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MS-DOS: The $75,000 Operating System That Built Microsoft

Abstract

Microsoft did not write MS-DOS. It licensed the system for $25,000 from Seattle Computer Products in December 1980 and bought all rights for $50,000 in July 1981; Tim Paterson had written the first version there in about six weeks as a stopgap until CP/M-86 arrived. Microsoft then licensed it to IBM for a per-copy fee while retaining the right to sell it to other computer manufacturers. This licensing structure, more than the purchase, was the decision that made Microsoft the dominant software company of the personal computing era. IBM paid Microsoft for copies; Microsoft owned the operating system; the clone market ran Microsoft software on IBM-compatible hardware. By 1990, Microsoft had revenues of $1.18 billion.

The IBM Opportunity

In 1980, IBM was building a personal computer in secret under the codename “Project Chess.” The 12-person team in Boca Raton, Florida, led by Don Estridge, needed an operating system. IBM approached Digital Research, the company of Gary Kildall, to license CP/M, then the dominant microcomputer operating system. Digital Research’s president, Dorothy McEwen, would not sign IBM’s one-sided nondisclosure agreement, and the later talks failed over royalties and an unfinished CP/M-86 (the story that Kildall lost the deal by going flying is a later simplification; see Myths and Misconceptions). IBM turned to Microsoft.

Bill Gates and Paul Allen at Microsoft did not have an operating system to offer. But Gates knew of Seattle Computer Products’ QDOS (Quick and Dirty Operating System), which Tim Paterson had written as a CP/M-compatible system for the 8086 processor. Microsoft took a non-exclusive licence to the system, by then called 86-DOS, for $25,000 in December 1980, bought all rights for $50,000 in July 1981, a month before the IBM PC appeared, renamed it MS-DOS, and licensed it to IBM. Seattle Computer Products later sued, claiming Microsoft had hidden the IBM deal to buy cheaply, and received about $1 million in a settlement.

The Critical Clause

The IBM contract gave IBM the right to use MS-DOS in its PC, under the name PC-DOS. But Microsoft retained the right to license MS-DOS to other companies.

When the IBM PC launched in August 1981 and became commercially successful, a clone market quickly developed: Compaq, Tandy, NEC, and hundreds of others built IBM-compatible computers. IBM-compatible hardware required IBM-compatible software, which meant MS-DOS. Every clone PC maker was a Microsoft customer. IBM had paid to build a market for another company’s most profitable product.

By 1984, MS-DOS was installed on nearly every IBM-compatible personal computer sold. Tim Paterson joined Microsoft in 1981 to work on MS-DOS.

The Trajectory to Windows

MS-DOS provided the revenue and market position that allowed Microsoft to develop and ship Windows. Windows 1.0 (1985) and Windows 2.0 (1987) were graphical shells on top of DOS; Windows 3.0 (1990) and Windows 3.1 (1992) were the first versions widely adopted by businesses. The transition from DOS to Windows maintained Microsoft’s operating system dominance through the shift from command-line to graphical interfaces.

How the IBM PC’s open architecture made Microsoft dominant is told in that article.

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