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Bill Gates and Microsoft

Abstract

Bill Gates did not invent the personal computer, the operating system, or even the software business. What he did was understand, earlier and more clearly than almost anyone else, that software would be the most valuable thing in the computing industry, and then spend twenty-five years ensuring that Microsoft captured that value with a ferocity that eventually brought the United States government to sue him for monopoly abuse. The DOS deal with IBM in 1980 was not luck; it was a calculated bet that the IBM PC would define the market, and that whoever controlled the operating system would control everything built on top of it. He was right.

Bill Gates
Bill Gates, 2023. Image: Lukasz Kobus, European Commission, CC BY 4.0, via Wikimedia Commons.

The First Program

William Henry Gates III was born on October 28, 1955, in Seattle, Washington, into an upper-middle-class family. His father was a prominent attorney; his mother served on the boards of major corporations and the University of Washington. The family could afford to send him to Lakeside School, a private school that, in 1968, leased time on a General Electric time-sharing computer for its students.

Gates was thirteen. He became immediately and obsessively interested, spending every hour he could at the terminal. He met Paul Allen, two years older, in the computer room. Together they exploited bugs in the time-sharing system to get free computer time, taught themselves BASIC and Fortran, and, after being caught and banned, traded work for machine time: debugging software for Computer Center Corporation, then writing payroll code for Information Sciences Inc. Gates also wrote Lakeside’s class-scheduling program.

By the time Gates left for Harvard in 1973, he had logged more programming hours than most professional programmers. At Harvard, he found the coursework unchallenging, spent most of his time playing poker and programming, and made no particular academic distinction. He did not graduate.

Albuquerque and the BASIC Gamble

In January 1975, Popular Electronics published a cover story on the Altair 8800, the first commercially successful microcomputer kit. Gates and Allen saw the cover at a newsstand. Allen called Gates and said they needed to write a BASIC interpreter for the Altair immediately, before anyone else did.

They had not written the interpreter. They did not own an Altair. They had not asked the manufacturer, MITS, whether they wanted one. They called MITS anyway and told them they had a working BASIC. MITS was interested. Gates and Allen then spent eight weeks writing the interpreter from scratch, working from the Intel 8080 manual without ever having access to the actual Altair hardware. When they demonstrated it to MITS, it ran correctly on the first try.

Gates was nineteen. On 4 April 1975 he and Allen formed a partnership in Albuquerque, New Mexico, where MITS was headquartered, and called it Micro-Soft (a compression of “microcomputer software”); the hyphen disappeared at the end of 1976. Allen took a job at MITS, while Gates commuted between Harvard and Albuquerque until 1976 and then dropped out. The first full-time employee, Marc McDonald, started in April 1976; by the end of 1978 there were thirteen staff and annual revenue passed a million dollars, and on 1 January 1979 the company moved to Bellevue near Seattle.

The MITS BASIC was a commercial success, and it established the crucial early pattern: Microsoft licensed the software, retaining ownership. Gates was unusually clear-eyed about licensing as a business model at a time when most hardware manufacturers regarded software as a giveaway. When he published his “Open Letter to Hobbyists” on 3 February 1976, condemning software piracy as theft (he reckoned that fewer than one in ten Altair owners had paid the $150 to $200 for BASIC), most hobbyists were incensed. He repeated the charge in his first public talk, at the first microcomputer convention, which MITS held in Albuquerque on 27 and 28 March 1976, then struck a more conciliatory tone in a second letter that April. Gates understood that the value was in the code.

The IBM Deal

In 1980, IBM was developing its first personal computer and needed an operating system. Its software man, Jack Sams, first visited Gates on 22 July 1980 and came back with colleagues on 21 August, asking for a 16-bit operating system. IBM’s preference was CP/M, the dominant PC operating system at the time, made by Digital Research. The CP/M negotiations collapsed, accounts differ on whether Digital Research’s founder Gary Kildall missed the meeting in Pacific Grove the next day or whether IBM’s terms were unacceptable; what is agreed is that Dorothy McEwen Kildall would not sign IBM’s non-disclosure agreement. IBM came back to Microsoft.

Gates and Allen did not have an operating system. Gates referred IBM to Digital Research again. When that fell through, Gates introduced IBM to Seattle Computer Products, where Tim Paterson had written QDOS (Quick and Dirty Operating System), a CP/M-like system for the company’s Intel 8086 card, between April and August 1980; it was renamed 86-DOS at the end of the year. Microsoft licensed it for $25,000 without telling SCP’s head, Rod Brock, who the customer was, signed its contract with IBM on 6 November 1980 for $430,000 covering the operating system and languages, had Bob O’Rear adapt the code, and on 27 July 1981 bought all rights to 86-DOS for $50,000. Paterson himself worked at Microsoft from July 1981 to April 1982. IBM unveiled the PC on 12 August 1981; from spring 1982 it also offered CP/M-86, at $240 against $40 for PC-DOS.

The critical move was what Gates negotiated with IBM: Microsoft retained the right to license the operating system (renamed MS-DOS) to other manufacturers. IBM received PC-DOS for its own machines, but Microsoft could sell MS-DOS to anyone making IBM-compatible computers.

Myth: Bill Gates (or Microsoft) wrote MS-DOS

Microsoft did not write the operating system that made it dominant. Facing IBM’s deadline with no OS of its own, Microsoft bought QDOS (“Quick and Dirty Operating System,” a CP/M clone) from programmer Tim Paterson at Seattle Computer Products for $50,000, adapted it, and licensed it to IBM as PC-DOS / MS-DOS. Gates’s genius was the deal, not the code, retaining the right to license MS-DOS to the flood of IBM-compatible clone makers, which is what actually built Microsoft. The technical foundation was Paterson’s, itself modeled on Gary Kildall’s CP/M. See Myths and Misconceptions.

This clause defined the next fifteen years of the technology industry.

The IBM Deal’s Logic

Gates bet that IBM’s design would be cloned. IBM had, unusually, built its PC with off-the-shelf components and an open architecture. When Compaq and hundreds of other manufacturers built IBM-compatible machines, they all needed MS-DOS. IBM had inadvertently paid Microsoft to build the toll booth on an open highway.

Myth: Gates said “640K ought to be enough for anybody”

The internet’s favourite Bill Gates quote is almost certainly something he never said. Gates has repeatedly and emphatically denied it (“I’ve said some stupid things and some wrong things, but not that”), and no primary source has ever been found. A 1985 InfoWorld editorial pinned a looser version of the idea on him; the familiar wording first appears credited to Gates, without a source, in InfoWorld in January 1990, and spread from there. The 640K conventional-memory limit was a consequence of the IBM PC’s hardware design (the upper 384K of the 8088’s 1 MB address space was reserved for ROM and video), not a pronouncement by Microsoft. See Myths and Misconceptions.

Windows and the GUI Wars

When Apple visited Microsoft in 1981 to discuss Microsoft’s software products for the upcoming Macintosh, Jobs showed Gates the Macintosh graphical interface. Gates immediately understood that the GUI was the future of personal computing.

Apple later accused Gates of stealing the Macintosh interface for Windows. Gates’s response became famous:

“I think it’s more like we both had this rich neighbor named Xerox and I broke into his house to steal the TV set and found out that you had already stolen it.”

Microsoft announced Windows in New York on 10 November 1983 with 23 hardware makers pledging support. Gates had ordered it after seeing VisiCorp’s Visi On at the autumn 1982 COMDEX; Scott McGregor led the project, and the marketer Rowland Hanson replaced the working title “Interface Manager” with “Windows”. The first version tiled its windows side by side rather than overlapping them and promised delivery for April 1984. Windows 1.01 actually shipped on 20 November 1985 at $99, needing 256 KB of memory, and sold about half a million copies by April 1987, which the industry regarded as a flop; it was barely functional. Two days after its launch Gates and Apple’s John Sculley signed an agreement letting Microsoft use Mac-like windowing; Apple nevertheless sued over Windows 2.0 in March 1988 and lost, the decisive appeal ruling coming on 19 September 1994. Windows 2.0 was not much better. But Windows 3.0, released in May 1990, was successful, fast enough on 386 hardware, compatible with DOS software, and cheap compared to the Macintosh. Within two years, Windows 3.0 had sold ten million copies.

Microsoft also bought its way into presentations. Robert Gaskins, inspired by the digital slides his former colleague Whitfield Diffie had made at Bell-Northern Research in 1981, built PowerPoint for the Macintosh with Dennis Austin at the small Sunnyvale firm Forethought; it shipped on 20 April 1987 and sold 10,000 copies in a month, and on 30 July 1987 Microsoft bought Forethought for $14 million. The Windows version followed in 1990, and by 1992 PowerPoint sold a million copies a year.

Windows 95, launched on 24 August 1995 at $209 with a Rolling Stones soundtrack, a $200 million campaign, Jay Leno on stage in Redmond and massive public interest, sold about 40 million copies in its first year and marked the moment Microsoft’s dominance became unchallengeable; in the fiscal year to June 1996 Microsoft earned $2.2 billion on $8.67 billion revenue. The Start button, the taskbar, and plug-and-play hardware compatibility made Windows the computing environment for most of the world. Microsoft’s bundling of Internet Explorer with Windows (and later, making it essentially inseparable from the operating system) triggered the antitrust investigation that would consume the company for the rest of Gates’s tenure. Windows XP, presented in New York on 25 October 2001 with Mayor Rudy Giuliani six weeks after the September 11 attacks, joined the consumer line to the NT kernel and had sold about a billion copies when support ended in 2014.

The Antitrust Case

In 1998, the United States Department of Justice, joined by twenty state attorneys general, filed an antitrust lawsuit against Microsoft. The core allegation was that Microsoft had used its Windows monopoly to crush Netscape and the browser market, threatening to “cut off Netscape’s air supply” by distributing Internet Explorer for free and integrating it with Windows.

The evidence was damaging. Internal emails showed Gates personally directing strategy to undermine Netscape and Java. His deposition, in which he answered questions with unusual literalism, challenged the definition of common words, and often appeared to be deliberately obstructive, was played in the courtroom and became a public embarrassment.

In 2000, Judge Thomas Penfield Jackson ruled that Microsoft had violated antitrust laws and ordered the company broken into two separate entities: an operating systems business and an applications business. The breakup order was overturned on appeal, and the case was eventually settled in 2001 with Microsoft agreeing to share its programming interfaces with third parties. The company was not broken up.

The applications business at the centre of that order had been built by displacing the incumbents, most completely in word processing: see Dead End: WordPerfect.

The Antitrust Legacy

The antitrust case consumed Microsoft’s management attention for years and is widely credited with creating the window in which Google was able to grow without Microsoft’s full focus. Whether the case itself prevented harm is debated; what is clear is that the discovery process produced the most detailed picture available of how a technology monopoly actually operated, and that picture was not flattering.

Philanthropy and the Second Act

Gates stepped down as Microsoft’s CEO in January 2000, handing the role to Steve Ballmer. He remained as chairman. In January 2000, he and his wife Melinda merged their two earlier foundations into the Bill & Melinda Gates Foundation, adding $5 billion in Microsoft stock on 24 January to bring its endowment to $21.8 billion, which made it the largest philanthropic trust in the United States.

The foundation focused on global health (vaccines, malaria eradication, tuberculosis) and education reform. In 2010, Bill and Melinda Gates and the investor Warren Buffett founded the Giving Pledge, a commitment by the world’s wealthiest individuals to give away at least half their fortunes. By 2023, more than 230 people had signed it.

Gates resigned from Microsoft’s board in 2020. In 2021, Gates and Melinda divorced, with both retaining involvement in the foundation before Melinda resigned in 2024.

Dead End: Missing the Internet and Mobile

Gates’s great strategic failure was the initial dismissal of the internet. The 1995 memo “The Internet Tidal Wave”, in which Gates warned Microsoft’s executives that the internet was the most important development since the IBM PC and demanded that every Microsoft product be rethought around it, came after Netscape had already established its dominance of the browser market. Microsoft caught up in browsers by giving Internet Explorer away, but the pattern held: Microsoft consistently reacted to paradigm shifts rather than leading them.

In mobile, Microsoft’s failure was more complete. Windows CE, Pocket PC, and Windows Mobile all failed to achieve the combination of usability, developer ecosystem, and hardware integration that the iPhone demonstrated in 2007. By the time Steve Ballmer called the iPhone “the most expensive phone in the world” and predicted it would never get significant market share, Apple had already defined what a smartphone was supposed to be.

The mobile failure is covered in Dead End: Microsoft’s Mobile Failures.

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