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To: Bearded One who wrote (21796)	11/30/1998 11:06:00 PM
From: Gerald R. Lampton	Read Replies (2) \| Respond to of 24154

I think this may be the response to your Kempin memo: Message 6592821 Kempin is another story. His goals are simple - he owns the OEM business and he wants that business to be as profitable as possible. No one has ever accused him of having any strategic vision. As far as I can tell he is almost single-handedly responsible for the general negative perception of MSFT business practices among the OEMs. I have heard from various mid-level MSFT people that Ballmer and Kempin have had long-standing disagreements on this issue, but no senior MSFT executive has ever talked about this with me. But the mid-level people, who have been with MSFT for a long time, have given a pretty consistent story. They tell me that Ballmer and Kempin don't get along at all, to the point where Kempin and Ballmer don't even show up at the same meetings, even though Kempin nominally works for Ballmer. They also tell me that the product side guys, notably Maritz and Allchin, have argued for a long time that Kempin's policies are bad long-term strategy. You are assuming that Kempin speaks for the Company when he identifies potential competitors and assesses their abilities. He may be one side of a debate he lost. He may be trying to puff up his own ego or make himself look good when he says that Compaq would never be able to get an OS off the ground (let's hear what Pfeiffer has to say about that to his people outside the courtroom!). True, this may all be speculation, and even Rude Dog says that Chairman Bill supports Kempin. But it does not follow that his assessment of the competitive landscape is accurate, even assuming his memo is totally unbiased, or, for that matter, even if it is accepted as gospel at Microsoft. The point is, who knows what the memo means? It could mean anything.

To: Bearded One who wrote (21796)	12/2/1998 1:07:00 AM
From: Gerald R. Lampton	Read Replies (1) \| Respond to of 24154

Lies, damn lies, and statistics: Microsoft Has Monopoly Power On Software, Economist Testifies interactive.wsj.com Frederick Warren-Boulton, citing Microsoft's own figures, said that while the price of operating-system software as a percentage of total PC cost was relatively low, it rose fivefold between 1990 and 1996, to 2.5% from 0.5%. The cost has since then doubled to 5%, said Mr. Warren-Boulton, a witness for the government, citing more-recent Microsoft figures. Given current trends, the figure could rise higher, to as much as 10% of the price of a new PC, triggering a revolt among PC makers, according to another internal document entered into evidence. The year-old Microsoft memo says Compaq Computer Corp. was pushing hardest for lower prices and that "a major fight" was likely. The article goes on to say that the memo urges Microsoft to resist OEM requests for price cuts. I think what it shows, however, is the limit of Microsoft's market power. The writer believes Microsoft will lose market power when the price of the OS exceeds 10 percent of the total cost of a PC (and, not when the OS price rises to that level, but when the total cost of the system drops to where the OS portion exceeds 10 percent). It also is worth pointing out that, contrary to the meaning the article imputes to Warren-Boulton, the absolute price of the OS did not "double." It probably stayed the same, or might have even fallen in absolute terms, If the price of the total PC falls faster than the price of the OS component of the PC, it is still possible to have the percentage rise, even if the OS price falls in absolute terms. I have to admit, I do not have any idea what the actual statistics on OS prices to OEMs will show. In fairness I should also point out the following: Mr. Warren-Boulton also cited a Microsoft study of Windows retail sales that weighed pricing options and concluded that nearly doubling prices to $89 from $49 would result in a 30% sales decline, yet still boost profits. Yes, but would it boost them above what they would be at a lower price point? "Microsoft can raise the operating-system price without concern," he said. "That's monopoly power." That's actually price-inelasticity, which he defines as monopoly power in his direct testimony. I think what the overall article shows is that Microsoft's market power exists within a fairly narrow band: only to the price level, which is falling with the total price of a PC, where the cost of the OS exceeds 10 percent of the total cost of the PC. And, if Microsoft's market power is a function of a certain percentage of the total cost of a PC, that power goes away once the total cost of the PC gets low enough. In other words, left to its own devices, advancing technology is steadily reducing Microsoft's monopoly power in the PC OS market.