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Not so long ago, Microsoft’s OEM division was seen as the dark heart of the “Evil Empire.” During the Department of Justice (DOJ) vs. Microsoft antitrust trial that dragged on throughout much of the 1990s, the business practices of Microsoft’s OEM unit and its then-chief Joachim Kempin came under tough scrutiny. When the government declared that Microsoft was guilty of abusing its Windows desktop monopoly, the OEM unit was ordered to change its modus operandi.

Since Kempin resigned (or was pushed, as some company watchers claim) from his OEM directorship post in 2000, Microsoft has changed OEM chiefs a few times. First, Richard Roy, head of Microsoft Germany, stepped in to fill Kempin’s shoes. Next, Richard Fade, the VP in charge of Microsoft’s desktop applications division, headed the OEM unit for a couple of years, during the tough DOJ sanction-negotiation period. Then, in July of 2002, Rodrigo Costa took the OEM reins.

Costa, a 14-year Microsoft veteran, was Microsoft’s first employee based in Portugal. He stepped up to become general manager of Microsoft Brazil in 2001, and remained there until his appointment as corporate VP of the OEM division in 2002.

Read Costa’s Full Biography Here

Microsoft’s relationship with its partners is back in the limelight this week, with the European Union vs. Microsoft antitrust case in the news. (The judge overseeing the case will rule Wednesday on when to apply the Microsoft-monopoly remedies specified during the course of the legal battle.)

We tried to get Costa to talk about the EU case and the potential effects of the pending remedies, to no avail. He claimed that this topic did not fall under his domain.

Nonetheless, we thought it was an opportune time to publish our e-mail Q&A with Costa. (The original, full version of this Q&A ran in the December 4 and December 6 issues of the Microsoft Watch newsletter.)

Microsoft Watch: First, let’s set the stage. Could you talk about where the OEM division sits in the overall Microsoft org chart? Which products fall under your domain?

Costa: The OEM division sits in the Worldwide sales and marketing group at Microsoft. The worldwide sales and marketing group is organized into six different groups: EMEA (Europe/Middle East/Asia), Asia Pacific, China, Japan, Services and OEM. The OEM division has responsibility over all our OEM partners across all geographies. My job is to manage Microsoft’s relationships with all PC and device manufacturers. We cover all products that can be licensed directly by Microsoft to the OEM community including: all versions of Windows client and Server, Office, Windows Mobile, Windows CE, Works, Exchange, SQL Server, etc.

Microsoft Watch: How many folks are in your organization?

Costa: We have close to 400 people in the OEM division, working across all products and regions. Approximately two-thirds focus on sales and marketing activities, and one-third are systems engineers focusing on technical support and pre-sales activities.

Microsoft Watch: Could you talk about your sense of how the OEM division has changed since the U.S. antitrust decision came down and the majority of the states settled? Once the consent decree was drawn up, what changed inside the OEM division, in terms of its day-to-day operations, policies in dealing with OEMs?

Costa: I was not working in the OEM Division in the period before the antitrust decision was issued and the settlement agreement was reached so I can’t tell you firsthand about how day-to-day operations have changed. I do know that when you are in a business that is subject to a consent decree you have to focus a lot on the legal framework. We pay a lot of attention to the legal training of all OEM division employees. We have a deep understanding of our responsibilities, and we are totally committed to deliver on our consent decree responsibilities. There is no room for failure.

But Is Microsoft Really Mending OEM Fences? Go to Page 2 for More

(“A Q&A With Microsoft OEM Chief Costa” Page 2)

We have ongoing training programs for our employees worldwide to ensure that the settlement is understood and followed in every part of our business. We understand that compliance is both a corporate commitment and a personal responsibility for every Microsoft employee. We are committed to our OEM customers, and we are working, in compliance with the decree, to continue to deliver the innovations that customers expect from Microsoft.

Microsoft Watch: Under one of your predecessors, Joachim Kempin, I would describe Microsoft’s relationship with OEMs as strongly adversarial and antagonistic. Do you think this has changed?

Costa: I joined the OEM division in 2002, and I cannot provide firsthand information about the culture of the division prior to that. I’m sure Microsoft has changed, as has the entire industry. Most of the people I work with today were not here three to five years ago. One thing I can say, I found a great team at Microsoft OEM, with deep knowledge of the business and great relationships with and commitment to our partners. I had the privilege of starting from something positive, and the connection has been strong as long as I’ve been here.

Microsoft Watch: Could you describe for my readers who may not know this acronym, what the MDP (Market Development Program) is and explain how it differs from the old MDA (Market Development Agreement) strategy?

Costa: We run several marketing initiatives with our OEM partners. The MDA program provides incentives for our customers who engage in activities intended to improve product quality, to promote Windows technologies and to improve end users experience with PCs. For example, OEMs that design their PCs to meet certain hardware quality requirements, and display an associated logo satisfy one of the activities in the MDA program. The MDA and the MDP are slightly different names for essentially the same strategy.

History Lesson: More About MDAs and Microsoft’s Trouble With the DOJ

Microsoft Watch: What’s been the OEM feedback, re: XP SP2? I had a sense that many OEMs – in spite of Microsoft’s lengthy beta process – weren’t ready for the update when it came out. Drivers weren’t ready; customers were calling PC makers for help with things not working properly. What is your sense of how that launch went and is going?

Costa: While a major upgrade roll out is always challenging, I believe we can consider the Windows XP SP2 roll out a success. Our systems engineers started to work with our customers six months before the launch. Testing was intense, and end user response has been very positive. Two months after the launch, more than 50 percent of new PCs were using the new release. Three months after the launch, all new Windows PCs have Windows XP SP2 pre-installed. Note that this timing depends to some extent on the language version of Windows.

Microsoft Watch: Could you talk a bit about Windows pricing trends? As a result of the antitrust consent decree, the top 20 Windows OEMs all pay the same for each copy of Windows they license. What can you say about this price, vis-a-vis the price per-copy-charged to OEMs prior to the release of XP? What’s the thinking in terms of whether you will charge OEMs more or the same to license Longhorn?

Costa: In general, we do not discuss our confidential pricing terms with OEM customers in public. However, I can tell you that prices for OEMs are based on volume. At the moment, we are evaluating the Longhorn product configuration and it is premature to share information.

Microsoft Watch: Are OEMs using Linux and other open-source software much in trying to negotiate better deals with you? (For example: If you won’t cut us a deal on Windows/Office, we’ll just start preloading Linux/OpenOffice.) Does Microsoft “punish” OEMs who are looking at preloading Linux and open-source software in any way?

What About the Linux Card? Go to Page 3 for More

(“A Q&A With Microsoft OEM Chief Costa” Page 2)

Costa: Like in any other business, we have competition and we set up our prices and our market strategies taking into consideration what we think is the value of our software vis-a-vis competitive offerings. In terms of business practices, you should also understand that our Windows business is regulated and we take the consent decree very seriously. Our contracts do not require any type of exclusivity, and we make it very clear to our OEM customers that their relationship with us is not an impediment for them to relate with any competitor of Microsoft. We do not provide any type of reward for OEMs to disfavor a competitor of ours, and we certainly do not “punish” OEMs for any reason!

Microsoft Watch: In the late 1990s, if an OEM signed a Windows licensing deal with Microsoft, they were required to engage in a patent cross-licensing deal with Microsoft. Is this still true now? And did Microsoft abolish the “non-assert” provision in its OEM licenses for all Windows vendors, so that OEMs are now allowed to sue Microsoft if they believe there’s been a patent violation pertaining to Windows?

Costa: OEMs were never required to sign a patent cross license with Microsoft in order to license Windows. Some of our OEM licensing agreements historically included a provision in which OEMs agreed to a limited covenant not to assert certain patents against Microsoft or its licensees. This year we removed this provision from our OEM license agreements.

Microsoft Watch: Another patent question: Has Microsoft ever said to OEMs that it believes that Linux violates Windows patents? If so, has it specified how many patents and which ones?

Read “Is Microsoft Rattling the Linux Patent Sabers?”

Costa: In general, we don’t publicly discuss products that we think are infringing or not infringing Microsoft patents. If we think there are patent licensing issues that need to be addressed, the way we would handle that is to engage in a confidential negotiation with the other party. This is consistent with how others in our industry work out patent licensing agreements. Licensing patents is very common throughout our industry and it is a valuable way for firms to create a marketplace for their patented innovations.

Microsoft Watch: Microsoft executives’ compensation is tied to customer and partner satisfaction these days. What about OEM satisfaction? Who is judged on this and how, if anyone is?

Costa: The compensation of all our OEM division employees is linked with the satisfaction of our OEM partners. Every year we run several types of satisfaction surveys. We ask for feedback on our communication with the customers, the quality of our operations, the efficacy of our people, our business practices, etc. We use these surveys to get feedback, improve our work and measure our people. And I am no exception. I want our OEM division to be recognized as a world class business partner.

Microsoft Watch: What do you consider your top three accomplishments from the past two years? What are still some of your biggest challenges?

Costa: Before I came to OEM, Richard (Fade) took the division through the consent decree implementation. His top priority back in 2001 was the implementation of a totally new set of business processes. When I arrived at the division in June 2002, I focused most of my time and energy on business development and partner engagement, although the consent decree responsibility was, and still remains a top priority. I believe we are making a lot of progress with our OEM partners. Our business grew by high single digits in fiscal year 2003 and by more than 10 percent last year. We also measure the quality of our relationships with OEM partners, and we have been able to make good progress on that front. All our people are measured and rewarded based on their achievements on the sales front and on partner satisfaction.

A large part of the OEM business is regulated, and being able to manage this business across 30 different locations worldwide requires a great team of people who have a profound understanding of the legal framework that presides over our Windows business. This type of framework brings unique challenges, which we continually work to address.

(This is an edited version of a Q&A which appeared in the December 4, 2004, and December 6, 2004, issues of the Microsoft Watch newsletter. Want to see what other Microsoft news nuggets you might have missed? Sign up today for a free two-week trial subscription to Microsoft Watch.)