Bill Gates

by Michael Becraft

The best thing for users would have been if all the manufacturers of personal computer hardware had got together years ago and decided on a standard OS. Every time a new device was introduced the driver needed in the standard OS would have to be included with the hardware. Software houses would write programs to run under the standard OS and wouldn’t have to worry about multiple versions. The source of the OS would be widely available and everyone could make suggestions for its enhancement.16

  Gates wasn’t selling MS-DOS, Windows, or Microsoft Office at the time; those products did not exist as of yet and that was not Microsoft’s market. Gates’s company was one of the software companies that developed programming languages only; he had never hired anyone with expertise in operating systems or applications. In fact, Microsoft was still four years from “developing” its own operating system, where “developing” meant “purchasing from another company.” Yet according to Cringely, Gates consistently would state “we want to monopolize the software business” in the 1970s.17 At the time, Gates was still in his early 20s, and Microsoft was small. Once Microsoft was large enough to have a public relations staff, he was probably counseled against stating that he wanted to form a monopoly, as that usually draws the attention of the federal government.

  DISPUTE WITH MITS THREATENS THE COMPANY

  Microsoft’s growth was constrained by a dispute with Altair builder MITS over license agreements and the total amount of royalties, as Ed Roberts was trying to sell his company. This created a very possible failure point for the company, as Microsoft was looking to sell modified version of the BASIC programming language to other competitors, while MITS was attempting to take ownership of the full rights to the Altair BASIC developed by Microsoft. Losing access to the one product created by the firm would have spelled the end of Microsoft in 1978, many years before Windows was created. MITS had a judge enforce the arbitration clause in the original contract, which meant that Microsoft was in a critical holding pattern. The company was not receiving any revenue from MITS, the company was paying lawyers, and the company was forbidden to sign contracts until the arbitrator made a decision. When the arbitrator finally decided, Microsoft was able to sign many contracts with other vendors previously negotiated, and take all of the money from those contracts, without revenue-sharing with MITS.

  By the beginning of September, the arbitrator sent down word in no uncertain terms: MITS had violated the agreement in what Paul Allen remembered the arbitrator calling “one of the worst cases of corporate piracy I’ve ever seen.” Although MITS could continue to sell Microsoft’s 8080 BASIC for its own machines, its exclusive license was officially terminated. MITS would no longer share in future third-party royalties, and Microsoft was free to sell the product to all comers.18

  At this point, Microsoft’s future looked much brighter. The company didn’t have to share any revenue from sales of Altair BASIC with MITS, owned the complete rights to its software under the contract, and could sign all the agreements that were placed on hold during the arbitration hearing. This sudden inflow of cash saved the firm and started another key pattern of Microsoft under Gates’s leadership; as Microsoft was not building the actual computers, he was willing to sell revised versions of BASIC for every company that did decide to build computers. Even early Apple and Commodore computers ran a version of BASIC written by Microsoft. Customizing one product for every participant in the early market for micro-computers provided Microsoft the revenue to grow, and soon relocate from Albuquerque. Microsoft would not begin to work on operating systems or applications in earnest until after the move to the state of Washington, first in Bellevue in January 1979.

  Working at Microsoft was never easy, and many early employees left. Of the Albuquerque dozen a few weeks before the move to Washington—11 people immortalized in the December 7, 1978, company portrait plus a 12th person who missed the photo due to a snowstorm19—Bill Gates and just two others would still work at the firm in the 1990s.20

  INTELLECTUAL PROPERTY WHEN NO ONE IS GETTING RICH

  After the Open Letter to Hobbyists in 1976, Gates had hoped the issue of copyright had been solved by revisions to copyright laws. He was sadly mistaken. The laws on copyrights had been modified slightly since Gates wrote the widely disseminated Open Letter to Hobbyists in February 1976, within the first year of Microsoft’s existence. However, Gates and Microsoft were still in an important battle to protect their intellectual property. The 1980 interview with Dennis Bathory-Kitsz was incorporated into an article called Have the Courts Smashed Software Copyright? in 80 Microcomputing magazine. The magazine was named after the TRS-80 computer, which also used a form of BASIC written by Microsoft. And Gates understood that the current model of software being used endemically without licenses created little incentive to pay for a licensed copy:

  There’s nobody getting rich writing software that I know of.21

  In an interview where Gates strictly defended the rights of his firm to protect Microsoft’s intellectual property from being copied, he truthfully—at the time—described the state of the industry as not being particularly lucrative for the developers of software. He had already learned from his experiences with competitors and users when his only product was Altair BASIC. Given no legal disincentive to using the software written by Microsoft without buying licenses, the company’s product would be copied and/or resold without the firm receiving a commission on those sales. In order for Microsoft to grow, there was a need for a substantial change in the way the intellectual property of software was treated by the government of the United States, although those same protections would come much later in some of the markets entered by Microsoft.

  The year 1979 was a critical point for software developers in the early age of computing. In fact, many software developers thought the interpretation of laws had taken a step backward. The revisions to copyright laws in 1976 had asked for a commission (CONTU, or Commission on New Technological Uses of Copyrighted Works) to write a report about software stored on various electronic media and whether photocopies violated copyright; the commission had suggested a process such that software would be covered by copyright. Although Congress had not yet acted on the report from the commission, many assumed that the issue had been resolved for computer programs. Then a firm named JS&A was sued for selling a product called “JS&A Chess Computer,” which was an exact replica of Data Cash’s “Compu-Chess” product. Although JS&A was selling software created by another firm, a federal judge ruled in 1979 that copying and selling the program did not violate copyright law at the time.

  Given his stance in the Open Letter to Hobbyists just four years previously, the thoughts of a 24-year-old Bill Gates on the issue were very predictable. If a precedent-setting ruling from a federal judge stated that software stored on electronic media was not protected by copyright, there would be few legal mechanisms available to stop any computer program from being copied, re-labeled, or resold without any revenue to the creator of the work. Widespread copying of software quickly became prevalent, and Bathory-Kitsz noted, “Stated very simply, the copyright laws, the most general form of protection for authors and artists, may not apply to the final version of programs as prepared and sold on magnetic media—disks, tapes, wafers—or in read-only-memories (ROMs).”22

  At the time of the Open Letter, Bill Gates noted that $40,000 was spent in developing the Altair BASIC. Microsoft had grown from that time, and expenses in software development were far greater. Without the ability to use patents or copyrights, he described how Microsoft tried to protect the company’s products. “We spend millions of dollars a year creating software programs, and we are protecting those in several ways. There’s the trade secret laws where we get non-disclosure—that’s how we handle our source codes and our so-called commercial packages that are high-priced.” Yet not all software was high-priced, and Gates still believed “if the law wasn’t going to protect it, there wouldn’t be any software written,” consistent with the Open Letter.

  When informe
d by Bathory-Kitsz that someone had taken source code created by Microsoft and republished the material elsewhere, Gates was insistent that his rights had been violated. “He certainly has because that’s my material. Whose does he think it is? Does he think that he has the right to go out and commercially profit by republishing something that we created? I mean, that’s ludicrous! Why should he be making money from that? All he did was take our stuff.”23

  Although this was Gates’s second major round in protecting the intellectual property created by Microsoft, it would not be the last. The issue with federal copyright law gets resolved within a few years, whereas charges of unfair competition and violation of intellectual property did arise in the future, including charges against Microsoft and other firms controlled by Bill Gates.

  HIRING PERSONNEL TO GROW

  As the 1970s rolled over into the 1980s, Gates recognized that his company would benefit from hiring superstars in computer science and software development. He also recognized the converse; if the best programmers he had already attracted started to leave the firm, then others would as well. Microsoft had to become a destination for the most exceptional programmers, despite being a small company when compared to the likes of Apple or IBM. And the demanding Gates was clear that his employees had to be very talented, where the vast majority of the population would be unqualified for his work: “The key for us, number one, has always been hiring very smart people. There is no way of getting around, that in terms of I.Q., you’ve got to be very elitist in picking the people who deserve to write software. Ninety-five percent of the people shouldn’t write complex software.”24

  Gates’s reputation for being a challenging boss is well earned. As a software programmer himself, he clearly understood that the majority of people should not be involved in developing new software. The key understanding of Gates was not that software developers need to graduate from the most prestigious colleges; neither he nor Allen had graduated from college at all. He did know that software developers should consistently be high IQ individuals.

  1980—Hiring Steve Ballmer

  The second of Bill Gates’s exceptional everyday partners was Steve Ballmer, from 1980 through near the present day, overlapping with Paul Allen from 1980 through 1983 in Eisner’s model.25 First, Gates had to convince Ballmer to join the firm as the business manager, in an era when Gates was already known for both his technical capability and controlling knowledge of everything done by his firm. Waters wrote decades later that the young Gates:

  once ruled Microsoft with a command of detail and intellectual intensity that led to the kind of culture that was capable of dominating the tech world—even as it tipped over into behaviour that brought a regulatory backlash. “I was a kind of hyper-intense person in my twenties and very impatient,” he says. “I don’t think I’ve given up either of [those] things entirely.”26

  In 1980, the young Gates had very little measured intensity. He was simply intense. Persuading Steve Ballmer to come to Microsoft was an undertaking. Although a long-time friend of Gates, Ballmer was in graduate school at Stanford after getting his baccalaureate degree in mathematics and economics at Harvard.27 So Gates worked somewhat on impressing Ballmer in the recruitment and interview process, even bringing in his mother and father for an assist: “Inviting Ballmer to Seattle, Gates wined and dined his college friend, getting him together with his parents, Bill Sr. and Mary, and giving him a tour of the city.”28

  The recruitment and interview process was a high priority of Gates but not his highest priority at the time. Years later, Ballmer would reveal that Gates left for vacation during the interview; Gates already knew who he wanted at the company.29

  Ballmer also received partial ownership of the company to come to Microsoft on June 11, 1980. As the first business manager of Microsoft, the market would see the first IBM personal computers launch a year later, each running MS-DOS, the first commercial operating system for PCs. Gates then realized that hiring exceptional programmers would be the next step in growing Microsoft. And in his case, he started by hiring Dr. Charles Simonyi from Xerox PARC—the group that had been working on advanced computing techniques starting in 1970 because Xerox feared the paperless office that could occur by 1990.

  Gates knew that attracting very good programmers made it easier to attract others of the same caliber. Stars sought to work wherever the best in their fields congregated. Gates in 1981 had recruited Charles Simonyi from Xerox PARC as one of the first “really bright guys I hired in software development.” The presence of Simonyi, who can be regarded as the father of Microsoft Word, in turn helped to lure others. This was only one of the many virtuous cycles that were the centerpiece of Gates’s management philosophy. The converse was also true. If Microsoft were to lose its best programmers, others would begin thinking about leaving, too. Thus Microsoft had to pay ongoing attention to retention as well as recruitment.30

  Like with the example of Traf-O-Data, where Allen knew far more about hardware than Gates, Bill was at a decision point for Microsoft. Although he had been programming extensively for the firm in terms of programming languages, he “knew very little about applications and admitted it.”31

  Even much later, Gates recognized the importance of his most talented employees among a staff of thousands, saying “Take our twenty best people away, and I will tell you that Microsoft would become an unimportant company.”32 Although reported as exceptionally demanding, Gates understood that he needed to attract and retain the highest-quality employees in a company of exceptionally bright people.

  1981—Selling an Operating System Requires an Operating System, IBM and QDOS

  Bill Gates had a connected family and likely benefited from those connections in the earliest days of Microsoft. His mother was on the board of the United Way of America at the same time as the chairman of International Business Machines (IBM). That company was looking to develop a computer that would be affordable to home users but not compete with the cherished, high-profit commercial market. And Microsoft was fortunate, as there were two projects where the suspected lead candidate did not win. Per the obituary of Mary Gates, she may have provided Microsoft’s most critical connection:

  In 1980, she discussed with John R. Opel, a fellow committee member who was the chairman of the International Business Machines Corporation, the business that I.B.M. was doing with Microsoft.

  Mr. Opel, by some accounts, mentioned Mrs. Gates to other I.B.M. executives. A few weeks later, I.B.M. took a chance by hiring Microsoft, then a small software firm, to develop an operating system for its first personal computer.

  The success of the I.B.M. P C gave Microsoft and its MS-DOS (for Microsoft Disk Operating System) a lift that eventually made it the world’s largest software company for personal computers.33

  Microsoft was still specializing in programming languages at the time, including FORTRAN, BASIC, and COBOL. IBM started by asking Microsoft for BASIC, which Microsoft was already selling to everyone else. Gates even made the recommendation on what chip IBM should use for the computer.34 IBM asked for an operating system, and Bill Gates knew of a firm—and a programmer—that IBM did not know about.

  After securing the rights to provide a Disk Operating System (DOS) to IBM, Microsoft and Bill Gates encountered a significant quandary. The company had never before developed an operating system for a computer, focusing on programming languages instead. In a business sense, Gates had a choice between three very different alternatives in order to meet the IBM deadline. The firm could develop the operating system internally with existing programmers, the company could acquire another firm with the expertise to develop an operating system, or the company could essentially buy the rights to an existing operating system that was not used on other devices.

  At the time, few people understood the importance of the IBM product that was being created. Bill Gates was one of the individuals who did understand the importance. For IBM, with a long-standing interest in mainframe computers rather than reaching h
ousehold consumers, the project was not envisioned for the revolution that it would cause. Not only would IBM-PC compatible computers quickly overtake Apple computers in the home market, but Microsoft would benefit by being able to sell a single product to IBM as well as IBM’s competitors.

  On July 27, 1981, for the amount of $50,000, Microsoft bought the complete license for the product developed by the Seattle Computer Products called 86-DOS (previously QDOS—Quick and Dirty Operating System). While the purchase agreement was signed by Microsoft vice president and cofounder Paul Allen, the official point of contact for all inquiries from that date forward was “William H. Gates” at Microsoft’s Bellevue, Washington address. The IBM PC was introduced two weeks later, on August 12, 1981, and Microsoft had complete rights to the operating system used on the prevalent 8086 computer processor at the time. What had been called “86-DOS Disk Operating System for the 8086—Version 0.3”35 was now Microsoft’s MS-DOS, and Microsoft had a product that would lead to phenomenal revenue growth.

  The contractual Agreement of Sale between Seattle Computer Products and Microsoft contained resolution for some issues related to intellectual property that had plagued Microsoft in the early days and discussed and described by Bill Gates, both in the Open Letter to Hobbyists and the later interview in 80-Microcomputing. Seattle Computer Products was allowed to continue selling copies of the operating system along with processors, paying a royalty to Microsoft for each computer sold in a legally binding contract. Most notably, all purchasers of a product with the operating system now owned by Microsoft had to sign a “Registration and Non-Disclosure Agreement” that precluded the ability to copy the software without violating the trade secrets of Microsoft, specifically:

  The party above named and below signed agrees that it is receiving a copy of the above named software for use on a single computer only, as designated on this registration form. The party agrees to fill out and mail this registration form to MS before making use of the software. The party agrees to make no copies of the reference software except for the purpose of backup for the above specified computer and to strictly safeguard the original software and backup copies against disclosure to persons not specifically authorized by MS. The party further agrees that unauthorized copying or disclosure of this software will cause great damage to MS and Seattle Computer Products and that this damage is far greater than the value of the copies involved.36