By Jonathan Collins in Washington

Microsoft Corp used its monopoly position in the operating system market to try to force IBM Corp to quit development of OS/2 and, later delay the bundling of Lotus Corp software on IBM machines, according to testimony from an IBM manager testifying at the antitrust trial in Washington yesterday. The prosecution maintained that in fall 1994 Microsoft had approached IBM with non-compete agreement. When that failed, the government contends, Microsoft used its monopoly power to try and remove or delay competitive products from reaching consumers. Even without proving monopoly power, it is a violation of antitrust law to seek non-compete agreements.

IBM’s Garry Norris is set to be the government’s key rebuttal witness and the bulk of his testimony deals with the IBM/Microsoft relationship between 1994 and mid-1996 – a time when Microsoft says its relations with IBM were at a low point. In 1995, Norris, who took the stand yesterday, headed IBM’s efforts to agree licensing terms with Microsoft for the upcoming release of Windows 95. With the release of Windows 95 set for August 24 1995, IBM, like all other PC vendors, needed access to the software in time to prepare its products to ship with the eagerly awaited software. In addition to pent up demand for the new operating system, the release came just ahead of two key boom times for PC sales, the back to school sales, and the fourth quarter – always the biggest sales quarter in the PC industry.

According to Norris, a Microsoft stalling technique, which aimed to win major concessions from IBM to benefit Microsoft cost IBM tens of millions of dollars as competing computer companies were able to upgrade to the new operating system. Norris said the software giant repeatedly told IBM that if it dropped its position as a competitor to Microsoft, it could win far more favorable licensing terms for Windows.

Norris took over negotiations in March 95, nearly six months after Microsoft says it first told PC manufacturers its terms for licensing Windows. By early summer 95 all other PC companies had agreed licensing terms to Windows 95 with Microsoft. All but IBM. Norris testified that if IBM was desperate to gain licensing terms with Microsoft. He said if IBM did not ship its machines with Windows 95, IBM would be forced to close its PC business. At the time he conducted an analysis that found IBM would lose 70% to 90% of volume by relying on OS/2 alone. There was no place to go without Windows 95, We couldn’t be in the PC business,” Norris said.

Microsoft maintains that it does not hold a monopoly in the personal computer operating system market, but Norris said he was told otherwise by the IBM OEM contact at Microsoft, Mark Baber. Norris said that Baber told him: Where else are you going to go? This is the only game in town.”

According to an email from Bill Gates presented in Court yesterday, Microsoft and its CEO were already worried about competition to its key Office software suite from Lotus Development Corp’s SmartSuite in 1994. However, when IBM announced it would acquire Lotus and then on July 17, 1995 said it would bundle SmartSuite a on all its PCs on July 1995, Norris said Microsoft reacted three days later on July 20, 1995 by breaking off all negotiation regarding Windows 95 licensing. Microsoft cut off the negotiations, citing the slow pace of a royalties audit for previous versions of Windows.

The government contends that Microsoft used the audit as a pretense, actually cutting off negotiations in an attempt to keep IBM from loading Lotus programs on its computers. Norris went on to testify that Microsoft senior vice president Joachim Kempin indicated that Microsoft wanted to use the audit payments as a way to reduce IBM’s potential in the PC software market. The prosecution presented notes from a telephone conversation between Norris’s boss at IBM, Tony Santelli and Kempin which took place on August 9, 1995, Joachim offered to accept a single payment and close all outstanding audits,” wrote Santelli, he suggested IBM not bundle Lotus Smart Suite on our system for a minimum of six months to one year.”

But IBM did not want to stop shipping its own products and insisted that Microsoft drop the linkage. Nevertheless it did have to license Windows 95 and eventually won an agreement from Microsoft just fifteen minutes before Windows 95 was released on August 24, 1995.

Despite being the largest computer company in the world, and the then second largest PC vendor, IBM had agreed to licensing terms for Windows 95 that saw it paying the same per copy as White Box vendors who typically ship from very small numbers to around 500,000 Windows copies a year. At the time IBM was selling 4-5 million units a year according to Norris. On the day it won the licensing agreement, IBM also agreed to pay $30m to settle the dispute over past unpaid royalties.