CHAPTER 10
By 1980, having sold more than half a million copies, our BASIC drew the attention of the largest computer maker in the world. After ignoring personal computers for years, IBM had awoken to their emergence as a platform for business. Big Blue knew that its four-year development cycle for mainframes wouldn’t fly in the fast-changing world of microcomputers. In a sharp departure from company tradition, it moved to outsource to companies that could help get a new product to market faster.
Microsoft was about to make the big time.
That August, a three-piece-suited contingent led by Jack Sams approached us about Project Chess, the code name for what would become IBM’s PC. After we talked them out of an 8-bit machine and won them over to the Intel 8086 (or as it turned out, the cheaper but virtually identical 8088), they wanted everything in our 16-bit cupboard, including FORTRAN, COBOL, and Pascal. Aside from BASIC, none of these products were even close to being ready for the 8086 platform. It would take a wild scramble to get them all done on IBM’s tight timetable.
Then, in late September, Sams asked us if we could provide a 16-bit operating system. We referred him to Digital Research, which we’d heard was far along in building one. Bill called Gary Kildall and said, “I’m sending some people over to you, and I want you to be good to them, because you and I are both going to make a lot of money on this deal.” He didn’t mention IBM by name because the company insisted on maximum discretion and secrecy. We’d had to sign a nondisclosure agreement before they’d even sit down with us.
As Kildall himself later acknowledged, he was off flying on business when the Project Chess group arrived. His wife, who was also his business partner, refused to sign the nondisclosure and offered a Digital Research document instead. That was something you did not do with IBM. Sams came back to us and said, “I don’t think we can work with those guys—it would take our legal department six months to clear the paperwork. Do you have any other ideas? Could you handle this on your own?”
After the fact, there would be endless rumors about Microsoft’s dealings with Digital Research. Kildall theorized that IBM chose to work with us because we were willing to license an operating system for a flat fee, while Kildall insisted on a per-copy royalty. But I had a front-row seat, and this is what happened: We tried to do Digital Research a favor, and they blew it. They dropped the ball. I vividly remember how furious Bill was at what had transpired. He couldn’t believe that Kildall had blown this golden chance and placed the whole project in jeopardy.
Bill called an emergency meeting with me and Kay Nishi. What could we do to resuscitate the deal? There was silence for a moment, and then I said, “There’s another operating system that might work. I don’t know how good it is, but I think I can get it for a reasonable price.” I told them the story of Tim Patterson and Seattle Computer Products, which began shipping its 8086 machine earlier that year but had found sparse commercial interest. The missing link was an operating system. Kildall had promised a CP/M-86 by the first of the year, but he hadn’t delivered; his company lacked the typical start-up’s urgency. No one knew when his 16-bit software would make it to market.
Tim Patterson had gotten frustrated waiting. Our BASIC-86 was fine for writing programs, but his customers couldn’t run a word processor or other applications on top of it. So Tim had cobbled together a provisional 16-bit operating system to help his company sell a few computers until Kildall came through. (As Tim later said, “We would have been perfectly happy having somebody else do the operating system. If [Digital Research] had delivered in December of ’79, there wouldn’t be anything but CP/M in this world today.”) He called the program QDOS, for Quick and Dirty Operating System, which he’d managed to cram into 6K of code. Once it was mostly done, he changed the name to 86-DOS.
Tim had made strong strides with his software, and I felt confident in telling Bill and Kay that it would probably work. Though we’d still need to finish and adapt it for the IBM PC, 86-DOS would give us a running start. At least we’d have a shot.
After I finished, Kay cut in. “We’ve got to do it!” he kept shouting. Selling our BASIC in Japan, he’d seen firsthand the enormous interest in CP/M-80 from computer hardware firms. If Microsoft was to govern its future, we had to have our own operating system.
I agreed. Ever since Altair BASIC, our objective had been to establish standards and then to license our programs throughout the industry. Now, thanks to a fluke, we’d been handed the opportunity to create the pivotal product of the era. With IBM’s unmatched power and reach, we might even be able to unify the microcomputer software market. As a bonus, as Kay pointed out, a 16-bit Microsoft operating system would dovetail neatly with our language development business.
Bill was less enthusiastic. He didn’t know Tim Patterson, and we’d be betting our deal with IBM—the most critical one we’d ever have—on an unknown quantity once called Quick and Dirty. But Bill realized that we might lose the whole contract unless we came up with something, and he went along.
I called Rod Brock, who owned Seattle Computer Products, to work out a licensing agreement. We settled on $10,000, plus a royalty of $15,000 for every company that licensed the software—a total of $25,000 for now, as we had only one customer. The next day, a Microsoft delegation (Bill, Steve, and Bob O’Rear) met with IBM in Boca Raton and proposed that Microsoft coordinate the overall software development process for the PC. Five weeks later, the contract was signed. IBM would pay us a total of $430,000: $75,000 for “adaptations, testing, and consultation”; $45,000 for the disk operating system (DOS); and $310,000 for an array of 16-bit language interpreters and compilers.
Bill and I were willing to forgo per-copy royalties if we could freely license the DOS software to other manufacturers, our old strategy for Altair BASIC. Already enmeshed in antitrust litigation, IBM readily bought this nonexclusive arrangement. They’d later be slammed for giving away the store, but few people at the time discerned how quickly the industry was changing. And no one, including us, foresaw that the IBM deal would ultimately make Microsoft the largest tech company of its day, or that Bill and I would become wealthy beyond our imagining.
AS I LOOK back at my life, I’d propose that my successes were the product of preparation and hard work. Yes, I was lucky to get early programming opportunities in high school and at C-Cubed; to have a father with the keys to a major library system; to find a partner in Bill who could take my ideas and magnify them; to cross paths with Ed Roberts, who needed to buy what we were able to build, just at the right time.
But it was no accident that I was positioned to take advantage of those breaks. IBM came to Microsoft in the first place because we had pushed the frontier for microcomputer languages with more prescience and boldness than anyone else. I had ties to Tim Patterson because I’d hustled to develop an 8086 BASIC and later hired Tim to take a first pass at the SoftCard. I was drawn by nature to people who, like me, were eager to see what might come next and wanted to try to make it happen. From my youth, I’d never stopped thinking in the future tense.
One part of my job description had not changed: I was still the research arm of our organization. I kept up with Electronic News and Computer Design and their ilk, and regularly dropped by UW’s computer science library to check on anything I might have missed. I’d long been fascinated by the work of Douglas Engelbart, who had invented the pointing device he called a mouse in 1963. His work influenced technologists at the Xerox Palo Alto Research Center, or Xerox PARC, the lab that would anticipate nearly every major trend in personal computing by a decade or more. (PARC’s breakthroughs were mostly ignored by its mother company, which had no idea what to do with them and squandered an opportunity to define the personal computer market.)
Xerox PARC was an ivory tower with a moat around it; you knew amazing things were going on there, but it was hard to get a handle on them. By the late 1970s, however, a few journal articles divulged some of PARC’s innovations. Even before we moved back to Seattle, I was putting a bug in Bill’s ear about the graphical user interface (known as GUI, pronounced “gooey”), a computer experience that went beyond conventional typing and character-based displays to new modes of interactivity. Linked to a mouse, a GUI would allow ordinary people to use computers intuitively; its potential impact on our market couldn’t be overestimated. Microsoft was preoccupied with Project Chess, but I knew that we’d need a GUI—and GUI applications—in our arsenal before long.
Whenever I showed Bill material like “Alto: A Personal Computer,” a technical report published by Xerox in 1979, he responded as he had to my pre-Altair excitement over the 8080 chip. “It looks intriguing,” he said, “but who’s going to build the hardware and sell it at a price that works?” The Alto was a research prototype that addressed a bold question: What could you create if you trusted Moore’s law and reimagined the state of the art with no cost constraints? But the machine was far too pricey for the home market. For a pragmatist like Bill, the whole idea must have seemed premature.
His view began to change in September 1980, when Charles Simonyi, one of PARC’s lead programmers, came in for a job interview. Bill was tied up when he arrived, and Steve Ballmer sent him to me. A soft-spoken man with a mild Hungarian accent, Charles had grown restless with pure research and wanted to move into product development. He knew us as “the language company” and brought some ideas in that area. But I was more interested in the work he’d been doing at PARC. I paged through his portfolio, and it blew me away.
Two months earlier, in a strategy memo for Microsoft R & D, I’d pushed for development of “a word processor which stands above the rest in terms of features, ease of use, and adaptability.” Now I was holding that very thing, or at least a fair description of it, in my hands. Charles had led the development team for Bravo, the first WYSIWYG (what you see is what you get) word processing software to feature proportional fonts. Unlike predecessors like WordStar, Bravo presented text on the screen exactly as it would appear on the printed page. While I didn’t grasp all of the technical details at first, it was plain that I was looking at the future of word processing software, and at the person who could guide us there.
Charles came back a second time after meeting with top Xerox executives who wanted very much to keep him. We must have said something right, because he decided to throw in with us instead. “The contrast couldn’t have been sharper,” he’d say later. Xerox was “an old company in an old industry going downhill, walking in the dark. It’s not that they didn’t know the answers. That’s normal. But they didn’t know the questions.” Charles’s decision shocked his PARC colleagues, who couldn’t believe he was moving to such an obscure software operation. (Six years later, the two companies’ market values would cross. As of late 2010, Xerox was worth $15 billion, or about 7 percent as much as Microsoft.)
Later that fall, before his deal with us was finalized, Charles invited me to his lab in Palo Alto for a demonstration. As he sat before an Alto and put it through its paces, I was amazed. It was one thing to read about a true breakthrough, something else to see it in action. Now I knew how people must have felt at Engelbart’s Mother of All Demos in 1968: as though beamed by transporter into the future.
The Alto wasn’t technically a microcomputer because it didn’t use a microprocessor. But it was compact for its time, with the cabinet holding the CPU and hard drive was the size of a dorm room refrigerator. The desktop unit consisted of a keyboard and an integrated monitor proportioned like a sheet of standard copy paper, taller than it was wide. Where commercial computers of the day offered low-resolution displays of white or green or amber characters on a black screen, the Alto had been rethought from the ground up. As Charles typed on the black-on-white, bitmapped display, I saw for the first time everything we take for granted in today’s word processors: bold and italic and underlined fonts of different sizes, curved lines and justified text. I watched transfixed as Charles “cut” and “pasted” sections of his document. Xerox PARC had not oversold the Alto. It did indeed replicate the flexibility of pen and ink, but with digital ease and speed.
To the side of the keyboard, Charles rolled a rectangular box with three buttons in a horizontal row: a mechanical mouse. When he moved aside, I sat down for a turn. It took a few moments to coordinate the movement of my hand with the position of a cursor on a screen. But soon the mouse felt like an extension of my arm, and it was then that I realized how a GUI interface could make people so much more productive.
Charles took over again and dragged an icon representing a document file to a printer icon. A laser printer known as the Dover hummed into action. At the time, dot matrix and daisywheel printers were the bane of personal computer users: slow, loud, and prone to jamming, with just one standard font. But in the magical world of Xerox PARC, I had within seconds a perfect copy of the memo that summarized our meeting with Charles in Seattle: “What is our business? Produce and sell software for micro-mini systems on the mass market. …” The printer was the one PARC brainchild that Xerox, a copier company at heart, would successfully bring to market. A single Dover cost about $200,000, Charles said, but we both knew the price would soon plunge.
Charles drew my attention to a yellow cable running out the back of the machine, an umbilical cord to a local area network that connected several Altos using Ethernet, yet another patented PARC technology. This nexus of personal computers had all the benefits of old-style time-sharing (a common printer and a file server for additional storage), but none of the drawbacks (slow connections, crippling networkwide crashes).
Wow! I thought. This is going to change everything. PARC’s achievement seemed both startling and commonsensical. Surely people would want what I’d seen and touched at Charles’s lab. Of course you should be able to interact with a computer with a pointing device, or drag a file to a different folder, or push a button to print what looked like a page from a book. That afternoon in Palo Alto was a thunderclap. Once GUIs went commercial, computers would become so natural and organic that anyone’s mother would learn how to use them. At that point, it seemed to me, nothing could stop their universal adoption. They’d be like television sets; they’d be irresistible.
PROJECT CHESS WAS so hush-hush that even industry insiders had no clue what we were doing. When I mentioned it to Charles after he started work for us around the New Year, he thought it was one of Vern Raburn’s consumer game products and wasn’t impressed. “We’ve got to focus,” he said. Then I told him about IBM’s move into the personal computer market.
That was a different story, Charles agreed.
We were so tight-lipped that we wouldn’t even mention the famous corporate acronym by name. We referred to our customer as HAL, after the computer in 2001: A Space Odyssey. (As movie buffs know, HAL is IBM moved one letter down the alphabet.) New levels of security were needed. When the PC prototype arrived at our office around Thanksgiving, it was closeted in a small, windowless backroom, under strict lock and key. Access was limited to a handful of people.
A third of our staff worked on some aspect of Project Chess, but the central developments unfolded in this airless ten-by-fifteen-foot space. My direct responsibility was BASIC-86. To conserve the PC’s limited memory, IBM had directed us to embed BASIC in the machine’s ROM. Though we’d done this earlier with Applesoft BASIC, I was nervous as hell about it. The only way to fix a faulty ROM chip was by recalling the machine, and what if our new BASIC had bugs? I knew that you didn’t release complex, first-generation software and have it banged on by hundreds of thousands of users without something bad turning up.
I hit upon a novel solution: to insert a hundred or more coding “hooks,” so that any part of the BASIC code could be patched or updated from a floppy disk. (For an analogy, think of open envelopes taped to key sections of a book, allowing new material or corrections to be inserted without reprinting the entire volume.) Those hooks turned out to be lifesavers.
To make sure that DOS would pass IBM’s tests, I chose the steady Bob O’Rear. He would make sure that Tim Patterson’s DOS was compatible with IBM’s BIOS (basic input/output system), the built-in software that controlled the computer’s keyboard and display. In addition to IBM’s prototype, our high-security room contained a blue box called the ICE-88 (for Intel circuit emulator), a diagnostic device to expedite the debugging. The machines generated tremendous heat, and Bob and I sweated like pigs in our Bermuda shorts and T-shirts. In an unused space across the hall sat Bill’s friend Andy Evans, a volatile securities trader in need of a desk and business telephone. Whenever the markets took a turn against him, Andy screamed and hurled his phone against the wall, which could be disconcerting.
We were working on a crash schedule with a client who was famously intolerant of slipped deadlines. We’d overnight floppy disks with each day’s progress to IBM in Boca Raton, where the software was tested. If some setback made a day unproductive, one of our programmers (unbeknownst to me) would “accidentally” reformat the disk before shipping. When IBM called to complain that they’d gotten a blank disk, he’d apologize for the error and correct it in the next shipment, buying time.
One big problem was the flaky IBM prototype. Bob kept resoldering loose connections, but it could be hard to trace the source of the defect: hardware or software? Precious days were lost. More delays came from IBM’s fastidious testing protocol, and Bob spent a discouraging amount of time filling out corporate forms. (We joked that IBM’s slogan should have been “Better products through better paperwork.”)
The original mid-January deadline to have DOS and BASIC working came and went, and we began to worry that IBM might pull the plug if they couldn’t make their scheduled August rollout. Rumor had it that a parallel workgroup in Japan stood ready to replace us if we faltered. On January 19, 1981, Bob expressed our concerns in writing to an IBM manager named Pat Harrington:
Microsoft is continuing its efforts to bring up 86-DOS and BASIC on the prototype hardware but, due to problems with both hardware and software provided by IBM we have yet to be successful. … These problems have left us several weeks behind schedule.
Six nights later, Bob got the software up and running. He broke the news to me the following morning, and I’d never felt so relieved. We still had bugs to address, and the IBM printer they sent us didn’t work, but we knew that we were on our way. On May 1, Tim Patterson left SCP to come to work for us. He was a critical reinforcement because he knew 86-DOS inside and out.
Late that spring, Bill and Kay Nishi made another trip to Japan. For a solid week they were besieged by Japanese computer makers clamoring for a 16-bit operating system. Despite a leak in one of the trade magazines, Project Chess remained top secret, and Bill couldn’t say a word about the DOS we were developing in Seattle. Even so, that trip was telling. Microsoft’s biggest plum, it became apparent, wasn’t the version we’d made specifically for IBM PCs. The real bonanza was the compatible system that we’d call MS-DOS—the product that could be sold over and over again worldwide, under our own name, to companies that would follow IBM’s flying wedge into the 16-bit market. Between the interest in Japan and IBM’s domestic ripple effect, we began to realize that MS-DOS would be the international centerpiece of personal computer technology.
So it was crucial for us to gain as much control over DOS as we could. In June, I returned to Seattle Computer Products to try to modify our deal for 86-DOS, offering a flat fee of $30,000 for any future licensing. Rod Brock countered by asking for $150,000 for an exclusive license. I upped our offer to $50,000 for exclusive rights and then proposed an outright purchase, throwing in favorable terms on subsequent upgrades of our 16-bit languages. That was the sales agreement that Brock and I signed on July 27, 1981, a contract that laid the foundation for what Microsoft would become. I knew it was a coup, and that a free-and-clear DOS would be a valuable asset. But I cannot say that we knew just how valuable it would be.
As I stated in a deposition sometime later:
Bill was very adamant that we should make the contract an agreement of sale. … Bill thought we should have complete ownership and control of the product. … [He] felt it was always better, if you wanted to control and benefit from the evolution of a product, to own it as compared to license it. … [He] said it would just make everything cleaner. …
If Brock had known about IBM, he undoubtedly would have held out for more, and we certainly would have upped our offer. But he was happy to sell. He’d been hit hard by the recession and needed cash, and no one twisted his arm. Brock’s priority was to increase his hardware sales by bundling a reliable operating system with his new computers. SCP wasn’t equipped to partner with IBM as the industry moved into the next era of personal computers—that was never in the cards.* (Five years after the PC’s rollout, Brock fell on hard times and sued Microsoft in an attempt to regain control over the operating system that he’d sold us. Given the uncertainties of a jury trial, Microsoft settled.)
IBM’s personal computer was announced on August 12, 1981, and shipped ahead of schedule in November. Everyone expected the PC to do well, but no one had anticipated that it would rule the PC market so quickly. Within four years, with Apple’s machines the sole exceptions, any microcomputer that was incompatible with the PC and MS-DOS standards would be irrelevant.
I was proud of our team, of course. MS-DOS quickly became the cornerstone of the company’s success, and it was deeply satisfying to have played a central role in its delivery to market. But I was equally proud of 86-BASIC, our old warhorse now running on a new processor chip. While I’d tweaked and improved the vintage code that we’d originally handcrafted for the Altair, it survived mostly intact in the PC. It still had some gas left in the tank, after all.
AS MICROSOFT GREW to nearly a hundred employees, we knew we had to follow the Silicon Valley model and share some equity to keep our top people. We weren’t yet ready to take on the complications of a public offering, as Apple had in 1980, but it was time to incorporate. We strengthened our board of directors by bringing in David Marquardt, a young venture capitalist who would ease our entrée into the financial markets. In June 1981, we filed our papers with the State of Washington.
With the pie cut into more pieces, our stakes were slightly diluted. Under the new ownership split, Bill kept 51 percent of the equity and I retained 30 percent. The other stakeholders were Steve Ballmer, 7.8 percent; Marquardt’s Technology Venture Investors, 5.1 percent (for an investment of $1 million); Vern Raburn, 3.5 percent; Gordon Letwin, 1.3 percent; and Charles Simonyi, 1.3 percent. I kept my title as vice president, later amended to executive vice president According to my formal employment agreement, I would receive a base salary of $100,000 as a corporate officer on top of my $60,000 manager’s pay. Bill got $25,000 more as president.
The incorporation didn’t immediately change anything, but it made our business feel more serious. That fall we moved into a larger space near Lake Washington and Burgermaster, a fast-food favorite. Bill and I took adjacent offices with a shared secretary and a short passageway between us. I could hear his every shouting match, including the battles royal with Steve Ballmer. Steve complemented Bill as a sounding board on business strategy, as I did on technical strategy. Bill remained the big-picture tactician, but Steve made us more disciplined and systematic. The two of them could get adversarial at times, with Steve’s arm-waving histrionics feeding into Bill’s pitiless dissections of what he thought everyone else was doing wrong. They were both ultracompetitive, super-high-IQ, maniacally relentless people with a tendency toward melodrama.
Over time, their disagreements seemed to get more frequent and intense, like face-offs between bull elephants—especially when Steve tried to push Bill to ramp up hiring, the only way to keep our customers and sustain Microsoft’s growth. Not long after coming on board, he told Bill that Microsoft needed another thirty people right away, doubling our staff. I was all for it, but Bill considered it heretical. He liked to take on overhead slowly and incrementally, which could miss the boat in the tech industry. He started yelling at Steve: “Do you know what you’re doing when you ask for thirty people? Are you trying to bankrupt this company?”
Steve bellowed back, “We don’t have a choice! We’ve got commitments and delivery dates! If we don’t make these hires, we’ll blow the contracts!”
And Bill said, “What if the business slows down while we’re paying all these people? We’ll be wiped out! Are you crazy? We could destroy this company! Do you want to destroy us?”
I gave Steve credit for not backing down; he kept working Bill over until he got what we needed. After an hour of back-and-forth, he said, “That’s OK, Bill, it’s on me, damn it, but we’ve got to get those people in here or we’re screwed.”
Steve was sincere and straightforward—theatrical, maybe, but not manipulative. We didn’t always agree about the business, but we generally stayed out of each other’s way. Sometimes we’d go on recruitment trips and share a twin room in the frugal Microsoft tradition. One morning I awoke to a series of grunts. I cracked my eyes open to find Steve doing push-ups by the dozen at seven in the morning. I thought, This guy is really hardcore.
Typically we’d tour the top computer science schools at the best universities: MIT, Cal Tech, Harvard, Yale, Stanford. (I can recall a packed lounge at MIT where students were chanting the actors’ lines in unison during a Star Trek rerun.) Bill thought it was better to get programmers when they were young and enthusiastic, before they were ruined by working somewhere else. After my stint at Honeywell, I couldn’t disagree. We wanted freshly minted bachelor’s degrees, occasionally a master’s, rarely a PhD. Above all, we were after the brightest lights. A great programmer can outproduce an average one by ten to one; with a genius, the ratio might be fifty to one.
Fortunately, with its water and nearby mountains and urbanized core, Seattle was an easier sell than Albuquerque. And once IBM announced the PC, anyone could see that we were offering unparalleled opportunities. We might pay slightly under the norm, but our pitch was persuasive: Would you rather work on some process-control project for Dow Chemical or a state-of-the-art word processor for the IBM PC? An ambitious young software engineer wouldn’t think twice about joining us.
Steve’s efforts finally got Microsoft growing in line with its revenues, from 40 employees in 1980 to 128 in 1981 and 220 in 1982. When a company doubles or triples in size each year, it can’t possibly stay tight-knit. But I still hung out with people from work, going for dinner at Casa Lupita or downtime at a pub called the Nowhere, where I built on my Wazzu skill set at foosball. When our six-day workweeks allowed it, there were volleyball games and barbecues at Bob O’Rear’s, with Marc McDonald serving batches of his homemade daiquiris.
My life was more rounded than before. I bought a small sailboat. I invited musicians to my house on Lake Sammamish, where we’d make a single blues jam last an hour. And I hosted a memorable Halloween party, where I dressed as a wizard and Bill did chest slides on the balustrade from my upper floor down toward the kitchen. He’d run as fast as he could, throw himself on the banister, and glide to the parquet below. He was still edge-walking. One day he borrowed Andy Evans’s Porsche 928 and spun and bottomed the car out, nearly totaling it; the repairs took more than a year. Bill got so many speeding tickets that he had to hire the best traffic attorney in the state to defend him. He finally switched to a sluggish Mercedes turbo diesel just to stay out of trouble.
In our farewell company photograph back in Albuquerque, nine of the eleven people were programmers, a bunch of young hackers having fun together. That changed in Seattle as we brought in MBAs to support an increasingly lucrative set of product lines. Many were hired for sales and advertising; others handled end-user testing on new features. This was basic business practice, but it inevitably funneled resources away from development. As a technology company grows, it must balance the need for innovation with the imperative to bolster existing products and keep the profits flowing. As Microsoft expanded far, far beyond the thirty-five programmers that once seemed like a pipe dream, it would get more and more difficult to keep that balance.