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[ale] NT Times article



Article in NY Times today:

BRUSSELS, May 14 ?????? At least 90 percent of the world's personal computers
run on Windows software. But Microsoft wanted still more.

Last summer, Orlando Ayala, then in charge of worldwide sales at
Microsoft, sent an e-mail message titled Microsoft Confidential to
senior managers laying out a company strategy to dissuade governments
across the globe from choosing cheaper alternatives to the ubiquitous
Windows computer software systems.

Mr. Ayala's message told executives that if a deal involving governments
or large institutions looked doomed, they were authorized to draw from a
special fund to offer the software at a steep discount or even free if
necessary. Steven A. Ballmer, Microsoft's chief executive, was sent a
copy of the e-mail message.

The memo on protecting sales of Windows and other desktop software
mentioned Linux, a still small but emerging software competitor that is
not owned by any specific company. "Under NO circumstances lose against
Linux," Mr. Ayala wrote.

This memo, as well as other e-mail messages and internal Microsoft
documents obtained from a recipient of the Microsoft e-mail, offers a
rare glimpse these days into the inner workings of Microsoft, the
world's largest software company. They spell out a program of tactics
that were carried out in recent years, ranging from steep price
discounts to Microsoft employees lying about their identities at trade
shows.

The Microsoft campaign against Linux raises questions about how much its
aggressive, take-no-prisoners corporate culture has changed, despite
having gone through a lengthy, reputation-tarnishing court battle in the
United States that resulted in Microsoft's being found to have
repeatedly violated antitrust laws.

Perhaps most important, certain discounts may run afoul of European
market regulators, who are still investigating accusations that
Microsoft abused their antitrust laws.

Discounting is a perfectly normal corporate practice. But under European
law, companies that hold a dominant market position like Microsoft are
prohibited from offering discounts that are aimed at blocking
competitors from the market. Microsoft has been concerned with the
legality of its discounts in the past, consulting a London law firm on a
specific discount plan in 1998, before it was determined in court that
the company had a monopoly in desktop operating systems.

In a telephone interview today, Jean-Philippe Courtois, the chairman of
Microsoft's operations in Europe, Africa and the Middle East, defended
the use of the special fund described in Mr. Ayala's e-mail message,
saying it was part of a strategy to be "competitive" and "relevant" in
the market for big government and education deals.

"Linux is obviously a key competitor," Mr. Courtois said. Rivals use
similar tactics, he said.

Sun Microsystems, for example, "is giving away StarOffice to basically
governments and schools," he said. The Sun suite of programs runs on
both Windows and Linux operating systems.

Mr. Courtois said that Microsoft sometimes gave software to "very
low-income countries." He cited a program where Microsoft donated
software in South Africa and helped train teachers to use it.

Mr. Ayala's memo said that the discounts could be offered to "developed
and developing countries," and that an "initial focus" was being put on
Latin America, Africa, the Middle East, India and China.

In his e-mail message, he focused on governments and large institutions
buying mostly desktop software. A separate memo described a discounting
program for corporate customers worldwide.

Two days after Mr. Ayala sent his e-mail message, Michael Sinneck, the
executive in charge of Microsoft's services department, sent a message
giving details of a program to provide corporate clients with discounts
on the hourly rates charged by Microsoft's consulting business.

The memo said nearly $180 million had been allocated in the 2003 fiscal
year, which ends in June, for this purpose alone. Of that, $140 million
was earmarked for consulting services for server software, an area where
Microsoft has a growing share of the market but still faces lively
competition, particularly from big companies like I.B.M. that are
promoting Linux as an alternative to Microsoft Windows.

Servers are the powerful computers used by corporations to store data,
manage Web sites and perform other network tasks. The software that runs
servers is the subject of one of the two antitrust cases currently open
against Microsoft in the European Community. In broad terms, Microsoft
is accused of illegally leveraging its overwhelming dominance of the PC
software market into the server market.

European antitrust laws are generally stricter than comparable American
laws, but the Microsoft practices described in the memos may raise red
flags for regulators in the United States as well.

 In June 2001, a federal appeals court in Washington ruled that
Microsoft had violated antitrust laws by bullying business partners and
rivals to thwart any competitive challenge to Windows. Later that year,
Microsoft reached a settlement with the Bush administration, agreeing
not to use its monopoly power in PC software, including pricing deals
and contract terms, to effectively force PC makers to favor Microsoft
products over competing offerings.

Among the documents is an e-mail message from an outside lawyer, Bill
Allan of the London-based firm Linklaters, to Microsoft that offers a
precise interpretation of European Community law on the matter of
discounts, including the view that short-term discounting would be more
likely to escape scrutiny. The message, from 1998, advised Microsoft
that its discounts should not discriminate between clients and that
discounts could not be aimed at excluding competitors from the market.

"Discounts are not per se unlawful," Charles Stark, a former antitrust
official at the Justice Department and a partner at Wilmer, Cutler &
Pickering in Brussels, said in an interview. "It depends on the market
circumstances and how they use them and what their impact is."

Mr. Stark, who has not seen the documents, pointed out that under
European law "pricing behavior can be viewed differently by a dominant
firm than by a nondominant firm."

Asked whether the discounting program for server software consulting was
legal in Europe, given Microsoft's position, Mr. Courtois, the Microsoft
executive, said that consulting was a "break even" business.

"We are not a global services company," he said. "We need to compete
against the big guys."

Mr. Courtois cited I.B.M. and Oracle as companies with large consulting
businesses.

The Microsoft documents show the preoccupation among top managers with
countering the open-source movement, a group of programmers who want the
software that runs computers to be offered free of charge. The codes
behind open-source software are developed openly by independent teams of
programmers, allowing companies to customize their programs and paying
for services to make the software perform better. This is in stark
contrast to Microsoft, which keeps most of its source code secret ??????
although governments and some corporations are increasingly allowed to
view the code.

Linux, the biggest open-source threat to Microsoft, has a tiny share of
the market for personal computer software. But Linux was installed in 26
percent of the large data-serving computers sold last year that power
corporate networks and the Internet, according to International Data, a
market research company. Microsoft's Windows was the operating system on
44 percent of the servers.

The server market is one area where Linux appears to have some momentum.
The use of Linux is also being supported by a handful of Microsoft
rivals and encouraged by many governments, especially in Europe, as a
cheaper and perhaps more secure alternative to Windows software. The
French, for example, have a Web site that recommends Linux systems for
government departments.

Mr. Ballmer, Microsoft's chief executive, once referred to Linux's
licensing as "a cancer that attaches itself in an intellectual property
sense to everything it touches."

In the face of this competition, the Microsoft documents show the
significant resources the company devotes ?????? and the unconventional
tactics it sometimes uses ?????? to combat Linux.

Chris O'Rourke, a Microsoft employee, described attending LinuxWorld, a
trade fair in California, where he "purported to be an independent
computer consultant" working with several public school districts,
according to an e-mail message he sent on Aug. 20, 2002.

"In general, people bought this without question," Mr. O'Rourke wrote.
"Hook, line and sinker."

He said his goal was to glean intelligence about the competition. His
guise, Mr. O'Rourke said, "got folks to open up and talk." Mr. O'Rourke
did not respond to a fax and voice mail message seeking comment.

Another employee, Todd Brix, said in an e-mail message that he attended
a Linux conference in June 2001 in San Jose, Calif., pretending to be an
"ambivalent OEM." Original equipment manufacturers, or O.E.M.'s, are
companies like Hewlett-Packard and Dell Computer that buy Windows
software licenses.

Reached at his office on Tuesday, Mr. Brix said that when attending such
a show, "you don't broadcast that you're a Microsoft person."

"You don't disguise that fact," he said. "You just don't lead with your
chin."

n his message, Mr. Brix described the technical issues discussed at the
show and said the tone of the meeting "was an even mix of Local Union
hall teamster gathering, Christian Scientist revival and Amway sales
conference."

Of all the Microsoft tactics described in the internal messages, the two
discount programs appear to be the most aggressive ?????? and perhaps the
most legally questionable.

Mr. Ayala sent his memo at 8:17 a.m. on July 16, 2002. In addition to
Mr. Ballmer, the recipients included two Microsoft vice presidents ??????
James Allchin and Jeffrey S. Raikes ?????? along with some of the company's
top lawyers and the general managers of Microsoft's operations in Asia,
Europe, Africa and the Middle East.

Mr. Ayala wrote that in today's "difficult economic environment" some
institutions and companies were focusing on cheaper software."

"It is important," he continued, "that we have a way to address large PC
purchases that involve low-cost/no-cost competitors in the education
(and government) sectors, especially in emerging markets."

The solution, he wrote, was to "tip the scales" toward Microsoft in
these deals by using the special fund, which he called the Education and
Government Incentive Program.

The fund was to be used "only in deals we would lose otherwise," Mr.
Ayala said.

When he wrote the memo, Mr. Ayala was a quite high-level executive at
Microsoft, reporting directly to Mr. Ballmer. He was in charge of sales
and marketing and responsible for roughly 22,000 of the more than 50,000
Microsoft employees.

In March, Mr. Ayala was transferred to lead a new division that focuses
on small and medium-size companies. This new push is one of Microsoft's
top priorities. Mr. Ayala was not available to comment.

In his separate e-mail message, Mr. Sinneck, the Microsoft services
executive, wrote that the consulting fund would be used to cover the
difference between the "discounted customer rate and the standard
services billing rate per hour."

Reached this week, Larry Meadows, marketing manager for Microsoft's
services group at company headquarters in Redmond, Wash., said the fund
could be used "anywhere it needs to be."

"There's not really a limit to say that you can use it only in certain
geographies," Mr. Meadows added.

He said the funds would be used again in the next fiscal year that
begins in July.




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