On Gates’s and Allen’s 1975 move from Cambridge, Massachusetts (home of Harvard) to Albuquerque, New Mexico (home of MITS, the maker of Altair), historian Paul Ceruzzi wrote, “Their move set in motion not only the founding of one of the country’s biggest corporations, but it also led to the digital computer moving from its initial place as an expensive, specialized device affordable only by big businesses, government agencies, or scientific labs, to a technology that has spread first to the desktops and now the pockets of consumers around the world.”2
The company was named Micro-Soft (with the hyphen, and later with no space) at the suggestion of Paul Allen, because the company was making “microcomputer software” instead of working on large mainframe computers. So the firm had a name that would remain with limited variation over time. At the founding in 1975, the company’s address was in Albuquerque, New Mexico, at 819 Two Park Central Tower.
His parents were not very sure of this business venture controlled by their son. At the time, the Gates family did believe that Bill would return to Harvard one day. And in the early days of Microsoft, there were many tenuous times when the business was indeed capable of failing. The company was attempting to start an industry from a computer that was seen by others as difficult to use and only acceptable to a user with very precise knowledge of how computers worked at a fundamental level. These people were called hobbyists; micro-computers were a hobby rather than an occupation.
When Microsoft was founded, Bill Gates was very young (age 19). However, he needed to be self-convinced that the development of the firm would be beneficial to himself and he also needed to have the ability to persuade others that his vision for the future was practical. For Gates, Allen, and the friends who decided to join Microsoft at the founding, there was significant uncertainty: working to develop a new industry as well as the change of setting from the familiar state of Washington or Harvard University in Massachusetts to the city of Albuquerque, New Mexico.
Starting a new business in an entirely new industry was more than a little daunting. The earliest Microsoft employees were Gates, Allen, and many of their friends. How does a 19-year-old convince friends that his vision of the software would lead to a successful firm?
There become a few magic moments where you have to have confidence in yourself…. When I dropped out of Harvard and said to my friends, “Come work for me,” there was a certain kind of brass self-confidence in that. You have a few moments like that where trusting yourself and saying yes, this can come together—you have to seize on those because not many come along.3
That “brass self-confidence” is seen as a characteristic of the Masters of Enterprise as conceptualized by H. W. Brands. Of the 25 masters he identified—and Gates was one—the commonalities were good health and abundant energy, hunger and passion for the work, a close and intense identification with work, the ability to persuade others to buy into their personalization, and a creative vision.4 People did follow Gates, and he was the public face of Microsoft for many years; many still associate him with the firm despite leaving all day-to-day operations in 2008.
Along the way, the CEO of this new small business—after convincing his friends to accept job offers—had to worry about paying those same friends. In the early days of Microsoft, the cash flow to pay employees was sometimes imperiled.
The thing that was scary to me was when I started hiring my friends, and they expected to be paid. And then we had customers that went bankrupt—customers that I counted on to come through. And so I soon came up with this incredibly conservative approach that I wanted to have enough money in the bank to pay a year’s worth of payroll, even if we didn’t get any payments coming in. I’ve been almost true to that the whole time.5
Gates believed that the move from Harvard to start a software company was time-sensitive. Others who saw the same issue of Popular Electronics may be actively looking to develop software, and some of these new software developments would be based upon copying the software made by Microsoft. This created a number of rationalizations within his mind; the protection of his corporation’s intellectual property would always remain important and Microsoft would have to create exceptional new innovations in order to succeed over the long term.
There certainly were a lot of other software companies. Within two or three years of our being started, there were dozens of companies. Some of them tried to do better BASIC. And we made darn sure they never came near to what we had done. There were competitors in other languages. They didn’t quite take the same long-term approach that we did, doing multiple products, really being able to hire people and train them to come in and do great work, taking a worldwide approach, and thinking how the various products would work together.6
Bill Gates was always contemplating the future in some way. And even though the Altair was a box without even a programming language in early 1975, Gates had an idea of the future that involved using computers for reading, note-taking, and other tasks: “The early dream was a machine that was easy to use, very reliable, and very powerful. We even talked back in 1975 about how we could make a machine that all of your reading and note taking would be done on that machine.”7
Of course, this was a challenge given computers of the day, where all calculations and operations had to be programmed once a language like Microsoft’s Altair BASIC was written, using very precise syntax. Without Microsoft’s Altair BASIC, every single character—letter, number, or space—had to be entered in by hand, with a series of 0s and 1s; eight switches had to be flipped for every character printed. In order to get to a point where average people would be able to conduct reading and note-taking on a computer, there would be a number of major evolutionary steps required.
First, someone had to create an operating system for the computer, such as the version of DOS—Disk Operating System—that Microsoft provided to IBM in the early 1980s. The Altair already had a rudimentary operating system, which required programming in binary (the 0s and 1s). Today, Windows is the operating system that is associated with Microsoft. Second, software companies had to create programming languages for each computer, such as the Altair BASIC that was the original focus of Microsoft; while this was the initial focus of the company, few computer users actually use programming languages today. Microsoft’s earliest expertise is still present on every computer, although not commonly used by those who purchase a computer with Microsoft software. Finally, the software companies had to create applications for that operating system that would be intuitive enough for the average user. Applications like Microsoft Office are taken for granted today and are how the vast majority of computer users know their computers, yet these were missing in the earliest days of computing. Gates and Allen wrote the programming languages—the second part—so individuals could write their own applications. Microsoft has evolved to being known for every part of the chain except the part that led to the firm’s founding.
Combined, these steps took very few years from the founding of Microsoft in 1975, although the operating system we know now as Windows, with graphics and the ability to click/select icons, did not come into being for almost a decade. In fact, Apple was a much bigger company than Microsoft until the introduction of Windows. And Gates was not alone in his 1975 vision of using computers in the way described back in 1975; Xerox’s PARC (Palo Alto Research Center) had been founded in 1970 based upon a belief of a paperless office coming by the year 1990.8 Although Xerox had an incorrect idea of the future, its work at PARC greatly influenced the industry. Xerox—which had started as a photographic company but made its biggest impact on the world through the introduction of the photocopier—was greatly worried about a world where paper was no longer needed. Later, Xerox would influence Apple and Microsoft into developing a lot of the innovations still used in computers today, like graphical displays and computer mice or pointers.
SUCCESS BASED UPON QUICK TURNAROUNDS
We didn’t even obey a 24-hour clock, we’d come in and program for a couple of days
straight.9
In the early days of software development, the early mover advantage was critical. The first company to create a product that could be marketed would develop easy partnerships with other firms (as Microsoft did with MITS). With the same urgency that led Gates to leave Harvard in order to found Microsoft, we also see that the company was necessarily committed to working long days to meet deadlines with the hardware providers to whom they had made commitments. Time became an abstract concept for the employees of the company shortly after founding, with Gates actively involved in programming projects.
Gates and Allen were among the earliest to recognize that computers would become everyday appliances and had a shared vision of the capability of the programmers at Microsoft. However, Gates greatly misunderstood the global scope of computing and the number of employees that would be needed at the firm as the growth rate of the firm accelerated. Not only did Gates personally know many of the earliest employees, he had also hired these individuals. And Gates firmly believed that a company of 100 people—or fewer—could create enough software to supply the entire global market. This underestimation meant that the firm quickly grew past the point where Gates could know all the employees, and even all the managers of products under development at Microsoft.
We thought the world would be like it is now in terms of the popularity and impact of the PC, but we didn’t have the hubris to think that our company would be this size or have this kind of success. The paradox is that we thought, “OK, we can just have this 30 person company that will be turning out the software for every PC.”10
If you had asked me at any point how big Microsoft could be, Paul and I once thought we could write all the software in the world with 100 people.11
Gates also understood that at the founding of Microsoft, the key players in the industry were all about the same age. Malcolm Gladwell also noted this characteristic in his book Outliers, where the major players in Microsoft and Apple were all born in a very short timeframe, around the age of 20 when these two firms were formed to become major enterprises based upon a piece of technology that could change an industry. In fact, Gates didn’t recall working with anyone over the age of 30 in the early days of micro-computing, a statement reiterated by Apple’s Steve Jobs at an event in 2007:
“It’s funny,” says Bill Gates. “When I was young, I didn’t know any old people. When we did the microprocessor revolution, there was nobody old, nobody. They didn’t make us meet with journalists who were old people. I didn’t deal with people in their 30’s. Now there’s people in their 50s and 60s. And now I’m old and I have to put up with it.”12
Microsoft was married to MITS, creating various versions of BASIC for specialized purposes by necessity; the firm could not make versions of BASIC for other companies until other companies decided to make micro-computers requiring BASIC. This meant that the early success of Microsoft was solely driven by how many copies of Altair BASIC were sold by MITS, as Microsoft only received a percentage of each license that was sold. Soon, Gates would fight his first battle to protect Microsoft’s intellectual property, as he learned that MITS was selling very few licenses for Altair BASIC.
THE OPEN LETTER TO HOBBYISTS
More than 25 years before Napster was shut down to comply with a court order about copyright infringement, Bill Gates faced his own issues in protecting intellectual property. The firm founded by him and Paul Allen had written the Altair BASIC programming language that was sold by MITS. Computers at the time were limited in scope to major research institutions and small groups of individuals called hobbyists. Bill Gates noticed that less than 10 percent of all Altair computer purchases had an accompanying sale of Altair BASIC to run on the computer.
Effectively, the vast majority of users of Altair BASIC had used the software without ever purchasing a license to do so. This upset Bill Gates, who crafted an open letter that was mirrored by many artists and performers 25 years later in the cases against Napster and other peer-to-peer file sharing services (which were clearly illegal by the year 2000, copying software was not clearly illegal in 1976), raising many salient questions. If a software company is not compensated for costs required to develop the software, would that prevent other individuals and organizations from undertaking the effort to develop the software to make computers truly usable?
Gates and Allen had taken a significant risk in starting Microsoft, feeling that personal computers would be absolutely meaningless without good software. As he notes, even with the Altair BASIC his company created, the computer still required programming skills to use—the average consumer could not (yet) effectively use the device. Based upon his company’s revenues he was able to determine that for each 10 Altair computers purchased, less than one license for his company’s Altair BASIC was being purchased. At the same time, he was getting enthusiastic notes and feedback from more BASIC “users” than the number of licenses MITS had sold.
As a software company, his firm clearly benefits from the sale of licensed copies. This relates to the concept of marginal cost in economics; the initial development costs are very high but the cost of selling additional copies of the software is very low. However, the corporation could fail if the development costs of the software are never made back by selling licenses. Gates recognized that with the amount spent on developing the versions of BASIC, the revenue to his company was less than $2 per hour, about half of the minimum wage at the time. If his product development costs consistently exceeded the cost of his employees’ time and labor, Microsoft would likely rapidly fail, and there would be little incentive for other companies to develop software for computers. Furthermore, he declared that those computer hobbyists who used the software without purchasing were guilty of theft, also identifying a nuance of the software market at the time. While more than 90 percent of the users were not buying the official software through MITS, some of the users were paying for unofficial software from people who had copied the software without putting any time or effort into the development process. Of this group, he had particular disdain, stating “They are the ones who give hobbyists a bad name, and should be kicked out of any club meeting they show up at.”13 He invited suggestions (and payments) to an apartment address in Albuquerque, New Mexico. The apartment in question still exists, near Kirtland Air Force Base and the city’s commercial airport (now called the Albuquerque International Sunport), and the text of the letter—as printed in many of the magazines and newsletters available to computer users in 1976—is available through many forms of electronic media.
Fun fact: People did write to Bill Gates (now age 20) and a few even included a check for the cost of Altair BASIC. Most assuredly, Gates would not include his mailing address on a communication sent to computer users today.
While Gates was insistent that Microsoft should be compensated for the time and effort placed into developing the software, he was incorrect on a major conceptual component in the letter. At the time, copyright protection in the United States did not extend to computer programs, so anyone copying his software was technically not infringing on his copyright (and thus not a thief), although selling a copy made might be against the law in an individual state.
A legal case in 1976 might be created based upon a state’s “unfair competition” laws. Those laws—when available in a state—would apply only to a business or individual who was making a profit by reselling the work of Microsoft. The aspect of making a profit was key; members of the clubs who were giving away copies clearly would not be deriving a profit, and thus were not competitors. And unless an individual had signed a nondisclosure agreement specifically with Microsoft or MITS (selling Microsoft’s products), there would be no violation of trade secrets. The ability of Gates—and the leaders of all other software producers—to gather profit from producing and selling software in the 1970s was imperiled. Given a total of 60,000 Altair computers were sold over the lifetime of MITS, the ability of Microsoft to sell its BASIC to a higher percentage of users was critical to th
e firm’s survival.14
EARLY ADOPTION OF POWER
While Microsoft started in 1975, Gates and Allen officially formed their partnership on February 3, 1977. According to Allen, the agreement contained two very important clauses. While the agreement was between only two people, there was a clause that a partner would not have to work if attending school as a full-time student and another clause that in an irreconcilable dispute, Gates could force Allen out of the firm.15 Gates had the majority stake in the firm with 64 percent of all the shares, was clearly the controlling partner in Microsoft, and still—even at some low level—considered the possibility of returning to Harvard in the future.
Gates also understood early on the power of a single operating system to allow other organizations in the computer hardware and software industry to work effectively together. As early as 1977, he spoke about having one standard operating system for computers to make the job of computer programmers much easier. At the time he made the statement in writing, he did not know that he was speaking of his own company’s future; he believed a standard operating system would be desirable (like Windows today), but his company was not focused on writing operating systems. In fact, his company had not even written an operating system at the time he wrote that the industry would benefit from a single OS:
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