sun delayed sending anything to Microsoft for about a week. With sensitive contract information about to be turned over to Sun’s number-one enemy, company executives wanted to think everything through thoroughly. Finally, Sun sent a licensing team to Redmond with contracts in hand. At least one member of the team would remain until the deal was done. Several days later, on Monday, December 4, Heinen flew to Sun’s headquarters in Mountain View, California. It was the first real meeting about Java between the two companies at the executive level.
“What’s your price?” Heinen asked. Sun named a figure, and Microsoft made a counteroffer the next day, Tuesday. Time was running out. Microsoft had to have the contract signed before the December 7 show in Seattle. Like Spyglass, Sun was in a good bargaining position. Microsoft had a serious deadline problem. “They wanted this deal badly,” said Schmidt. “We thought we could do a deal that was very favorable to us and to our shareholders, on terms that we could live with, given the timing. And Microsoft seemed happy with that.”
On Wednesday, December 6, the two sides had a draft agreement to show to the lawyers. Schmidt phoned his boss, Sun CEO Scott McNealy, who was in New York City at the time, and told him: “Look, Scott, I’m really going to do this deal. You understand the implications, right? It’s a huge deal for Sun, a huge deal for Java, a huge deal for the industry, by any measure.” McNealy told Schmidt that he understood, and asked him to call him at his hotel room when the deal was done, no matter how late.
