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Newspaper: Microsoft Ran Slush Fund to Counter Linux

Microsoft created a slush fund to heavily discount or even give away Windows in cases where the software giant was about to lose large international deals to Linux, according to published reports.

The International Herald Tribune reported in Thursday's online edition that it obtained internal e-mails from Microsoft showing that Orlando Ayala, former group vice president for Worldwide Sales, Marketing and Services, created the fund called the "Education and Government Incentive Program." The fund was to be used to "tip the scales" in favor of Microsoft "only in deals we would lose otherwise," Ayala wrote in a July 16, 2002 memo. "Under NO circumstances lose against Linux," the newspaper reported Ayala's memo as saying.

The fund could be paid out of the $40 billion in cash Microsoft has built up from its phenomenal success, which is due in part to business practices that have been found anti-competitive by U.S. courts.

The newspaper spoke with the chairman of Microsoft operations in Europe, Africa and the Middle East, Jean-Philippe Courtois, who defended the use of the fund, saying it was part of a strategy to be "competitive" and "relevant" in the market for big government and educational deals.

Microsoft also consulted with a London law firm about the legality of discount plans, which could lead the software giant to run afoul of antitrust regulations in the Europe, where the company already faces two antitrust actions.

Ayala's memo concentrated on price-constrained government and education institutions with an initial focus on Latin America, Africa, China, India and the Middle East. A later e-mail the newspaper said it obtained shows a discounting program for corporate customers worldwide.

Linux and open source have been especially attractive overseas, where distrust of Microsoft is compounded by nationalistic concerns about sending profits or potentially trade secrets to the United States through real or imagined holes and mechanisms in Microsoft software. In the developing world, the lower purchase prices of open source operating systems generates intense interest.

Ayala sent his e-mail to top Microsoft executives including Steve Ballmer, Jim Allchin and Jeff Raikes. Ayala was the No.3 executive at Microsoft when he wrote the memo. He was transferred to lead a new division focused on small and medium-sized companies in March.

According to the newspaper, Ayala's memo makes it clear that the fund's focus includes desktop purchases, where Microsoft controls 90 percent of the market, not servers, where Windows goes out on 44 percent of new shipments. It is a potentially important distinction for European regulators.

"It is important that we have a way to address large PC purchases that involve low-cost/no-cost competitors in the education (and government) sectors, especially in emerging markets," Ayala is reported to have written.

Ayala provided an example scenario in his e-mail of a government that was advocating open-source software "in order to keep 'x' dollars in the country and save the taxpayers millions of dollars."

In Ayala's example, the government was considering buying 50,000 PCs installed with locally produced software costing $5 per computer. Ayala's e-mail authorized Microsoft salespeople to reduce the price for the customer to the amount that the PC manufacturer pays Microsoft as a royalty.

The entire International Herald Tribune article is available here: www.iht.com/articles/96369.html.

About the Author

Scott Bekker is editor in chief of Redmond Channel Partner magazine.

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