How to transition OEM without looking bad

Date: June 1993

Synopsis
From what I can read between the lines, the DOJ has placed restrictions on what MS can demand from their current OEM customers. To counteract this, MS is transitioning current OEMs into new licenses to sidestep the DOJ. Apparently the new agreements are not covered by the DOJ. What's at question is - is it legal to transit old OEMs to new OEMs without violating something legal.

The benefits of the new agreements seem to be that they are the same as the old agreements before the DOJ poked its head in. One such benefit is that MS get to 'audit' how many machines are sold and can put up prices if volume drops. The OEMs can 'choose' to not upgrade or have the license revoked.

The volume license agreement, basically means that the OEMs get penalised for selling anything other than Windows. Something I thought the DOJ declared illegal.

Snippet
DOJ - Legal

From: Joachim Kempin To: Domestic OEM Sales; International OEM Sales Subject: FW: mail to oem Date: Wednesday, August 03. 1994 5:33 PM

Please read the attached documents and follow these directions. It is important to understand that we need to transition OEMs into new arrangements without making it look like we are doing anything bad. We are following just the goverment agreements. One of the sticky issues is to amend the contracts in a clear way so that no doubt is left when it comes to our agreements and when we decide to audit people for compliance. We have the right to do volume pricing but it is not 100% clear from the legal language in the goverment agreements if we can easily add this into the amendments and if we can actually increase prices if we experience a significant drop in volume for these transitional agreements (no problem on brand new agreements), pls do not do any hasty stuff in that regard.

Contact Your area director of me for advice often. the OEMs might want to negotiate other things than the goverment decree allows and a fair trade is never a problem (in that case it will be good to keep a record, in case somebody complains later. If you have any questions regarding the contents pls talk to Your director.

..

MS-DOS, Windows and Windows for Workgroups OEM Per System Pricing Model August 3, 1994 Transitional (i.e OEM chooses not to terminate license agreement):

1) If an OEM has an active 'per processor' or 'per system' license for the products affected, the OEM receives a copy of settlement document.

2) Account managers with a Per processor agreements contact OEM regarding the status of the systems covered by the agreement.

The assumption is that the OEM will want to continue business as usual ..

2) License Agreement is amended to eliminate minimum commitments and to designate Customer Systems.

We expect most OEMs will want to continue to license systems as before. We will ask the OEMs for a listing of their customer systems as part of the agreement. The list of customer systems will allow MS to comply with the agreement we reached with the DOJ.

..

The ideal amendment would also include a statement that an OEM estimates it will ship X volume annually of licensed products and that MS has a right to re-negotiate royalties if the OEM fails to ship that volume. In return, MS would add an additional price point to the OEM's royalty structure. For example, if an OEM is licensed at a volume of 100K units annually (25K per quater), their current royalty is $25,00 for MS-DOS. For units shipped in excess of 25,000 in a quater, the royalty would drop to £24.50 for thise units:

Quartly Volume = 25,00 Units 1 - 25,000 = original royalty = $25.00 Units 25,001 and above = $24.50 If you believe that the projected volume of systems an OEM lists will result in volumes that are not at the OEM's former minimum commited level, we may want to negotiate with the OEM to reset royalties and prepaid balance recoupment at a level consistent with the OEM's projected volume. We need to handle this very carefully and your area director should be consulted in any such case.

..

1) OEM receives copy of settlement document

2) Of OEM notifies MS in writing that it wishes to terminate current agreement:

Current prepaid balances are forfeited. ..

Advance Royalty: For new agreements, MS will require an advance royalty payment equal to 25% (or three months' worth) of the annual volume used to calculate "Break 2" royalties. All of this amount will be refundable to the extent not earned (i.e if all amounts owed MS have been paid), with the exception of a $10,000 administrative fee which would be retained only if an OEM fails to ship product under the agreement. Unpaid royatties, fees such as finance charges (see above) and a royalty uplift on unbundled product (see below) may be deducted from the advance royalty.

Why an administrative fee? There are many costs associated with negociating and signing an OEM agreement. This is a recovery mechanism for those costs in the case that an OEM decides not to ship product.

¯ *MICROSOFTCONFIDENTIAL-INTERNALUSE ONLY **

Full Exhibit
http://boycottnovell.com/wp-content/uploads/2009/01/px02129.pdf