Joachim Kempin's December 16, 1997 Memo on MS OS pricing

[James Love <love@cptech.org>]

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Info-Policy-Notes | News from Consumer Project on Technology 
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November 20, 1998

         - Joachim Kempin's December 16, 1997 Memo on 
	   Microsoft OS pricing

Yesterday DOJ released a December 16, 1997 memo from Microsoft executive Joachim
Kempin (a MS senior vice president) to Bill Gates regarding desktop OS pricing. 
This interesting document was also distributed to Steve Ballmer and Paul
Maritz.  It is marked as exhibit 365, and the 4 page document can be downloaded
in PDF format from the DOJ web site at:

http://www.usdoj.gov/atr/cases/ms_exhibits.htm


The memo contains several blockbuster items.  Kempin apparently considers Intel
its biggest threat in the OS market, outlining a fear that Intel could sell a
CPU for $200 that would run a $1 OS.  He offers as a counter strategy the idea
that Microsoft would buy AMD and/or Cyrix (Nsemi):

	Our reaction could be to buy Nsemi or AMD
	or both and own the CPU and the SW business
	-while both stocks (INTEL and MSFT) are 
	taking a dive.  We would sell SW at $100 
	and CPUs at costs + $1. 
  	How sure are we of our partnership and how
	fast could we react if needed?  We could
	bring compatibility to another platform
	better than anyone else and we would have
	the money to fund the fab capacity.

Kempin also discussed the possibility of "renting" Windows for limited times, if
Microsoft could develop a system of end user registration, which apparently is
already in the works for MS Office.  For a news report on the recommendation to
"rent" Windows, see
http://www.zdnet.com/zdnn/stories/news/0,4586,2167444,00.html, Microsoft
considered 'renting' Windows, by David Lawsky, November 20, 1998.  According to
Kempin, this would wait on the release of NT 6.0, in calendar year 2001, if it
was done.

There are many additional details of the relationships between MS on OEMs. 
Apparently OEMs face price discrimination for the same software, depending upon
the machine.  Sometimes MS has based OEM prices on CPU models, other times on PC
prices, and it uses other options as well.  According to the memo, the object
is:

	To get the highest amount of $/unit for 
	DTOS through the OEM channel without 
	breaking the current model of pre-installing 
	the SW on PCs.

As reported by several news outlets, Kempin says "While we have increased our
prices over the past 10 years other component prices have come down and continue
to come down."  In this memo, Kempin reckons the Intel gets $120 to $140 on
average for the intellectual property (IP) in its CPU chips, which he compares
to $120 to $140 as apparently the price OEMs pay for Windows NT (NTW).

For low end PCs, Kempin figures Microsoft's OS royalties will amount to about 10
percent of the purchase price.  He says the new universal serial bus (USB)
allows the OEMs to ship stripped down units, cutting their prices, making it
easier for MS to "defend our pricing as we increase our BOM percentage."   He
notes, however, "The danger does exist that more PCs might get shipped without
an OS and we should not take this lightly!"

Kempin considers the acceleration of replacement cycles and the shortening of PC
life time revenue boosts for Microsoft, so long as consumers have to buy a new
copy of the OS with each replacement.  And Kempin suggests Microsoft can move
software back out of the OS to various "add on retail packages" that consumers
would have to buy to get "performance, management and ease of use features." 
Kempin says "we need to start this now in order to be ready at NT 6.0 time
frame."   

As reported in the press, Microsoft is also concerned that OEMs like Compaq,
which "might pay us 750M$ net year" to license Windows, or a coalition of OEMs,
might try to develop or buy an alternative OS to cut down on Microsoft
royalties.


   Jamie Love
   love@cptech.org
   http://www.cptech.org

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