The story you told us about going in and turning off employee terminals so they stop working. Is that any indication that it’s hard to give you feedback and it’s hard for other employees to push back on you?
Oh, I wish it were tough. We are very open. You don’t need appoint-ments to see me. Everybody storms up here. So it’s not a big deal. I also don’t think it’s tough, because employees recognize that when you’re tough with me, I respect and appreciate you more.
If people keep telling me what I want to hear, then I tell them,
“If you and I agree all the time, then one of us is redundant—and it ain’t me. Now, you figure that one out.” And they understand.
You said that the journey is really important. What about the journey motivates you?
If I can have an impact and do something to leave this world a little bit better, and I can get paid well for it, then I’m going to have the time of my life.
There is nothing macho about this. There is nothing here about achieving this or that or being the biggest software company in the world. People have said that at one point we were the biggest software company, but now Microsoft has passed us up.
Yeah? Big deal.
We never said we had to be the biggest. I want to be the best that we can be, though. I want us to be the best software company that takes care of its clients, takes care of its employees, takes care of its shareholders, and has a great time doing it.
If I can manage all of those things, we’ll do fine.
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BILL GATES
Microsoft
RUNNING THE PANZER
DIVISION
Had you invested 10,000 dollars in a Seattle software company with the newly branded stock ticker symbol MSFT
at the time it went public and had you managed to keep that stake, your stock would have at least been worth over $1 million in 1996. A cool ten-thousand percent return on your investment.
If you had been lucky enough to start the company with your own money, your net worth might exceed $20 billion. An even cooler return.
Just who is Bill Gates?
On the surface, we all know a number of facts. He is the world’s richest person. His company’s operating system software runs 90 percent of all personal computers. So powerful is his company that in 1995 his firm was investigated by the United States government for alleged antitrust violations.
Yet, at the end of the day Bill Gates is a businessman with real responsibilities: selling software, charting product strategy, keeping almost 20,000 people employed and meeting 143
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shareholders’ now very high expectations. Along the way he has built a company comprised of many smart, talented, and aggressive people who aim to dominate practically every market they set their sights on. Whatever the management technique, philosophy, or gestalt Gates uses, it works.
Getting underneath and studying this approach was our focus when we met with this truly self-made man; anyone who drops out of college at age 19 to start a company in Albuquerque, New Mexico, and turns it into an 8 billion-dollar software company is doing something right. Just what is it?
One telling characteristic is Gates’ penchant for reading biographies of the great minds of the modern era: Napoleon and Alfred Sloan of General Motors, among others. It’s not surprising that Gates reads these with the premise that perhaps one of the best ways to become a leader is to understand how others did it themselves.
When Gates and his partner, Paul Allen, decided to form a company called “Micro-Soft,” Allen pushed for the nascent company to produce both the computer and the software that ran on it. After all, just about everyone else was doing it. The conventional wisdom was that by locking customers in to both technologies, the provider of that computer system could lock in its customer base. Of the dozens of companies with this vision of computing, only a handful remain. The majority of today’s successful companies focused on either hardware or software, did it right, and beat the rest. Microsoft was one of these companies. For several years, though, Gates, Allen, and company labored in the shadows of high-flying entrepreneurs like Steve Jobs of Apple Computer and Adam Osborne of Osborne Computer who seemingly overnight built their businesses into multi-million- or multi-billion-dollar enterprises.
Microsoft was put in business—and nearly taken out—by Ed Roberts of MITS. After convincing Gates that they were the team to write the operating system for MITS’ computer, Altair, Paul Allen convinced Roberts that they could pull it off.
Needless to say, sales of the Altair computer rocketed once people used this software to make the computer perform rudi-mentary tasks. In what was to set the standard for licensing
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software, Gates wrote the initial contract that gave MITS the rights to incorporate this software into its machine but left the right to distribute the software to other companies firmly in the hands of Microsoft. This licensing model dominates the industry today.
Microsoft’s licensing of BASIC to rival firms angered Roberts and his corporate parent Pertec. Roberts obtained a restraining order on Gates’ firm to keep them from earning revenues from their core product. Though an arbitrator ruled wholly in Microsoft’s favor, Gates was fortunate not to have lost the company. Microsoft’s cash hoard helped it weather what was certainly a seminal moment in the company’s history.
In those early years Microsoft wrote software like FOR-TRAN and COBOL for just about every computer platform then on the market. Most failed. Who today remembers products like Quick Pascal, SoftCard, or even recent debacles like Microsoft Bob? Nonetheless, in an industry where up to 90
percent of startups flop in the first five years, Microsoft has a league-leading batting average.
Several perils await the startup founder whose company achieves liftoff. One is that the founder, sensing genius, decides that s/he is quite capable of handling that “vision and management thing.” Another is concluding that the company needs professional management from a Fortune 500 executive only to see the seasoned manager tank the company. Bill Gates avoided both of these. In 1982, recognizing that Microsoft’s internal controls were in shambles, Gates looked outside the company for someone with solid management experience to straighten out business processes. He hired Jim Towne from an Oregon firm, Tektronix, to do the job. In less than a year Gates dismissed him and reinstated himself as president before venturing outside again to hire Jon Shirley, a former Tandy executive who would go on to help lead Microsoft into the Fortune 500 over the course of his seven-year tenure.
For some entrepreneurs, achieving financial liquidity and security in the stock market is the siren’s call. Today companies with meager revenues and nonexistent profits belly up
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and drink their fill from the public markets. Flush with cash and investor goodwill, these startups lose some of their hunger to survive and squander their advantages to fast-approaching competitors. In contrast, Microsoft waited for over ten years after going into business and racked up $140 million in yearly revenues before going public. Gates knew perhaps better than all others that past was but prologue.
In what was to be Microsoft’s most challenging product development effort to date, Gates laid plans for a next-generation operating system. It would have to have the powerful graphically-based desktop metaphor of the Macintosh yet leverage the huge installed base of IBM-compatible systems running Microsoft’s workhorse operating system known as DOS. There is much disagreement over how Microsoft obtained the right to develop this system that resembled Apple’s, but one thing is clear: The scope of the project itself almost broke the will of everyone including Gates before it finally hit the market almost two years late in 1985.
Gates’ work ethic is as impressive as his intellect. The stories of him falling asleep—at his terminal, waking up someti
me later and immediately continuing where he left off—are legendary. Working in such a sleep-deprived state for several years is usually a CEO’s ticket to a coronary. Perhaps it was Gates’ youth that saved him from this fate. We were eager to see if he had moderated his pace and, if so, if it implied any softening of that competitive instinct.
Everyone likes the underdog and Microsoft hasn’t been one for some time. New technologies for navigating the World Wide Web are the hottest things on the market since the advent of PCs. The premise is simple: any computer that is able to connect to any other one in the world has access to unimaginable quantities of information. As a new generation of startups races ahead, pundits crow that these new internet technologies lessen the need for a computer operating system, such as Microsoft’s.
The excitement surrounding the internet leaves Gates & Company as vulnerable as it was when it was a ten-person outfit on the eighth floor of Two Park Central Tower in
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Albuquerque. He must critically evaluate over 200 Microsoft technologies though he hasn’t written code for years. And he must somehow keep Microsoft from becoming the clumsy and lumbering behemoth of the computer industry—something Microsoft employees delighted in accusing IBM of by donning t-shirts that jeered, “IBM: Weak as kittens, smart as a sack of hammers.”
When we met with Gates, he had just come off a series of bad interviews. His rivals in Silicon Valley had done a good job of painting the internet as the thing to unseat Microsoft as the King of the Hill (something none of them have managed to do on their own) and the media, sensing blood, relentlessly and openly questioned Microsoft’s viability. In short, we wondered if Gates might pull a Connie Chung and summarily boot us from the office after the first tough question.
“My job is the best job there is.”
When Microsoft started, the conventional wisdom was to create both the computer and the software that ran on it. How did you choose to focus strictly on software?
The PC industry is about disaggregation between building hardware and building software. But there’s another level in that disaggregation that’s key: the hardware system versus the chips. The miracle of microprocessor technology is really what transformed computing.
When Microsoft started, a computer company designed the computer, laid out the circuits, and designed the instruction sets. The chip industry today does that better than anyone else. It wasn’t destined to happen, actually—DEC could have put their architecture onto a chip, and they almost did.
Today, in retrospect, things were very simple. But there were many microprocessor companies in the early days and we wrote BASIC for seven different chips. We didn’t even cover all of the chips out there. It was clear that the chip companies were going to build the best chips and deliver the needed performance. If the chips were used by multiple hardware companies, then what about software?
Paul and I knew how to write software. That’s what we loved to do and that’s what we thought we could make a contribution in: operating systems, languages, applications.
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DEC didn’t buy outside software. They wouldn’t buy an operating system or a compiler from somebody else; it was all developed inside. So we couldn’t start a company selling software to DEC or IBM. Our opportunity was a vision of a completely restructured industry where Intel did its part and we provided software to the many systems companies. Initially, we had an immense variety of customers and the taxonomy of the computer industry was much richer than it is today. The different types of computers were amazing.
There were 30 word processor manufacturers and we licensed our BASIC Interpreter to 27 or 30. Now those guys are gone. The “general-purpose PC” has taken that over.
You’re absolutely right, though. The insight to do a dedicated software company was key, because companies like Wang or DEC or IBM—who had lots of software expertise—didn’t have that vision.
They didn’t treat their software skill as a key business. Of course it took a long time for the business to develop and we had many competitors, but they were all startup companies like ourselves.
So the decision to create a software-only company was based on your personal preference for software?
It’s not that simple. Paul was very good with hardware and he understood it much better than I did. In fact, Paul wanted to do a hardware company. It was a great debate between us. In my senior year in high school, Paul and I both worked at TRW and the big question was whether we should start a company. Apple didn’t exist at the time and MITS was still making model rockets and measurement systems.
I told Paul that Intel’s 8008 processor wasn’t powerful enough and that we shouldn’t start a company. Then the 8080 came along and it was clearly powerful. It was more powerful than DEC’s PDP8 minicomputer. An amazing number of things could be done with Intel’s 8080. Paul tried again: “Let’s take the 8080 and make a computer with it.”
Since I didn’t know that much about hardware, I pushed for software. Paul eventually came around, but he went to work for MITS.
Paul and I wrote BASIC—our first product. It was almost a year-and-a-half later that we worked full-time, but the number of our early customers was just unbelievable. A lot of them went bankrupt, but most of them were companies doing a variety of different kinds of computers. For a couple of years almost half of our revenues came from Japan. Our sales approach was to say, “If you had to write the
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software in-house, your fixed engineering budget would be X and Microsoft’s price is less than half what you dreamed you could do it for, and far better than what you could do.” We competed against in-house engineering budgets. When Radio Shack made their first computer that was the question: what would the in-house costs be?
Your sales pitch was to outsource.
Yes. What Radio Shack got from us was more powerful than if they had done it themselves. But there was no notion of it as a standard.
We started to promote the standard. We got people like Bob Albrecht of People’s Computer Company and Adam Osborne [of Osborne Computer] to create programs on our BASIC and publish those programs. These people were famous at one time.
A variety of companies came out with applications. That’s when people said, “Hey, I want Microsoft BASIC. My applications need Microsoft BASIC.” That’s the point when you’re in a position to start commanding royalties as opposed to a fixed fee. Eventually, we knew we had enough of a brand position to use a pure royalty approach.
Let’s talk about when you firmly established your market presence.
Microsoft was unusual in that it waited until it had over $100 million in revenues before going public. Would you do it differently now?
Software is a very unusual business. The development work is not that capital-intensive. The first year we generated cash like mad even though we had many customers who went bankrupt—in other words, we had a wide margin for error. I always wanted to have enough money in the bank, so that if nobody paid us for a year, we’d be okay.
After 1978 I was able to do that.
In 1981 we decided to do a stock option program to a very broad set of employees. In 1983 I thought, “I’ll use a board of directors to get some experienced business people in here and get their advice.” I created a board of directors comprised of local business leaders and one venture capitalist. The capitalists of course were very interested in Microsoft. So we spent a lot of time with them and got to know TBI [a local venture capital firm]—Dave Marquardt, in particular. It was very hands-on. We told Marquardt, “Pretend you are a board member for six months and we’ll see if you really help us to hire people who can make business trade-offs.” We liked that quite a bit.
Dave joined the board and bought five percent of the company for a
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million dollars. That was their incentive to help us, but it was really business experienc
e that they brought. The local business people didn’t buy in since they weren’t into venture capitalism.
We had enough stock options outstanding such that we had to start registering information. If you have a thin market for the stock, you get incredible volatility, outrageous prices. So we had to sell some shares to create some liquidity. We only went public because of the stock option plan. The money we got from going public is in the bank.
That and the $23 million along with the other $5 billion currently in the bank. If I had to do it all again, I might have done a deal like UPS
has done where you use a buy/sell formula and you avoid a need to go public; you keep it as a purely internal market and drive the pricing through a formula. It avoids some of the volatility and overhead that you get in the public market. Our experience hasn’t been bad or anything, but in retrospect, I would choose the other route.
What are some of the pitfalls you could have avoided in the beginning?
I used to have this memo that I updated every year called The Ten Great Mistakes of Microsoft, and I would try to make them very stimulating for people to talk about lessons for the company’s future.
Many of our mistakes relate to markets we didn’t get into as early as we should have, but the constraint was always the number of people we could hire, managing everything, and ensuring that we met all our delivery commitments—we were always on the edge. We really pushed the limits of how fast we hired people. The only real disagreement Steve Ballmer [VP of Sales and Marketing] and I ever had was when he joined the company—we had 25 people. He said, “We have to hire about 50 more people to deal with all this opportunity.” I said,
“No way, we can’t afford it.” And he said, “But that’s what we’ve got to do.” I said, “I just disagree. I’m not going to agree to that.” I thought about it for a day and said, “Okay, you just hire as fast as you can, and only good people, and I’ll tell you when you get ahead of the sanity picture.” Here we are at 18,000 people now and still the key constraint is bringing in great people.
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