Regardless of what really happened that day, most of those in the computer industry believe Kildall’s actions helped make Microsoft the software giant it is today.
Sams said he subsequently telephoned Kildall after the ill-fated trek to Digital Research. "I told him we were serious, we really did want to talk with him. I had to assume we had gotten off to a bad start and that he wouldn’t arbitrarily refuse to do business with us, you know, did he have some religious opposition to us. He said ‘No, no, no, we really do want to talk with you.’ " But Sams said he and others at IBM could not get Kildall to agree to spend the money to develop a 16-bit version of CP/M in the tight schedule IBM required. "We tried very hard to get a commitment from Gary," Sams said. "When we couldn’t, I finally told him, ‘Look, we just can’t go with you. We’ve got to have a schedule and a commitment. We can get one from Gates.’ "
In a series of meetings with Microsoft after the initial rebuff from Digital Research, Sams threw the operating systems problem in Gates’ lap. "This was the negotiating tactic we took with them," said Sams. "We wanted this to be their problem, to find us the right operating system, one that we could integrate successfully on our schedule."
Luck once again would shine on Bill Gates. An operating system for the 16-bit Intel chips had just been developed by Tim Paterson at Seattle Computer Products, not more than a twenty-minute drive from Microsoft.
Tim Paterson had always wanted to design an operating system for a microcomputer. But had the "Father of DOS" realized he was going to stir up so much controversy, he might have stuck with racing cars, which he enjoyed almost as much as programming.
After showing off Seattle Computer’s 8086 CPU boards at the National Computer Conference in the spring of 1979, Paterson had returned to Seattle to perfect the boards so they could be sold commercially. During this time, he was contacted by Digital Research, which wanted one of the CPU boards in order to develop a 16-bit version of CP/M. But Seattle Computer did not have any boards to spare. Paterson asked when Digital expected to have its new version of CP/M ready. By December, he was told.
Seattle Computer began shipping its first 8086 CPU boards to customers in November of 1979. Microsoft’s Stand-alone BASIC was offered as an option. These first customers were mostly software developers. By April of 1980, Digital Research had still not designed CP/M-86. Paterson decided to wait no longer; he would develop his own operating system.
"Here we had something that would work, but we were waiting and waiting for Digital to come out with their version of the operating system for the 8086," said Rod Brock, owner of Seattle Computer Products. "They kept telling us any day now we will have it. This delay was really costing us sales. It’s hard to sell a product without an operating system. We were probably selling five to ten boards a month, but figured there were a lot more sales out there than that. We needed an operating system to get them."
Five months later in September, around the time Jack Sams was being stonewalled by Dorothy McEwen and the lawyer at Digital Research, Paterson had his operating system up and running for the first time. He called it 86-QDOS, which stood for quick and dirty operating system.
Seattle Computer began shipping Paterson’s 86-QDOS to customers. "This was a real product," said Paterson. "Everyone always thinks IBM was the first to have it. That’s crap. We shipped it a year before they did. It was used on our computer. We were selling a computer that was more than twice as fast as the one IBM was going to come out with." (The reason for the difference in speed was that the IBM PC used the slower 8088 chip.)
Just as Gary Kildall has had to read over the years how he lost the IBM deal because he was off flying in the clouds, Paterson has had to read how he ripped off CP/M in developing an operating system that became the industry standard. Typical is this comment from an unidentified Digital employee who was quoted in a 1990 Business Month article that depicted Gates as a silicon bully: "We never tried to patent CP/M. Nobody was patenting software then; it was almost unethical. But if we had, Microsoft probably couldn’t have developed MS DOS because parts of the original source code looked a lot like CP/M’s. How else did Paterson and Gates come up with that nice new operating system overnight?"
At one point, Kildall telephoned Paterson and accused him of "ripping off" CP/M.
"At the time," said Paterson, "I told him I didn’t copy anything. I just took his printed documentation and did something that did the same thing. That’s not by any stretch violating any kind of intellectual property laws. Making the recipe in the book does not violate the copyright on the recipe. I’d be happy to debate this in front of anybody, any judge."
Although Paterson’s operating system mimicked some CP/M functions, there were significant improvements. QDOS stored data on disk in a completely different way than CP/M did, and it also organized files differently. Paterson’s goal was to make it as easy as possible for software developers to be able to translate what had become a huge body of 8080 programs that ran on the popular CP/M so they could run on his operating system. He first obtained Intel’s manual for its 8086 chip, which had detailed rules for translating 8080 instructions into 8086 instructions. Paterson wrote a translator that followed Intel’s guide. He then got Digital’s CP/M manual, and for each 8080 function he wrote a corresponding 8086 function.
"Once you translated these programs, my operating system would take the CP/M function after translation and it would respond in the same way," said Paterson. "To do this did not require ever having CP/M. It only required taking Digital’s manual and writing my operating system. And that’s exactly what I did. I never looked at Kildall’s code, just his manual."
Once Paterson had 86-QDOS working, he contacted Paul Allen and asked him if Microsoft wanted to adapt any of its software for Seattle Computer’s new operating system. "That’s when they found out we had it," said Paterson.
Up until then, Microsoft had been unsure what it was going to do about obtaining an operating system. Digital Research was out of the picture. IBM did not have time to develop an operating system within the 12-month deadline set by its corporate brass. Neither did Microsoft, at least not if it had to start from scratch. Without an operating system, the entire PC project appeared to be in jeopardy. "The feeling was if we couldn’t solve it, the project couldn’t go forward," said Bob O’Rear, the Microsoft programmer who would soon be given technical responsibility for the operating system. "We’d have no languages to sell on the IBM PC. It was of paramount importance that we engineer a solution to the operating system equation.... We had to do something so that this project could go forward."
In late September, Allen contacted Rod Brock and told him that Microsoft had a potential OEM customer who might be interested in Seattle Computer’s new operating system. Allen, who could not reveal the identity of the customer, wanted to know if Microsoft could act as the licensing agent. Brock said yes.
Gates would later say that obtaining Seattle Computer’s operating system saved Microsoft about one year of work.
IBM had told Gates it wanted a final proposal from Microsoft in October, and time was running out. Gates faced a critical decision. Could Microsoft deliver languages and an operating system and still meet the demanding schedule IBM had set to have a computer ready for market within a year? The software would have to be finished before that, probably in about six or seven months. The four languages IBM wanted—BASIC, COBOL, FORTRAN, and Pascal—would require writing about 40,000 bytes of code. An operating system would likely mean another 2,000 bytes of code. According to Microsoft, on September 28, 1980, a Sunday night, Gates, Allen, and Nishi were in Gates’ eighth-floor corner office in the downtown bank building, brainstorming about the operating system. Should they commit to it? Suddenly, Nishi jumped to his feet, waved his short little arms in the air and shouted, "Gotta do it! Gotta do it!"
That’s when it became obvious to Gates that 2,000 more bytes of code for an operating system was no big deal. Of course they had to do it. "Kay’s kind of a flamboyant guy, and when he believes in something, he believes in it very strongly," Gates would say later. "He stood up, made his case and we just said ‘Yeah!’ "
Not long after this, Gates was pacing nervously in his office late at night, waiting impatiently for the last pages of a lengthy computer printout. When the machine was finally silent, he grabbed the pile of paper it had been spitting out, stuck it in his briefcase, and dashed out of the building with Ballmer and O’Rear for the airport. Microsoft’s final report to IBM was ready. It was now time to get down to hard-core negotiations with the guys in blue suits in Boca Raton.
Previously published accounts of this crucial meeting between Microsoft and IBM, including the books Blue Magic, Fire in the Valley, and The Making of Microsoft, reported that Paul Allen made the trip to Boca Raton with Gates and Ballmer. This was not so. "It was Bill and Steve and myself," said O’Rear. "I’m not sure why P&ul didn’t make it, because he was certainly heavily involved. Maybe he was off on some other project that evening. It was a situation where we kind of finished the proposal to IBM, tore it off the computer, raced out to the airport, barely made the flight, flew all night, got there, bought a tie for Bill and made the pitch."
The report Gates carried with him covered hundreds of technical issues, involving both hardware and software recommendations for the PC. But it also detailed financial matters. Early on, Sams had talked to Gates about a fixed price for an unlimited number of copies of any software Microsoft licensed to IBM. The longer Gates thought about this proposal, the more he became convinced it was bad business. Microsoft would be making a huge financial investment in this project, and a lump sum payment from IBM would not give the young company much of a return on its investment over time. When Gates boarded the nonstop Delta flight for Miami, he had decided to insist on a royalty arrangement with IBM.
Sams had made it clear from the first of his meetings with Gates that Microsoft would retain ownership of whatever software it developed. In fact, IBM wanted nothing to do with helping Microsoft, other than making suggestions from afar. "There has been a lot of speculation about why we ever let Microsoft have the proprietorship and all that," said Sams. "The reasons were internal. We had had a terrible problem being sued by people claiming we had stolen their stuff. It could be horribly expensive for us to have our programmers look at code that belonged to someone else because they would then come back and say we stole it and made all this money. We had lost a series of suits on this, and so we didn’t want to have a product which was clearly someone else’s product worked on by IBM people. We went to Microsoft on the proposition that we wanted this to be their product.... I’ve always thought it was the right decision."
When the rental car carrying Gates, Ballmer, and O’Rear pulled up in front of IBM’s Entry Level System unit in Boca Raton, it was half past ten in the morning. They were 30 minutes late. But Gates had a new tie dangling from his neck, and he walked confidently into the large conference room where about seven or eight IBM employees were waiting for him, including a couple of lawyers.
Gates planned to make the presentation himself. Ballmer and O’Rear were there to make points if necessary and to answer questions. "Bill was on the firing line," Ballmer said later.
If Gates was nervous, he didn’t show it. As usual, he was in complete command of his material and his audience. The much older executives asked question after question, making notes on yellow, legal-sized writing tablets as they went around the table taking turns. Many of the questions concerned the operating system that Microsoft proposed to supply IBM. Gates answered with confidence and maturity, often rocking back and forth with characteristic intensity. Everyone in the room wanted the joint venture to work. It was in the interest of both parties to resolve any differences here at this meeting. IBM was about to forge an alliance with an outside supplier unlike any in the company’s history. Microsoft would not be supplying nuts and bolts for the new PC but rather the vital operating system, the very soul of the machine.
"We had a lot of coaching from the IBM people, they really wanted to do the thing," said O’Rear. "We’d talk to them about what we wanted to do and how we wanted to do it, and they’d say things like, well, it’ll be more acceptable if you do this, that or the other.... Everybody was searching for a solution. Everybody in that room wanted to do the project. They just wanted to explore all the issues."
That evening, Gates, Ballmer, and O’Rear had dinner with Jack Sams, who had been part of the IBM team quizzing them throughout the morning and afternoon. Over dinner, Sams coached Gates on how he should modify parts of his proposal to make it more acceptable. Later, the three exhausted Microsoft employees went to their rooms at a nearby Holiday Inn. It had been two days since any of them had slept.
When the meetings ended the next day, Gates and Ballmer immediately flew back to Seattle. O’Rear remained in Miami for two days visiting friends. It would be his last consecutive days off for the next ten months.
The talks had gone well in Boca Raton. Gates and his team had made a good impression. During the two-day meeting, Gates had gotten to know Don Estridge, the brilliant, maverick leader of the Project Chess team. Although Estridge was almost 20 years older than Gates, they would develop a close friendship. When it came to computers, they were kindred souls sharing the same vision. Estridge told Gates that IBM chief executive John Opel, who was known around the company as "The Brain," had mentioned to him that he knew Mary Gates, having served with her on the national board of United Way. (Before joining the national board, whose members, like Opel, were for the most part chief executives of Fortune 500 companies, Mary Gates was the first woman president of United Way in Seattle.) Whether this United Way connection helped Microsoft get the IBM deal is not clear. Opel, now retired, won’t talk. Sams said Estridge made the same comment to him about Opel and Mary Gates. Sams believed Opel may have been reassured about Gates because he knew his mother. After all, Gates was only 24 years old, and IBM was betting the reputation of the company on Gates, and Microsoft, coming through.
It was shortly after the Florida meeting between Microsoft and IBM that Estridge replaced Sams on the Project Chess team. But Sams, who would continue to see Gates off and on during the coming years, had formed a lasting impression of the young cofounder of Microsoft. "He was an extraordinarily competent person," said Sams. "More than anyone I’ve ever known, Bill had committed himself to the idea of being ready for what was coming before it happened. He was willing to make investments on the strength of what he saw happening two or three years ahead of time.... I’ve never dealt with anyone since who was such a force."
In early November of 1980, the corporate odd couple officially signed the paperwork. Microsoft would develop the software for IBM’s first personal computer and supply the vital disk operating system, or DOS. Deadlines had been set, numerous timetables established, commitments and promises made. The schedule would be brutal. IBM wanted an initial working version of the operating system and BASIC by mid-January. "They showed us we were three months behind schedule before we started," recalled Gates.
On Sunday nights, Gates usually took time off from work and went to his parents’ home for dinner. But he now told his mother that she probably wouldn’t see him again for six months.
A few days after Thanksgiving, two prototypes of the top secret Acorn arrived at Microsoft, hand delivered by Dave Bradley, an IBM engineer on the PC project in Boca Raton. "Acorn" was the codename that the corporate brass in Armonk had given to what they hoped would be the newest and smallest member of the IBM computer family. The overall project was still known as "Chess." Big Blue was big on codenames and secrecy. When Bradley landed with the Acorns early one morning at Seattle-Tacoma International Airport, he rented a station wagon for the drive to Bellevue. It was the only way he could get all nine boxes of parts to Microsoft.
He was met at Microsoft’s offices by Steve Ballmer, who took him to a back supply room used by the shipping department. Large plastic bags and boxes littered the floor. IBM’s prized prototype computers would be kept here, Ballmer said, along with all documentation regarding the secret project.
IBM executives had made it clear to Gates at the two-day meeting in Boca Raton that they considered security a matter of the highest priority. The outside world was to know nothing about the Acorn. The cloak of secrecy would not be lifted until the official announcement when the computer was unveiled to the press and public—an event tentatively set for sometime in the summer of 1981. Any breach of security could jeopardize the project, they emphasized. The computer was to remain in the room at all times, with the door locked even when Microsoft programmers were in the room. All manuals and documents also were to stay in the room, secured in filing cabinets and a safe. IBM sent Microsoft special file locks. They also sent someone to install the locks. But when IBM insisted that Microsoft install chicken wire above the ceiling tiles to protect the room from an assault from above, Gates finally said enough is enough and nixed it.
All work on the computer had to be done in this unventilated, windowless room, which measured only ten feet by six feet. Heat generated by the computer and other electronics equipment quickly built up in the tiny, enclosed room. The temperature, which often reached 100 degrees Fahrenheit, not only made for an uncomfortable work environment, but further contributed to numerous hardware problems. Programmers would spend hours running down what they thought was a software glitch, only to discover the problem was with the unstable hardware.
Occasionally, IBM would send inspectors out to Microsoft just to nose around and check on security precautions. On one visit, an IBM security man found part of the company’s computer in the hallway outside The Room. And the door had been left ajar to allow a little fresh air for the sweaty programmer inside. Ballmer was called on the carpet by IBM. "After that, we got hard core," said Gates.
One Microsoft programmer remembered Ballmer running down the hallway one day, shouting, "Close the door and lock the safe! They’re here!" Ballmer, it turned out, had gotten a call from an IBM executive, and when he asked how the weather was in Boca Raton, the IBM guy said he didn’t know. He was in Bellevue and would be there shortly.
An elaborate communication system was established between Microsoft and the Entry Level Systems unit in Boca Raton. Electronic mail allowed messages to be immediately transmitted between computers at the two companies. Packages and hardware were shipped back and forth via Delta Dash, an express service provided by Delta Air Lines. Gates made frequent trips to Boca Raton on the red-eye flight for quick business meetings, returning to Seattle the same day.
No two U.S. cities in the contiguous 48 states are further apart than Seattle and Miami, kitty-corner across the country, and probably no one from either IBM or Microsoft made that 4,000 mile trip more often than Bradley, who had brought the first PC prototypes out to Microsoft. His role in the project was to develop what is known as the BIOS, the basic input and output of the computer system, which Microsoft was helping IBM write. Every time Bradley made the trip to Seattle, it rained. Gates, who had a corner office with a view of the Cascades, would tell Bradley on each of his visits that if it weren’t so cloudy he’d be able to look out the window and see majestic Mount Rainier. But Bradley never did see the mountain. A few years later, Bradley took a vacation to Seattle just to see for himself that there really was a Mount Rainier.
About the time the Acorns arrived at Microsoft, Miriam Lubow did as well. The company’s secretary and den mother from its Albuquerque days had moved with her family to Bellevue so she could go back to work for Microsoft and continue looking after its youthful president. One morning, not long after Lubow had returned to work, she was surprised to see Gates arrive at the office dressed in a suit. Later that morning, three strangers arrived carrying briefcases and wearing jeans, tennis shoes, and casual shirts. The men amazed Lubow by saying they were from IBM. Shaking her head, she showed them into Gates’ office. The IBM men took one look at the spiffy-looking Gates, and he took one look at them, and everyone burst out laughing.
The hardware and software engineers in Boca Raton had much more in common with the Microsoft employees than they did with some of the executives they were used to dealing with at IBM. "A lot of people on the team were not cut of the IBM cloth," said Bill Sydnes, engineering manager for Project Chess. "We did not recruit what you might call typical IBM blue for work on the PC program. They were all unusual characters."
A special camaraderie developed between the IBM and Microsoft teams working on the project. Personal, nontechnical Email was sent daily, and the two groups gave each other a good-natured hard time when one group fell behind schedule, which was often. In an interview with PC Magazine after the project was finished, Gates talked about that camaraderie: "This IBM project was a super-exciting, fun project. We were given, even for a small company, an incredible amount of latitude in changing how things got done as the project progressed.... And we had a really great interface with the people from the Customer (IBM), even though they were as far away as they could be.... We loved to kid them about all the security—how we had to have locks, and sign things in, and use code names and stuff like that.... I was very, very impressed with the team they put together.... We were the only vendor that understood what the project was about. Even up to the announcement, most vendors were kept in the dark about the general scope and the general push of things. So we enjoyed a really unique relationship."
Gates went on to describe the scene at Microsoft during the year-long project as very much like that which Tracy Kidder captured in his book, The Soul of a New Machine, about a group of computer whiz kids at Data General who pushed themselves to the limits of endurance to build a new kind of computer.
Microsoft’s first priority was getting the operating system up and running on the Acorn. This responsibility fell to Bob O’Rear. Other software being developed for the PC had to run on top of the operating system, and if O’Rear couldn’t adapt Seattle Computer’s 86-DOS to the prototype, the entire project was doomed.
"If I was awake, I was thinking about the project," said O’Rear, who worked throughout December without even taking Christmas or New Year’s Day off just like many of the others at Microsoft who were on the project.
Though Seattle Computer had furnished Microsoft a copy of 86-DOS back in September, when Microsoft informed the company it had a possible OEM customer for the operating system, no licensing agreement had been signed by the end of 1980. That didn’t seem to worry anyone. "We had no hesitation to let them try it out," said Tim Paterson. Six days into the new year, Microsoft and Seattle Computer finally signed an agreement giving Microsoft a nonexclusive right to market 86-DOS. This meant Seattle Computer could continue to license its operating system to other customers. The negotiations were handled by Paul Allen and Rod Brock, the owner of Seattle Computer. Although the agreement was signed by Gates, he and Brock never met or even talked. For each sublicense of 86-DOS, Microsoft agreed to pay Seattle Computer $10,000, plus an additional $5,000 if the source code were part of the sublicense. Seattle Computer also received $10,000 for signing the agreement.
"We came to an agreement fairly easily," said Paterson, vice-president of Seattle Computer. "We even called Digital Research to see what they sold their stuff for. We got a feel for what the prices were like."
Of course, no one at Seattle Computer knew that Microsoft’s unnamed customer for the operating system was IBM, with revenues approaching nearly thirty billion dollars.
One important clause in the contract stated: "Nothing in this licensing agreement shall require Microsoft to identify its customer to Seattle Computer Products."
Recalled Brock: "That seemed strange to us, but we agreed to go along."
Microsoft ended up paying Seattle Computer a total of $25,000 under terms of the agreement, because it turned around and sublicensed 86-DOS and the source code to only one customer, IBM.
A source at Microsoft who was privy to the negotiations with IBM for the operating system said Microsoft licensed the first version of DOS to Big Blue for only $15,000. Microsoft also received royalties as part of the license, although the royalty arrangement has always been a closely guarded secret at IBM and Microsoft. "We were an aggressive company," the Microsoft employee said. "Our strategy was, we would make our money on the languages. Remember, we already had the deal for all the languages, and Digital Research was supposed to have the deal for CP/M. And when it looked like we might lose the language deal because IBM didn’t have an operating system, we simply were going to solve the problem. And we solved that problem for about $15,000. But I can assure you it cost us more than that to make the delivery. And I can also assure you we made money on the BASIC. We made money on the licenses we already had, and we made sure that we got the operating system deal. Not so much to make money, and not so much to set the world standard, but simply because we couldn’t close our language deals without it."
For a while, O’Rear wondered if he would ever get 86-DOS running on the hardware he was using in the small, stuffy, win-dowless room at Microsoft. The technical problems with both the software and hardware seemed endless. The prototype machines delivered to Microsoft just after Thanksgiving were just that—rough drafts. They didn’t work very well. O’Rear continuously fired off memos to his contacts in Boca Raton about equipment problems, complaining about the difficulty of meeting the January 12 date for the delivery of DOS and the BASIC due to breakdowns in the hardware IBM had provided.
Microsoft didn’t make the January 12 deadline. It was not until February that O’Rear finally got 86-DOS to run on the prototype. He still vividly remembers the moment. "It was like the middle of the night. It was one of the most joyous moments of my life, to finally after all the preparation and work, and back and forth, to have that operating system boot up and tell you that it’s ready to accept a command. That was an exciting moment."
The IBM team in Boca Raton wanted several changes in the operating system, and Allen asked Paterson to help with these. The changes were all fairly minor. For example, IBM wanted one feature that remains on DOS today—the date and time stamp. Another change involved the so-called prompt that DOS left on the screen when the system came up. The prompt that Paterson had designed for 86-DOS was the drive letter followed by a colon. Neat and simple. But IBM wanted the CP/M prompt, which was the drive letter followed by a colon followed by the "greater than" sign used in mathematics.
"It made me want to throw up," said Paterson of the request for CP/M prompts. But he obliged. Paterson was working blind as he made the requested changes in his operating system. He did not have a prototype computer. He did not even know one existed.
Seattle Computer picked up an occasional hint that Microsoft’s unnamed customer might be IBM. One day in early spring of 1981, Brock received a call from someone who said he was with IBM, and he had a question about the operating system. Brock knew his company had not licensed 86-DOS to IBM, so he asked the caller where he was located. The caller immediately hung up. Brock later mentioned to a sales rep who called on Seattle Computer from time to time that Microsoft was dealing with an OEM who did not want to be identified. The computer sales rep told Brock he had heard a similar story from a friend at Intel. The chip maker also had an agreement with an OEM who wanted to remain anonymous.
Given the scope of the PC project and the number of people at IBM who were either working on the computer or knew about it, word probably should have leaked out about what was going on at Microsoft and at the Entry Level Systems facility in Boca Raton. But other than rumors, specific details didn’t get out, at least not until near the end.
The original group of 13 engineers assigned to Project Chess grew to several hundred. Programmers at Microsoft joked that this was IBM’s smallest project and Microsoft’s biggest, yet IBM had more people writing requirements for the computer than Microsoft had writing code. O’Rear often felt overwhelmed by the number of people he had to deal with in Boca Raton. He had the authority to say "yes" to anything requested of him by the IBM team. But only Gates could say "no."
"If they said we have to have this or we have to have that, I could immediately give approval," O’Rear said. "Otherwise, it had to go through Bill. I was dealing with a lot of people. IBM had this mainframe program where they outlined every little point and conversation that we would have, and I would get calls from people doing all different kinds of things, from contract administration to looking at the technical details to deciding where we were in the schedule to writing documentation. All these calls would be from different people. And I'm trying to write all this stuff and make it work on the PC. Just to take two or three or four phone calls a day, and do all this stuff, and follow up on several of these phone calls, looking into each little aspect, or trying to educate them towards the project, it was a lot of work, it was a lot of stress."
Everyone involved in the project at Microsoft was under incredible strain. One by one, deadlines for various stages of the project slipped by because of technical problems. Most programmers writing code for the PC worked seven-day weeks, frequently pulling all-nighters. Gates did not leave the office for days at a time, unless he had business in Boca Raton to talk about the design of the computer with Estridge or others.
Although he didn’t write much code himself, Gates reviewed most of the software code being written by his programmers for the PC. And he also helped with technical problems, as did Allen. Both suggested or ordered changes in the code when they found something they didn’t like or thought could be improved.
Bradley, the IBM software engineer, recalled a trip he made to Microsoft to bring a new power supply for one of the broken-down prototypes. The problem was fixed on a Saturday, but Bradley was told by his office to remain in Bellevue until Monday so he could pick up a new version of BASIC that Microsoft was supposed to have finished by then. But on Monday, Gates told Bradley it was not yet ready and to come back Tuesday. Around five the next morning, Bradley got off the elevator at Microsoft’s offices, walked down the hallway, and found Gates sprawled on the floor of a back office, going over a huge computer printout with a red pen, marking changes he wanted. He had been up all night debugging the BASIC.
Although the pace of work was unrelenting during the spring of 1981, Allen and a couple programmers took a quick break and flew to Florida in mid-April for the maiden launch of the Space Shuttle. "This was the first mission, and it was a big deal," said Charles Simonyi, who had to talk an exhausted Allen into making the trip. But they almost didn’t get to go. Gates had scheduled a company meeting for Friday, April 11, the day Columbia was supposed to blast off. But a computer software glitch at NASA postponed the flight until Sunday, so Simonyi, Allen, and Marc McDonald flew down on Saturday. They rented a car in Miami and drove all night up the Florida coast to Cape Kennedy. The Columbia, carrying astronauts John Young and Robert Crippen, blasted into orbit at seven o’clock in the morning Eastern Daylight Time. The three space enthusiasts from Microsoft then drove back to Miami and flew home.
Simonyi was not working on Project Chess. He had recently been hired to take over development of Microsoft's applications. Although much of the company’s attention was focused on the IBM project, Microsoft could not neglect its other business. Deals with OEM customers in this country and in Japan continued. Programmers like Simonyi worked on various applications. In dealing with these other customers, Microsoft took advantage of its inside knowledge that IBM was going to introduce its own personal computer based on Intel’s 8088 chip, according to a manager who was working for Microsoft at that time. "We would highly advise some of our customers to chose the 16-bit processor," he said. "Nobody really knew that we were working on the IBM contract."
On May 1, Tim Paterson went to work for Microsoft, where he learned for the first time who the customer for his operating system was. He had asked Allen about a job a few weeks earlier. Paterson decided to leave Seattle Computer because Brock could not make up his mind whether to sell the company’s products by mail order or through dealers. Brock was thinking of going back to a mail-order business, and Paterson did not want to work for what he figured would soon be a mom-and-pop operation. At Microsoft, Paterson joined O’Rear on the operating system. By the end of June, DOS was pretty much finished.
The company was growing rapidly, in part because of so many new employees hired to help with the IBM project. By June, the number of Microsoft employees had more than doubled from the previous year, to about 70.
One programmer hired in June, Richard Leeds, thought he was joining Microsoft to work on something else until he came to work the first morning, signed the nondisclosure agreement, and was told he would be helping with Project Chess. Each Microsoft employee on the project had to sign the document. Leeds was surprised when he got his first look at the PC. It had a clear plastic keyboard, and he could see right through the keys into the workings underneath. "We called IBM the typewriter company, he said. But the joke was, here was a typewriter company that couldn’t come up with a usable keyboard." Leeds was made project manager for COBOL, one of the languages that Microsoft was supposed to deliver to IBM. His job was to convert Microsoft’s 8-bit version of COBOL to a version that could run on the 16-bit chip.
"It was very hectic around there," Leeds recalled. "Everybody was real driven, real proud to be kids working on the next machine from IBM.... It was nonstop work. I was working 65-plus hours a week and I had a girlfriend, and there were complaints that I wasn’t working hard enough. They wanted 80. There were times that I worked 80."
When the COBOL work was done, Leeds received only a fourteen percent bonus instead of the promised fifteen percent.
Leeds had a habit of collecting pens that had been chewed obsessively by Gates. In only a couple of months, its grew to be a very large collection. Gates worried incessantly about the project. He knew that IBM had a habit of spending vast amounts of money on research projects that never saw the light of day. IBM would conclude a product could not be marketed, and then put the lid on it, buried forever in its giant bureaucracy. Up until the final days before the PC was announced, Gates was haunted by the thought that IBM would cancel the project. Had his nightmare scenario come true, Microsoft would have been hurt significantly because Gates had thrown so much of the company’s resources into the project.
"There was always the fear that IBM would decide not to announce this, that someone would say, ‘Nice effort guys, but we don t want to go into this personal computer business,’ " said O’Rear.
Gates got a particularly bad case of the jitters when the industry journal InfoWorld, in its June 8 issue, reported in alarming detail about the top secret PC project in Boca Raton. Gates worried that such stories would blow IBM’s cover and cause it to abandon the effort.
The InfoWorld article was entitled "IBM to Pounce on Micro Market." It was datelined Boca Raton. "A reliable source within IBM’s Entry Level Systems group in Boca Raton has provided InfoWorld with exclusive details on IBM’s new personal computer," the article said. "The system is scheduled to be announced in New York in mid July 1981. The central processor for this new system will be the 16-bit Intel 8088."
It went on to describe the computer’s memory size, monitor, and keyboard. The article even talked about the operating system. "IBM gave some thought to using CP/M as the disk operating system for the personal computer, but this would have been an incredible departure from normal IBM product development strategies," InfoWorld reported. "Instead, the operating system for this new computer will be similar to CP/M in many respects. The designers didn’t strive for compatibility, just similarity."
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.
As 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."