Hard Drive: Bill Gates and the Making of the Microsoft Empire (22 page)

The article ended with a strong denial from an IBM spokesperson. “We asked Harry Smith of the Entry Level Systems group if he could tell us about the application software planned for the machine. He responded, ‘To my knowledge we are not introducing any such product.’ ”

Gates was so upset by the
InfoWorld
story that he called the editors as an industry spokesperson and scolded them for printing rumors. In fact, about the only thing the article got wrong was the date of the official announcement. IBM did announce a new computer in July, but it was the System 23 Da- tamaster that Bill Sydnes and others from the Project Chess team had been working on when they were pulled off to develop the PC. The Datamaster was a $9,830 small business computer designed to compete with similar models by Data General and DEC.

The announcement of the System 23 machine obviously caught the business press off guard. They believed the rumors that IBM was working on a personal computer.
Business Week
magazine ran a short story regarding the July 28 announcement of the Datamaster. The capacity of International Business Machines Corp. to surprise competitors and other IBM watchers remains unimpaired, the magazine said. “IBM was expected to introduce a low-cost personal computer to compete with popular models made by Apple Computer Inc., and Tandy Corp.’s Radio Shack Division.”

The day before IBM cleverly threw the press off the scent of its new PC by announcing the Datamaster, Gates signed what would prove to be the key financial agreement that made him a billionaire and many of those working for him millionaires.

For only $50,000, Gates bought all rights to 86-DOS previously owned by Seattle Computer Products. It was the bargain of the century. Once again, Gates had proved he was a master businessman.

How Gates came by the deal begins with an old friend from Gates’ days at MITS, Eddie Curry.

After Pertec bought out MITS in 1977, Curry worked at Pertec for nearly four years, waiting to be fully vested with generous stock options he had received from the company. In June 1981, he joined LifeBoat Associates, the software distributor. LifeBoat had recently been approached by Datapoint (the company that Steve Wood was now working for), which wanted to know if LifeBoat could get CP/M working on its new 16-bit computer. Curry’s first assignment at LifeBoat was to go to Digital Research and negotiate a license for the 16-bit version of CP/M that could be used on Datapoint’s machine. When he was unable to get an agreement, Curry headed up the West Coast to Seattle Computer, which he knew was marketing a 16-bit operating system known as 86-DOS. Curry offered Brock a quarter of a million dollars for the rights to DOS.

While he was in Seattle, Curry made one other visit, to Microsoft. He told Gates why he was in town.

“There was no reason not to tell him because I couldn’t, in good faith, do the deal with Brock and have Bill find out about it, Curry said. “LifeBoat had business relationships with Bill and I would have had to tell him something that wasn’t true. Plus, I had a personal relationship with Bill. So I told him about the offer.”

Allen, who had dealt with Seattle Computer in the past, wrote Brock a letter asking that Microsoft be given an exclusive license to sell 86-DOS. Allen said Microsoft wanted to compete directly against Digital Research.

“I felt Paul out on the phone and we arrived at a halfway decent agreement, I thought,” said Brock. “They would come up with fifty grand and give us beneficial terms on buying all the high-level languages Microsoft offered.”

But when Brock received the agreement drawn up by Microsoft’s lawyer, it had changed from what Allen had told him over the phone. It was now a sales agreement. Microsoft wanted to buy the operating system outright. It would then relicense DOS back to Seattle Computer.

An attorney who saw the original agreement said Gates personally went through the document and in his own handwriting changed key language to specify a sale of DOS instead of an exclusive license. “That was just a brilliant master stroke on his part,” the lawyer said. “Microsoft, not Seattle Computer, would have ownership of DOS.”

Said Brock: “I called Paul on it. He said Microsoft’s attorney thought it would work out better this way. Well, I wasn’t fully convinced, but I could see the fifty thousand bucks on the other hand and we certainly needed capital at that point.”

Brock didn’t take Curry’s offer of five times that much because Microsoft agreed to provide Seattle Computer with updated versions of DOS. Brock figured this would be of great benefit to Seattle Computer since Tim Paterson was no longer around to work on the operating system.

“Microsoft must have been getting antsy,” said Brock, “because they sent Steve Ballmer over. He tried to get us to hurry up and agree to the thing and sign it. I met with him personally. He basically told me how it was a good deal, how it would not change anything whether or not they owned it or we owned it, since we would have unlimited rights to use it. I guess he convinced me, because Paul called a few days later and said come on over to Bellevue and let’s sign the papers.”

When Brock showed up at Microsoft on July 27, Allen called in Paterson to read over the agreement. Paterson told Brock he thought the offer was a fair one.

“We had no idea IBM was going to sell many of these computers,” Paterson said. “They were a stranger to this business. Somehow, people seem to think we had an inkling it was going to be this big success. I certainly didn’t. So buying DOS for fifty thousand dollars was a massive gamble on Microsoft’s part, a 50/50 chance.”

Before Brock signed the agreement, Allen took it into Gates, who was in another office. Brock could hear Gates and Allen talking. But Gates never came in to greet him. A few minutes later, Allen came back with the agreement and Brock signed over ownership of 86-DOS to Microsoft.

Brock met Gates by chance for the first time a couple of years later, at a popular Bellevue restaurant called “Jonah and the Whale.” The name was appropriate. The big fish had eaten the little fish. The operating system that once belonged to Seattle Computer had by then become an industry standard; by 1991 Microsoft was making more than $200 million a year just from sales of MS-DOS.

. On August 12, 1981, two weeks and two days after Microsoft acquired ownership of the operating system from Seattle Computer, IBM triumphantly introduced its new personal computer to the press at the Waldorf-Astoria Hotel in New York City.

The industry would never be the same again. Neither would Microsoft. The IBM announcement came almost one year to the day after the corporate brass in Armonk, New York, had given Bill Lowe the go ahead for Project Chess, with orders to have a machine ready for market in 12 months.

“International Business Machines Corp. has made its bold entry into the personal-computer market, and experts believe the computer giant could capture the lead in the youthful industry within two years,” wrote a reporter for the
Wall Street Journal
who covered the coming-out party for the PC.

The basic machine introduced that day had one disk drive, sixteen kilobytes of random access memory, and came with a $1,565 price tag. With options, the price quickly rose as high as $6,000. IBM, which teamed with Sears Roebuck & Co. and ComputerLand Corp. to sell the PC, offered customers a mix of software and application products that would run on its machine. None of the software had been developed by IBM.

Microsoft’s software for the PC included BASIC and the game Adventure, the company’s first product that was not a language or operating system. “Microsoft Adventure brings players into a fantasy world of caves and treasures,” said the IBM press release. It was a microcomputer version of a game played for years by computer hobbyists and hackers on larger minicomputers. Adventure, which was in the public domain, was originally written on a mainframe computer at the Massachusetts Institute of Technology. The player was a participant in the game, typing in commands like WALK NORTH or OPEN THE DOOR. Along the way, the traveler solved puzzles, outfoxed opponents, and found buried treasure.

IBM offered several application programs for the PC, including the popular spread sheet program, VisiCalc, and a word processing program called Easy Writer from Information Unlimited Software. Unbeknown to IBM, the infamous phone phreak Captain Crunch wrote Easy Writer, reportedly while serving a jail sentence after the feds caught him making free long-distance phone calls with his blue box. (Captain Crunch got his name when he discovered that a toy whistle included in boxes of the breakfast cereal of the same name emitted a tone that caused Ma Bell’s circuitry to release a long-distance trunk line to the caller.)

Although DOS was the only operating system available on the PC when it was introduced in New York City, IBM had finally been able to reach an agreement with Gary Kildall for a 16-bit version of CP/M. But Digital’s operating system would not be ready for another six months, and when it did come out, CP/M was priced much higher than DOS. Also, IBM had indicated it would only provide further support for DOS.

There was little celebrating back at Microsoft when the big day came and the shroud of secrecy was finally lifted. Steve Ballmer tore off the telex from the Dow Jones newswire and posted it on the front door. There were smiles, hand shakes, and pats on the back. But no wild partying; no champagne corks popping. There was still a lot of work to do. A new version of DOS was already in the works.

No one really knew what to expect. “We thought it was going to be important because it was IBM,” said O’Rear. “But I don’t think I had a sense for the scale. I’m thinking more in terms of the hardware itself. I didn’t give much thought at all at that time to the ramifications of the operating system and what an impact that would have. I still had a lot of ideas that 86-CP/M was going to be extremely important, and the IBM DOS was just going to be for the PC.”

The word “clone” had not yet entered the industry vocabulary.

About a week or so after the official PC announcement, Microsoft received a form letter from IBM. “Dear vendor,” the letter said. “You’ve done a fine job.” It wasn’t a very warm way to affirm a marriage. Although IBM apologized an appropriate number of times to Gates for the letter, it was a sign of things to come. When a company climbed into bed with IBM, it usually got kicked out once the honeymoon was over.

CHAPTER 5

Growing Pains

_A

s was common for that time of the year in the Pacific Northwest, a gentle rain fell steadily throughout the Seattle area on Friday, November 13, 1981. But neither the cold drizzle nor the inauspicious date could dampen the spirits of the boisterous group who had gathered in the Seahawks Room of the Ramada Inn just off Interstate 520, across Lake Washington from Seattle. At times, the roar coming from the room sounded like a crowd of college kids holding a pep rally before a big football game. The occasion was Microsoft’s second company-wide meeting.

The atmosphere was intoxicating. Bill Gates and sidekick Steve Ballmer acted more like cheerleaders than executives, whipping up the emotions of the more than 100 employees into a frenzy as they talked enthusiastically about the company’s future.

Gates and Ballmer established a company tradition that rainy November day: Microsoft’s employee meetings would always be lively and entertaining affairs. Each year, Gates and other executives would try to top what had been done previously to rouse the faithful who gathered to hear reports of record profits and sales. In 1991, for example, Gates would ride into the annual meeting on a Harley Davidson motorcycle, leading a gang of bikers. More than 7,000 of the faithful went wild.

Gates made no such dramatic entrance in 1981. In fact, he was upstaged by one of Microsoft’s newer programmers, Charles Simonyi, who delivered what would go down in company folklore as the “Simonyi Revenue Bomb.”

“Charles was the hit of the meeting,” recalled Jeff Raikes, who had been with Microsoft only a few days, hired away from Apple Computer to market Microsoft’s software application products that were then under development.

The Hungarian-born Simonyi was the hot-shot programmer in charge of developing Microsoft’s applications. As he stood in front of the employees that rainy November day, he explained that the company was about to invest heavily in applications. The market place for personal computers was still very fragmented; the IBM PC with Microsoft’s new operating system had not yet become an industry standard. Simonyi said that his goal was to have as many different Microsoft applications running on as many different computer platforms as possible. He pointed to a large chart showing the results of this strategy. Every line on the chart, from revenue to labor force, started fairly flat and then exploded upwards off the scale. In 15 years or so, according to Simonyi’s chart, everyone in the state of Washington would be working for Microsoft.

When they saw the numbers on the chart, the 100 or so employees in the Seahawks Room went wild.

Microsoft’s revenues had at least doubled every year since Gates and Allen had founded the company in 1975. By 1981, revenues had grown to nearly $16 million. But the company’s real growth was just beginning.

“It was exciting to be in a place that was growing so quickly,” said programmer Bob Wallace. “I can’t remember if we were doubling employees and tripling sales or the other way every year for awhile. . . .”

Shortly after Microsoft’s move to the Seattle area, Gates had told one of his programmers at a party that he had two objectives—to design software that would make a computer easy enough for his mother to use and to build a company bigger than his dad’s law firm. By November of 1981, one of those objectives had been realized. Microsoft had more employees and was making more money than the law firm of Shidler McBroom Gates & Lucas. In fact, Microsoft had been growing so fast that at the time of the second employee meeting in November, the company was completing a move from the downtown Bellevue bank tower into new, spacious offices in the Nor- thup building, a few hundred feet from the Ramada Inn off Interstate 520.

One side of the Northup building faced a fast food restaurant called The Burgermaster, and Gates’ secretary soon had the restaurant’s number on her telephone speed-dial so she could quickly order Gates’ favorite meal: hamburger, fries, and a chocolate shake. Not long after the move to the Northup building, Miriam Lubow went to lunch with Gates and others at one of Bellevue’s more fashionable restaurants. Gates ordered an expensive wine for the table and the usual hamburger for himself.

Not only did growing pains force Microsoft in 1981 to move into new offices, but the company was reorganized from a partnership into a privately held corporation. Gates became chairman of the board, with Allen serving as a director. Then, in a carefully planned move that had been under discussion for some time, Chairman Bill sold five percent of Microsoft for a million dollars to Technology Venture Investors, a venture capital firm in Menlo Park, California, the heart of the Silicon Valley. David Marquardt, a general partner in TVI, was made a director of Microsoft’s new board. Gates had been introduced to TVI officials a year earlier by Blair Newman, the computer whiz who later killed himself.

Microsoft did not need the venture capital; Gates was essentially hiring the firm’s expertise in incorporation procedures. He was also positioning the company should it eventually go public, as Apple Computer had done the year before, in December 1980. It was Ballmer who convinced Gates to sell off a small part of the company as a long-term investment in the future.

“We just threw that million dollars into the bank with all our other millions,” said Steve Smith, Microsoft’s first business manager. .

As a private corporation, Microsoft could now offer stock incentives to its employees. Although there had been some grumbling about the lack of a company stock plan, most of the technical people working for Gates would probably have remained with Microsoft even without one. But stock participation in the company made it easier to attract good people. Employees could buy stock for about $1 a share. Owning stock in the company made up for a lot of hard work at low pay. Microsoft did not pay very well in comparison with the rest of the industry, but it was very generous with its stock options. (When the company went public in 1986, a number of long-time employees became millionaires on paper).

“The pay was always okay, but never much more than okay,” said one programmer who was working for Microsoft in 1981 when the stock plan was first announced following incorporation. “Nobody ever did real well at Microsoft until the stock started coming. They didn’t pay well at all, especially when you considered the hours involved. The big compensation for most people was being in a place where you were going to know more about what was happening in the industry than you could anywhere else. Although it took a long time for the rest of the world to realize it, everybody at Microsoft understood the company’s significance from early on. There was never any doubt in my mind, practically from the time I hired on, that Microsoft was going to be the most important company in the personal computer industry.”

Gates underscored that message to his programmers whenever he got the chance.

One day in late 1981, Gates approached Richard Leeds, project manager for COBOL, one of the languages that Microsoft delivered to IBM for the PC, in the hallway of the Northup building outside of Leeds’ office. Gates was trying to get the word out about what he considered Microsoft’s top priority. And what was on his mind was Microsoft’s operating systems strategy. “We’re going to put Digital Research out of business,” he told Leeds, slamming his fist into the palm of his other hand.

He would issue a similar vow twice more during the next year, according to Leeds, promising to put MicroPro and Lotus out of business, each time emphasizing his promise by smashing his fist into his hand.

At the time, MicroPro had the best-selling word processing program, entitled WordStar. Lotus announced a spreadsheet program known as 1-2-3 toward the end of 1982 that quickly overtook the popular VisiCalc.

It was clearly not enough for Microsoft to beat the competition; Gates wanted to eliminate his opponents from the playing field. “Bill learned early on that killing the competition is the name of the game,” said a Microsoft executive who was with the company in the early 1980s. “There just aren’t as many people later to take you on. In game theory, you improve the probability you are going to win if you have fewer competitors.”

At the time Gates issued his threats, Digital Research was working on a 16-bit version of its CP/M operating system for the personal computer. When CP/M was finally released for the PC in the spring of 1982, it was priced at $240, or four times as much as DOS. Eventually Digital slashed its price to be more competitive with Microsoft.

Gates wanted to eliminate Digital Research before CP/M was available for the IBM PC and could compete directly with MS-DOS. Soon after IBM’s PC made its debut, Gates suggested to his friend Eddie Curry of LifeBoat Associates that perhaps Microsoft should put DOS in the public domain as a way of getting rid of CP/M once and for all. Gates may have been only

half serious, said Curry, but the remark showed how badly Gates wanted to eliminate what he thought could be a serious competitor for the PC operating system.

“There was absolute determination on Bill’s part to take Digital Research out of the market,” said Curry. “It’s part of Bill’s strategy. You smash people. You either make them line up or you smash them.”

Gates surrounded himself with trusted lieutenants who shared his predatory nature. Two of these people, Kay Nishi and Steve Ballmer, were involved in every strategic move Gates made in the early 1980s, according to one former Microsoft executive. “Kay was as driven as Bill to beat Digital,” he said. “And you have to include Ballmer, too. Those three were intense guys. Digital was a very important target for us all.”

Part of Gates’ strategy was to get so much industry momentum built up in support of DOS that CP/M would become an also-ran. To this end, he tried to convince manufacturers to use DOS on their machines. Sometimes, he used strong-arm tactics bordering on the unethical. One such case involved the Rainbow computer introduced by Digital Equipment Corporation in 1982. At the time, DEC dominated the minicomputer market with its famous PDP series of machines. The Rainbow ' was the company’s first attempt at a personal computer. The Rainbow was unique in that it had dual processors enabling it to run 8-bit and 16-bit software. According to a knowledgeable industry source, the Rainbow was originally intended to run only on CP/M. But Gates “persuaded” DEC to eventually include DOS as an option. According to this source, DEC wanted to be able to offer Microsoft Word with the Rainbow. This word processing application was under development at Microsoft in

“I remember them [DEC officials] telling me they were not going to follow in IBM’s wake with DOS,” the industry source said. “And that was a thorn in Bill’s side because his gambit was to get all the OEMs signed up with DOS so Digital Research would get bumped off, and more importantly, so that DOS would be secure. The fact that DEC had picked up a different operating system was sort of an embarrassment to Bill. . . . But when the smoke cleared, DEC was offering MS-DOS as an option. There’s no question in my mind that Bill told them if they wanted Microsoft Word, they had to at least offer MS-DOS.”

Curry, for one, believed it was good for the industry in the long run that Microsoft beat out Digital Research for control of the operating system that became the standard in personal computers.

“You could not have relied on people like Gary Kildall,” said Curry. “He didn’t have the vision, the understanding of the problems. ... If you talk to Bill about any software company or any hardware company, there’s a very high probability that he will be able to tell you who the CEO is, what their revenues were last year, what they are currently working on, what the problems are with their products. He’s very, very knowledgeable and he prides himself on knowing what’s going on in the industry. Kildall never had that.”

As things turned out, Microsoft didn’t have to worry about CP/M, although it would take a while before a majority of computer makers lined up solidly in support of DOS. The IBM PC was an instant hit, and with DOS being the only operating system available on the machine for the first six months, Microsoft jumped out to an early lead, and CP/M was virtually shut out of the IBM PC market.

Arguably, MS-DOS became an industry standard as much from the momentum generated by the huge success of the PC as anything Microsoft’s brash, competitive chairman did. As the IBM PC gained in popularity, more and more programmers wrote software for that machine and for the operating system Gates had acquired.

Before the PC announcement in August of 1981, Commodore, Apple, and Tandy’s Radio Shack had been the Big Three of the personal computer industry, with a 75 percent market share. None of them seemed to take IBM’s PC seriously, because there was nothing innovative about it. The computer used existing technology and software.

But that was just what the Boca Raton team had intended. “When we first conceived the idea for the personal computer in 1980, we talked about IBM being in a special position to establish standards, but we decided we didn’t want to introduce standards,” explained Project Chess leader Don Estridge in an interview with
Byte
magazine two years after the PC was announced. “We firmly believed that being different was the most incorrect thing we could do. We reached that conclusion because we thought personal computer usage would grow far beyond any bounds anybody could see back in 1980. Our judgment was that no single software supplier or single hardware add-on manufacturer could provide the totality of function that customers would want. We didn’t think we were introducing standards. We were trying to discover what was there and then build a machine, a marketing strategy, and distribution plan that fit what had been pioneered and established by others in machines, software and marketing channels.”

Not long after the official unveiling of the PC in New York City, Apple Computer, with great arrogance, ran what would become a famous full-page ad in the
Wall Street Journal.
“Welcome IBM,” the ad proclaimed. “Welcome to the most exciting and important marketplace since the computer revolution began 35 years ago. We look forward to responsible competition in the massive effort to distribute this American technology to the world.”

Apple Chairman John Sculley later told
Playboy
magazine that running such an ad was like Little Red Ridinghood welcoming the big bad wolf into her grandmother’s home. “There is a very fine line between being self-confident and getting cocky