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Who is Microsoft’s Secret Power Broker?

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It all happened within minutes. The U.S. Department of Justice stepped up its war on Microsoft Corp. and immediately two top Microsoftexecutives were on the phone to PC makers, leaning on them to dispute the government’s argument. Their sole mission that wintry Dec. 17 afternoon in Redmond was to drum up support to wage war on the Justice Department.

The agency had petitioned U.S. District Court to find Microsoft (MSFT)in contempt for not providing an adequate way of separating Internet Explorer from Windows 95. It had said previously that bundling the browser with the operating system was a violation of the 1995 Consent Decree signed by Microsoft and the U.S. government.

Microsoft argued it is difficult-if not downright impossible-to remove the browser and all associated files from the most recent releases of the operating system. And the question its two executives were putting to hardware makers that day was rather blunt: Are you with us or against

On one Bat Phone was Steve Ballmer, Microsoft’s executive vice president of sales and marketing. In typically animated Ballmer fashion, he was pounding on tables and conjuring up images of breaking chairs to convince hardware makers to back Microsoft on the record.

Working the other phone wasn’t Bill Gates. Nor was it senior vice president of law, Bill Neukom. It was Joachim Kempin, senior vice president of Microsoft’s OEM, or original equipment manufacturer, division.

A closer look at Joachim Kempin.

Kempin was a seemingly sensible choice for calling on hardware vendors. For hardware makers, the buck stops here. He has the final sign-off on all Microsoft licensing contracts with all hardware makers, from Compaq Computer Corp. to Dell Computer Corp. to Germany’s Vobis. And he is the Microsoft official around whom swirls most of the current Microsoft vs. DOJ fireworks.

It is Kempin who determines which Microsoft products get preloaded on which systems. He also wields the pricing sword. And he has the final say about how much hardware vendors pay per seat for Windows, NT, Office, individual Back Office applications and Microsoft’s handful of
hardware products.

Those agreements affect the margins of every hardware maker-and of every reseller of that hardware-yet almost no one outside of those who directly negotiate OEM deals with Kempin has ever even heard of him.

Nevertheless, the more Microsoft charges, the greater the pressure on hardware and software margins and the more resellers must make up elsewhere.

Those agreements also limit the choices of resellers as to which browser to use, which in turn affect their options for customizing the desktop and offering additional services. But while Kempin clearly is a force to reckon with at Microsoft, he also was an odd choice to corral OEM
support. Those who know him through their negotiations have few good things to say about him. Kempin, who reports directly to Ballmer, didn’t get to where he is by being Mr. Nice Guy.

“Everything Kempin does pisses us off,” said an official with one of Microsoft’s largest OEMs, who requested anonymity. “He even parks his silver Porsche in the visitors’ spot at [OEM] Building 18,” the OEM official continued, resulting in visiting hardware execs being forced to spend precious minutes circling while seeking parking on the Microsoft campus.

Added an official with another top Microsoft hardware vendor: “The only way we can deal with [Kempin] sometimes is to have him thrown out of the room and go straight to Ballmer. He drives his OEM team very hard. He beats the hell out of them. We’ve definitely had some not-so-pleasant conversations with the guy.”

In this story, not one hardware maker is on record. The word Sm@rt Reseller received was that no one crosses Kempin and keeps his job.

Kempin also is not quoted. Microsoft insiders concede that Kempin (like another Microsoft executive, NT guru David Cutler), is downright prickly when it comes dealing with the press and is best left unseen and unheard.

Who is Joachim Kempin?

Indeed, little public information is available on the 55-year-old Kempin. According to testimony he gave to the Department of Justice lawyers in October, Kempin joined Microsoft in 1983, where he started out in Germany as country manager. Four years later he landed in the
United States as vice president of Microsoft in charge of the then-fledgling company’s support organization and the U.S. OEM group.

In 1991, Kempin relinquished control of support and consolidated his position as head of the international and U.S. OEM divisions. He currently holds the title of senior vice president and is in charge of Microsoft’s OEM Division worldwide.

“My job is to basically set the sales and marketing goals for a certain fiscal year and then basically make sure that the group achieves the goals,” said Kempin in a sworn statement to the Justice Department.

This all sounds modest enough-that is, until you take into account just how powerful Microsoft’s OEM group actually is.

In fiscal 1997, ended June 30, Microsoft’s OEM group contributed $3.48 billion, or nearly one-third of the company’s total net revenues of $11.36 billion. Even
though Microsoft’s financial gurus have warned Wall Street for years that the operating system market, at least for desktops, is close to tapped-out, the OEM division managed to grow its revenue contribution almost 40 percent, from $2.5 billion, in fiscal 1996.

Playing monopoly

How did the OEM group accomplish this? The old-fashioned way, by raising prices in what is virtually a monopoly market (what choices do they have?).

OS pricing: The crux of the matter.

Under Kempin’s tutelage, Microsoft launched the Market Development Agreement (MDA) licensing concept in 1994. The drill for hardware makers went something like this: If OEMs wanted to license Windows 95 but didn’t promote or sell it, they would pay a fairly hefty price per copy. If they agreed to co-promote the operating system in ads or issue a Microsoft-endorsed press release noting they had decided to offer their customers Windows 95 preloaded on new systems, they got a better price.

The Windows 95 MDAs listed a dozen or so criteria through which OEMs could lower their per-machine fees. Those agreeing to preload the operating system on at least half of their PCs each month got a knock-off. Those agreeing to display the Windows 95 logo prominently on their advertisements got another benefit.

Hardware vendors who okayed the whole list of Microsoft Windows 95 marketing criteria got a “bargain” rate of, on average, $60 to $70 per Windows 95 copy. That’s for those who were considered tier-one hardware makers, committing to move a lot of Windows 95 copies. But there were then-and are still now-only a handful of tier-one vendors, including
Compaq Computer Corp. and Gateway 2000 Inc. The next 12 to 15 vendors, constituting tier two, receive a slightly less favorable per-copy rate, even if they agree to the bulk of the MDA criteria. Tier-three players-the rest of the OEMs with whom Microsoft does business-get an even less attractive rate because they sell fewer boxes.

OEMs were none too happy about the MDA deals. But one by one, they fell.

The last of the major hardware makers to sign on the dotted line to carry Windows 95 was The IBM PC Co. Officials there signed the MDA just hours before Microsoft released Windows 95 on Aug. 24, 1995, in the costliest and most hyped product rollout ever.

Decoupling IE

Never ones to abandon a successful marketing tactic, Kempin & Co. have perpetuated the MDA concept to this day, but with a few modificiations.

“The original market development agreements were heavily laden with [Internet Explorer] requirements,” recalls one OEM official. “The MDAs Microsoft wrote last year [1997] didn’t call out adoption of IE as a criteria for gaining financial incentives.”

At least part of the reason that the IE criteria did not figure prominently this year, according to some hardware vendors’ theories, was the ever-present DOJ threat. By requiring OEMs to license IE as a condition for licensing Windows 95, Microsoft could be considered guilty of “tying” the sales of unrelated products, some hardware makers

On Oct. 2, the DOJ Antitrust division lawyers took Kempin’s deposition, in which he acknowledged that Microsoft required OEMs to agree to license IE in order to license Windows 95. And on Oct. 20, the DOJ used the tying argument as the basis for its argument that Microsoft violated the 1995 Consent Decree.

The next day, the DOJ-to the surprise of some of the OEMs in
question-released sworn statements of OEM officials from Compaq, Gateway, IBM, Micron and Packard Bell NEC. (Sources close to the case say DOJ officials later apologized to some hardware makers for making publictheir statements without warning them.)

In those depositions, OEM officials said they were required by their license agreements with Microsoft to ship IE with every copy of Windows 95 sold and to sport the IE icon on every desktop of every new Windows 95 machine that went out
their doors.

Something else came out with those statements, too-Microsoft’s best-kept secret, Joachim Kempin.

By Mary Jo Foley
Published February 2, 1998 by Sm@rt Reseller