VideoMicrosoft has given Maffei, who holds an MBA from Harvard Business School, ample opportunity to wheel and deal. He has "incredible street smarts," says his counterpart at WebTV Networks, Albert "Rocky" Pimentel, and is "a masterful poker player" when it comes to negotiating deals.
But Maffei's persona is as far removed as a CFO's can get from the nasty caricatures that Justice Department prosecutors and competitors have drawn of Microsoft executives. Both in public and in private, Maffei comes across as anything but an arm-twisting, bad-ass dealmeister. In fact, he pokes fun at the image. When, for example, we suggested at the start of our interview in his small, spartan office that we intended to stray from the list of questions that we'd submitted in advance, Maffei, dressed for the occasion in golf shirt and khakis, joked that he was sorry, but that was just not possible.
"He's funny, honest, and easy to be around," says Leo Hindery, who as president and CEO of AT&T Broadband & Internet Services, in Englewood, Colorado, spent days negotiating the AT&T deal with Maffei. On the other hand (and with apologies to Hindery), Maffei admits that he uses humor as a means of disarming his negotiating partners.
Maffei also seems to have disarmed critics of Microsoft's accounting practices. Twelve days after telling CFO that the SEC had signed off on its deferral of revenue, but a month before this issue went to press, Maffei held a conference call with analysts and the press and announced that the company had learned "sometime during the past few months" that the SEC had launched an inquiry into Microsoft's accounting. If the SEC challenges Microsoft's deferral of revenue, the company could find it more difficult to smooth out earnings volatility. But in the conference call, Maffei said the inquiry would not have a material effect on the company's results, and the stock barely budged on the news. Smooth indeed.
Maffei, however, does have his detractors. Some analysts contend that Microsoft overpaid for WebTV, for example, when it spent $425 million in 1997 for technology designed to provide TV sets with Internet capability. Reportedly, Microsoft initially expected to have somewhere between 2 million and 3 million WebTV subscribers by now, but so far the company has managed to sign up less than 1 million.
But on closer examination, the WebTV deal may be less expensive than it seems. Microsoft wrote off nearly 70 percent of the purchase price as in-process research and development. Although the SEC has been cracking down on such write-offs, Maffei says Microsoft's accounting for the acquisition passed SEC muster.
Other analysts complain that Maffei didn't get as much as he should have in the AT&T deal. They note in particular that Microsoft's contract to supply software for the set-top boxes is nonexclusive. But both Maffei and AT&T's negotiator point out that Microsoft did not seek exclusionary terms, and that it wasn't all that critical to have done so. "[The deal is] de facto important, if not exclusive," says AT&T's Hindery.
Also, it might have been unwise for Microsoft to demand exclusionary terms when such arrangements rank high among the business practices being challenged by the Justice Department. Maffei agrees: "If Microsoft and AT&T were to do an exclusive deal, you'd have to be deaf, dumb, and blind not to notice." But he adds that Microsoft would have sought the same terms for the deal even if it weren't an antitrust target.
To Be Remodeled
More broadly, Maffei says the focus of Microsoft's dealmaking isn't on short-term financial returns but on strategic benefits down the road. An extra million dollars here or there is beside the point: "People don't pay us a multiple of our capital gains," he remarks. Hindery, for one, supports this view. Referring to the AT&T deal as well as other investments and acquisitions that Maffei has overseen, Hindery contends that "these companies aren't just good deals, they're good businesses."
Indeed, Microsoft hopes they will eventually produce an entirely new business model for the company--one no longer dependent on one-time sales of licenses, but instead on rental contracts that produce an ongoing stream of revenue. Likening such a model to that of companies that offer cell phones or cable TV service, analyst Hensel says that Microsoft would eventually like "to get a cut every time" its software is used. And he says the company's E-commerce business in particular lends itself to such a model.
"Our business model is clearly changing," confirms Maffei. And as the CFO sees it, more and more of Microsoft's business will eventually produce "an annuity-like revenue stream."
How would that happen? Maffei explains that commercial software is starting to become "embedded in services" and "highly aligned" with communications capabilities--so much so that the business and the technology are inseparable. "Is AOL [America Online] a software company?" he asks. "Sure. Is Amazon.com a software company? Is Ebay? Software is a very important element of what they do. So I think you'll see us continue to be looking for all sorts of partnerships."
These deals will help produce a fee-based business model in both direct and indirect ways. Deals such as the one with AT&T will help develop the infrastructure for Internet services, thereby supporting other deals in which Microsoft either offers such services itself or provides the software for other service providers. In either type of arrangement, the company expects to get a cut of whatever advertising or transaction revenue the services generate. As for the software itself, "It's a loss leader," says Hensel.
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