PC makers balk at Microsoft licenses

Under the new agreements, which Microsoft began putting into place late last year to satisfy the Consent Decree between the company and the government, the top two PC makers will pay $4 more per copy for Windows, according to a deposition by a senior Microsoft executive.

Meanwhile, in a legal brief filed this week with U.S. District Judge Colleen Kollar-Kotelly, the nine states seeking tougher sanctions against Microsoft allege the software company wrote these new terms for its own benefit.

The brief cites comments by Richard Fade, senior vice president of Microsoft OEM (original equipment manufacturer) sales and marketing, to bolster the states' argument that the settlement is weak and has done little to stop the software giant from abusing its monopoly in PC operating systems.

Based on Fade's Feb. 8 deposition, the states charge that the company has taken advantage of the terms of the proposed antitrust settlement "to adopt significantly more onerous licensing terms and to impose them on the (computer manufacturers)."

At least two PC makers apparently agree. Gateway and Hewlett-Packard have gone on the record with Microsoft as opposing the new licensing terms, according to Fade's deposition and documents included in the states' filing.

Three major issues appear to concern the PC makers: Windows pricing, patent protection, and the lack of flexibility in the new licensing agreements.

As part of the Consent Decree, Microsoft must offer the same licensing terms to the top 20 PC makers. Previously, it had negotiated each agreement separately. Negotiating separate deals, however, gave Microsoft the power to reward cooperative PC makers and punish others, according to some witnesses in the trial.

IBM, for instance, didn't get a license to bundle Windows 95 until the eve of the release of the OS, according to evidence at the trial. IBM did not want to bundle Microsoft's application packages on some of its PCs. Maintaining consistent contractual terms has been used in other markets to prevent antitrust violations.

HP sent a letter to Microsoft specifically expressing concerns over the protection of its patents. The letter asserts that the new licensing terms create a one-way street, allowing Microsoft access to HP patents without paying for them.

HP's letter also cites pricing as a sticking point, but many of those details were omitted before it was released by the states. This is a common practice used to protect company secrets in documents released to the public.

An e-mail from Gateway's Gui Kahl, director of partner management, says the company is "significantly concerned with the potential implication of some of the proposed terms" in the new licensing agreement.

Both Gateway and HP declined to comment on the materials released by the states.

Microsoft spokesman Jim Desler accused the states of distorting Fade's deposition and said the idea that Microsoft was improperly benefiting from the new licensing terms was "simply inaccurate."

Meanwhile, smaller PC makers such as MicronPC, Concentric Systems and Systemax--companies without tremendous volume buying power--have publicly expressed support for the new pricing structure.

$4 more per copy?
According to Fade's deposition, two customers--the top two PC makers--have experienced a price increase, while the remaining PC makers have stayed the same or received a price break based on the new terms.

The top two PC makers worldwide are Dell Computer and Compaq Computer, according to market researcher IDC.

"It's a price-per-volume curve," said Fade in the deposition. "So the deepest discount we had we bumped up $4, and then the price we had for the smallest customers we brought down. So if you had a curve...we brought the customers that paid the most down and the customers that paid the least up to bring that range to the middle."

Microsoft appears to be "taking some of the steepness out of the (pricing) curve," said Roger Kay, analysts with IDC. As a result, some PC makers will pay more, and some will pay less, to license windows.

"Anyone that's in a relatively worse position than they had been before will grouse and those who are better off can be expected to cheer," Kay said.

However, increases in licensing fees for companies such as Dell, as the No. 1 PC maker, create a sticky situation.

"If it gets stuck with $4 more than anticipated (in system cost), that's a big lump" for Dell, Kay said. "The final outcome, however, depends on what kind of market muscle Dell has and (depends on) the legal reality: Is it part of the settlement that Dell must accept the terms?"

Dell and other PC makers have several options. They could pass the cost on to the customers or they could change their hardware configurations in order to reduce cost in some other area.

Fade also said that in a series of meetings and e-mail discussions, Microsoft's top executives, including CEO Steve Ballmer, made it clear they did not want to "create financial gain" from the new terms.

"We felt it was the right thing to do not to create financial gain for the company out of the Consent Decree," said Fade. "It just seemed imprudent and untoward to do that, that the company would be benefiting from the action with the government and the fact that the Consent Decree would become binding on us and that we would have no option and that our customers would have...less recourse with us."

However, the litigating states said Microsoft had forced computer manufacturers to agree to sign a provision that would go further in preventing them from enforcing the patents on their own hardware against Microsoft.

Computer manufacturers reasonably might have expected a consent decree with the federal government to decrease Microsoft's power, but "as Mr. Fade attested, (the settlement) has had the opposite effect," the states said in their brief.

The states added that the top 20 PC manufacturers were all unhappy with the new terms.

"Although more evidence is needed, the evidence gathered to date indicates that Microsoft may not only have profited from its (settlement) negotiation, but negotiated in order to profit," the states said in their brief.

Microsoft's Desler said the patent provisions cited by the states were standard in past Windows licensing agreements and have been reviewed by U.S. and European regulators.

"It's fairly predictable that the states would distort information gathered in the deposition process in their effort to undermine the settlement reached by Microsoft, the department of justice, and a bipartisan group of states," Desler said.

An appeals court in June agreed with a lower court that Microsoft had illegally maintained its monopoly in personal computer operating systems, but rejected splitting the company in two to prevent future violations.

The U.S. Justice Department and another nine states that had joined in the case have agreed to a settlement with Microsoft that would, among other things, give computer makers more flexibility to feature rival software on their machines.

Nine states, including California and Massachusetts, have rejected the settlement deal as inadequate and are pressing for more severe sanctions against Microsoft.

The states want to force the company to sell a cheaper, stripped-down version of Windows, to give competitors easy access to the detailed Windows code and to ensure Microsoft's Office suite of business programs works with other software applications.

Reuters contributed to this report.