MS considered changing pricing, buying chip maker
In a December 1997 e-mail to Microsoft Chairman Bill Gates, Joachim Kempin, senior VP of Microsoft's OEM division, said the software giant would have to consider new pricing and business strategies as the result of the new sub-$1,000 PCs.
Kempin said the cheaper PCs were making the OS a larger percentage of the cost of a computer. "While we have increased our prices over the last 10 years, other component prices have come down and continue to come down," Kempin wrote.
The government submitted the document in an attempt to show, among other things, the stranglehold Microsoft (Nasdaq:MSFT) allegedly had over the pricing of the entire computer.
'Danger': PCs without Windows
Kempin, who will be called as a Microsoft witness in the company's ongoing antitrust trial, also worried that computer makers would look for ways to avoid paying the company more money per system.
"The danger does exist that more PCs might get shipped without an OS and we should not take this lightly!" he wrote.
In the memo, Kempin worried that computer makers could try to band together to come up with an OS alternative.
"Our high prices could get a single OEM or a coalition to fund a competing effort [say, in India]," he wrote.
Pacifying PC makers
To counteract angry computer makers, Microsoft considered several options, including:
Charging users annually for Windows;
Breaking up Windows into components that could be sold in chunks, so low-end computers would have only the OS basics (Microsoft will follow this model when it releases Office 2000);
Charging computer makers different prices depending on their chips or systems (although Kempin worried that he could just hear "Intel calling me, feeling we treat them unfairly by putting all their competitors into the low-end bucket");
Or defending its current model.
PC makers frustrated
The memo was written at a time when computer makers were growing increasingly frustrated with their inability to offer a low-cost computer because of the high price of Windows.
Microsoft has been forewarning financial analysts for at least the past three years that it plans to implement an annuity, or subscription, model for many of its products.
Analysts have focused primarily on Microsoft's plans to sell Microsoft Office via subscription. But OEMs have expressed privately that a move to a subscription model for Windows and NT could result in them losing add-on or repeat sales to their customers, as Microsoft -- rather than the OEMs and their resellers -- would be selling OS upgrades to IBM (NYSE:IBM), Hewlett-Packard (NYSE:HWP), Gateway (NYSE:GTW) and Dell (Nasdaq:DELL) customers.
If and when Microsoft implements a subscription model for its products, it will hardly be the first vendor to do so. Other independent software vendors -- including Lotus and Oracle -- have begun testing the annuity waters with software rental/software hosting programs.
Fretting over Intel, OS
In the memo, Kempin also frets about "Wintel" partner Intel's potential move into the OS space. "If they decide to own the OS as well as the CPU -- it will get ugly. This could be an INTEL led and funded coalition -- say with Compaq and NSCP. I am convinced they have been thinking about this for some time," Kempin wrote.
Accusing rivals of banding together to try to combat it has been a common Microsoft defense tactic. The Kempin note doesn't speculate about how Intel (Nasdaq:INTC) could topple Microsoft's dominance of desktop OSes; Microsoft currently commands 90 percent of the market.
To counteract potential moves by Intel, Kempin proposed buying other chip makers, including Advanced Micro Devices (NYSE:AMD) and National Semiconductor (NYSE:NSM).
"Our reaction could be to buy NSemi or AMD, or both, and own the CPU and the SW business," he wrote.
Mary Jo Foley, Sm@rt Reseller, contributed to this report.