Bill Gates making his breakthrough as a conceptual innovator, age 19
The year was 1974. Fuel shortages had led to a new 55 mph national speed limit. Congress was preparing impeachment proceeding against President Nixon. U.S. troops had pulled out of Vietnam, but Saigon had not yet fallen. Digital Equipment Corp. had pushed its way into the Fortune 500 listing of the nation’s top companies as its powerful, popular new PDP minicomputers challenged the market dominance of IBM’s bulky, expensive mainframes. Bill Gates (at lower left in photo) was a freshman at Harvard. His friend and fellow software enthusiast, Paul Allen, had driven cross-country from Seattle to Boston to take a minicomputer programming job at Honeywell. They had been fascinated by computers since they first met at Lakeside School in Seattle. There, calling themselves the Lakeside Programming Group, they had agreed to help a local computer company with debugging PDP-10 software in exchange for access to its minicomputer. As they gained experience, Gates and Allen had written scheduling software for the school, a payroll program for a company in Portland, Oregon, and software for a traffic-count analysis machine, the Traf-O-Data, for the Washington State Department of Transportation.
One spring day in 1974, Gates and Allen looked in the latest edition of Electronics magazine and spotted an announcement of a new computer chip from Intel – the 8080. It was 10 times more powerful than Intel’s 8008 chip in the Traf-O-Data that they had just written software for. The new chip also cost less than $200. To the two friends, it seemed obvious that if a tiny chip could be so powerful, the end of big unwieldy computers was near.
“Computer manufacturers, however, didn’t see the microprocessor as a threat. They just couldn’t imagine a puny chip taking on a ‘real’ computer. Not even the scientists at Intel saw its full potential. To them, the 8080 represented nothing more than an improvement in chip technology,” Gates recalled.
“But Paul and I looked past the limits of that new chip and saw a different kind of computer that would be perfect for us, and for everyone – personal, affordable, and adaptable. It was absolutely clear to us that because the new chips were so cheap, they soon would be everywhere (and) software would be the key to delivering the full potential of these machines.”
Not only did Gates foresee that low-cost hardware would make software king, he also understood that no one was yet guarding the throne. A quick-moving software innovator could get the upper hand in the market before anyone else realized that computer users would soon settle on a common set of software standards.
“I was sure it would happen sooner rather than later, and I wanted to be involved from the beginning. The chance to get in on the first stages of the PC revolution seemed the opportunity of a lifetime, and I seized it,” Gates wrote. He and Allen sent letters to major computer companies, offering to write software for the new Intel chip, but none took them up on the offer. “By December, we were pretty discouraged,” Gates recalled. The discouragement grew when they saw a description in Popular Electronics magazine of an 8080-based Altair computer from Micro Instrumentation and Telemetry Systems. The price: just $397. “When we saw that, panic set in. ‘Oh no! It’s happening without us! People are going to write real software for this chip!’ ”
But Gates and Allen soon got their foot in the door when MITS agreed to take a look at BASIC software that they offered to write for the Altair. When Gates was 19 and Allen was 22, they started “the world’s first microcomputer software company” and wrote the Altair software in five weeks in Gates’s dorm room. Then they flew to MITS offices in Albuquerque, N.M., to show of what they had done. They won the MITS contract with MITS and soon moved to Albuquerque to continue the work. Gates dropped out of Harvard, they registered their new company in New Mexico as “Microsoft,” and soon had sold their BASIC software to NCR and Intel too. (The photo above is from this period.) In early 1979, with sixteen employees, they moved Microsoft to Seattle, where they knew they would have an easier time recruiting programmers.
Then, in 1980, they got their big break – IBM decided to build a low-cost personal computer and put it on the market quickly, using off-the-shelf parts, which meant that competitors could copy it. IBM contracted with Gates and Allen to provide operating software. They didn’t have one to sell, but they soon created one by making revisions to an operating system they purchased for $75,000 from nearby Seattle Computer Products. That company had called it the Quick and Dirty Operating System, or QDOS. Gates and Allen renamed it MS-DOS, while IBM called it PC-DOS. The software-writing contract didn’t assure their success, but it put them in position to win big.
“Few remember this now,” Gates recalls, “but the original IBM PC actually shipped with a choice of three operating systems—our PC-DOS, CP/M-86, and the UCSD Pascal P-system. We knew that only one of the three could succeed and become the standard. We wanted the same kinds of forces that were putting VHS cassettes into every video store to push MS-DOS to become the standard. We saw three ways to get MS-DOS out in front. First was to make MS-DOS the best product. Second was to help other software companies write MS-DOS-based software. Third was to ensure MS-DOS was inexpensive.”
Gates pursued all three strategies, but started with the price, charging IBM a relatively low one-time fee for the right to sell his operating system in as many computers as it could.
“This offered IBM an incentive to push MS-DOS, and to sell it inexpensively,” he recalls. As a result, while IBM set a price of $450 for the Pascal operating system and $175 for CP/M, the price for MS-DOS was $60. “Our strategy worked. … Our goal was not to make money directly from IBM, but to profit from licensing MS-DOS to computer companies that wanted to offer machines more or less compatible with the IBM PC. IBM could use our software for free, but it did not have an exclusive license or control of future enhancements. This put Microsoft in the business of licensing a software platform to the personal-computer industry.”
As Gates had envisioned and hoped, Microsoft’s operating system became the industry standard within three years. Microsoft was on its way to powerhouse status and Gates was on his way to becoming the world’s richest man. As he recalls, “luck played a role, but I think the most important element was our original vision. We glimpsed what lay beyond that Intel 8080 chip, and then acted on it.”
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