By Siobhan Kennedy
Microsoft Corp deliberately upped royalty payments to IBM Corp after the company told Microsoft’s chairman Bill Gates that it wouldn’t stop selling its rival OS/2 operating system bundled with PCs, IBM’s Gary Norris testified yesterday. During a three- hour deposition in Raleigh, North Carolina, Norris said that IBM was forced to pay Microsoft $220m in royalties to sell its Windows 95 operating system in 1996 compared with the $40m it paid for Windows 3.1 in 1995.
A spokesperson for Microsoft told ComputerWire that the issue of royalties started when Microsoft’s relationship with IBM was at its all time low at the end of 1994 and early 1995. IBM had asked and demanded to become a front-line partner with Microsoft and just when Bill Gates was due to sign on the dotted line, IBM executives reneged on their decision and instead told Gates it would continue selling its own OS/2 in preference to Windows 95. The meeting with IBM executives was held during the Comdex computer show in 1995. Gates and his executive in charge of relations with PC makers, Joachim Kempin, were ready to do the deal but IBM just decided not to work with Microsoft and to compete against us instead, he said.
Norris, who will be a key rebuttal witness for the government when Microsoft’s antitrust trial resumes next week, was the lead negotiator in securing the Windows operating system licensing deals with the software giant. Although he didn’t attend the Comdex meeting, Norris said Gates proposed an agreement for IBM to cut back on shipments of OS/2 and replace it with Microsoft Windows. When IBM refused, Microsoft took retaliatory action.
Norris said he was told by Microsoft: As long as you’re shipping competitive products…you will suffer, in pricing terms, conditions and support programs. Norris testified that once IBM had pulled out of the agreement to be become one of Microsoft’s two premier partners, alongside Compaq, the software giant deliberately upped its royalty payments for selling Windows 95. But the Microsoft spokesperson denied any retaliation. IBM had a sweet deal with Windows 3.1, it only paid $9 a license. With Windows 95, we only upped the cost so IBM would be in line with the rest of industry. The relationship became so acrimonious that IBM and Microsoft did not reach a licensing agreement for Windows 95 until 15 minutes before the operating system was launched on August 24, 1995.
During the hearing, it also came to light that Redmond suspected that IBM had not been paying the correct royalties and decided to conduct an audit of the payments. The number of licenses it said it was selling didn’t tally with the amount of money it was paying to Microsoft, the spokesperson said. The audit later revealed a difference of $50m, and the two parties finally settled the dispute for $30m.
