Bill Gates

by Michael Becraft

  Microsoft had clearly made an intentional move to say that computer software was associated with a single computer, and that the operating system necessary for using the computer was inherently tied to a single machine. As the number of computers in place throughout the world increased, this would become a very lucrative business model: one that eventually begins to draw the attention of competitors and the U.S. Department of Justice.

  The day the IBM PC was announced was a critical point in the history of Microsoft. If one had an invitation to the IBM press conference and were looking for Bill Gates the day the PC with MS-DOS was announced, he would not have been seen. He was not at the IBM ceremony, as the device was not seen as important enough to invite anyone at all from Microsoft, no less the CEO of the firm. On the day of the IBM announcement in 1981, Gates happened to be at Apple headquarters. Of the personnel at Apple looking at the announcement: “They didn’t seem to care,” he said. “It took them a year to realize what had happened.”37

  The IBM press conference described the innovation of the PC, with a brief mention of Microsoft. Students could now write papers, businesspersons could use accounting software, and the manuals provided meant that almost anyone could start using the computer within hours, and then begin personalizing their own programs. The computer was still about a decade away from the ability to simply plug in, turn on, and use:

  IBM has designed its Personal Computer for the first-time or advanced user, whether a businessperson in need of accounting help or a student preparing a term paper. An enhanced version of the popular Microsoft BASIC programming language and easily understood operation manuals are included with every system. They make it possible to begin using the computer within hours and to develop personalized programs quite easily.38

  Why was this event such an important event in the history of Microsoft? Almost all of the 500,000 computers running the previous operating system (CP/M) were replaced by 10 times as many computers running MS-DOS.39 This was a tremendous deal for a Gates-led Microsoft; he revisited the same business model as he had with BASIC. Any time a new manufacturer wanted to compete against IBM, he had a customized version of MS-DOS available. And now that he had an expert in developing applications, each manufacturer buying a customized version of MS-DOS could also purchase applications customized to the customized MS-DOS. Effectively, Gates could sell a slightly different operating system and slightly different applications to every computer manufacturer, including Apple. No matter which manufacturer ultimately succeeded, Microsoft would get paid.

  Immediately after the release of MS-DOS on the IBM PC, there was trouble on another project for which Gates was providing a version of BASIC, the TRS-80 Model III. In the confusion as to whether Radio Shack or Microsoft was the primary contributor to the problem, Gates received the reputation of being nonresponsive at times. Even in 1981, that elicited the statement “Bill Gates (president of Microsoft) is notorious for not being reachable by phone and for not returning phone calls.”40

  1982/1983—CRITICAL ILLNESS OF ALLEN

  In 1982, with the company located in a Seattle suburb, the leaders of Microsoft were honored by the Lakeside School with the Distinguished Alumni Award; Gates was in the high school class of 1973 and Allen in the class of 1971.41 Later that year, Allen was diagnosed with a form of lymphoma that could have caused his death at a young age if not treated aggressively.

  During his recuperation, cofounder Allen was slowed in his work due to chemotherapy treatments. He overheard a talk between Bill Gates and Steve Ballmer in December 1982. As Allen relayed himself in Vanity Fair, Gates and Ballmer were conspiring to reduce Allen’s ownership of the company without his involvement, and Allen was not pleased. Back in 1977, Microsoft was found as a partnership where Gates could remove Allen from the firm at any time. That partnership agreement was no longer in place—Microsoft became a corporation on June 25, 1981—and Allen could hold on to his ownership interest in the company as long as he wanted, even if he chose to leave.

  Allen notes Gates as trying to end the year 1982 with an olive branch, writing in a note on New Year’s Eve, “During the last 14 years we have had numerous disagreements. However, I doubt any two partners have ever agreed on as much both in terms of specific decisions and their general idea of how to view things.” The next month, Gates and Allen exchanged offers to buy out the departing Allen’s shares in the firm. Allen rejected Gates’s initial offer, Gates rejected Allen’s counter-offer, and Allen left the company with his shares of Microsoft stock.42

  With Allen’s offer to sell his shares at a set price rejected by Gates, most would think the interaction was detrimental to Allen. In fact, Allen was exceptionally fortunate. The buyout of his portion of the company would have netted a few million dollars if Gates had accepted Allen’s price. Microsoft’s explosive growth came much later, which made Allen a billionaire while he was off pursuing other interests, at his own pace, to protect his post-lymphoma health. Borsook labeled Allen the “accidental billionaire” and wrote “his wealth is a lucky trick of time and place, and particularly of his involvement with Bill Gates. While Allen was co-responsible for the early creation and early technical successes of Microsoft, his tremendous wealth came later. Gates made them both billionaires after Allen left off an active involvement with Microsoft.”43

  1983—GATES AND MEMORANDUMS TO STAFF

  June 1983 saw a famous memorandum that was co-written by Bill Gates and Steve Ballmer. This was the Applications Strategy Memo, which told staff that Xerox PARC’s vision was the future of Microsoft, and that the existing operating systems—those without graphics or mice—would not be developed in the future:

  Microsoft believes in mouse and graphics as invaluable to the man-machine interface. We will bet on that belief by focusing new development on the two new environments with mouse and graphics…Macintosh and Windows.

  …

  Microsoft will not invest significant development resources in new Apple II, MSX, CP/M-80 or character-based IBM PC applications. We will finish development and do a few enhancements to existing products.44

  What was most insightful about this message? That not only was Microsoft going to be working on Mac applications and then Windows, but that the Macintosh applications would actually be developed first.

  The Mac was a very, very important milestone. Not only because it established Apple as a key player in helping to find new ideas in the personal computer but also because it ushered in a graphical interface. People didn’t believe in graphical interface. And Apple bet their company on it, and that is why we got involved in building applications for the Macintosh early on. We thought they were right.

  —Bill Gates45

  1983—GATES’S INTELLECTUAL PROPERTY WIN WAS ACTUALLY BY APPLE

  Gates had maintained from the creation of his firm that the software created was his work, and should be protected under copyright protection. Despite the revisions to the law governing copyright in 1976, the legal setback in 1979 that suggested electronic media was not covered persisted a few more years until 1983. And the case that finally put to rest the idea of copyright wasn’t about the software developed by Gates or Microsoft, but software developed by Apple. August 30, 1983, was the significant date in the case Apple Computer, Inc. v. Franklin Computer Corporation, which was sent to the U.S. Court of Appeals Third Circuit after an adverse ruling against Apple in the same case three days prior.

  Franklin attempted a novel defense in the case when Apple presented evidence that the software used was almost identical to that used in the Apple II. In fact, Franklin had not even bothered to change some references to Apple and Apple employees encoded in the software, so denying the copies would be impossible. As noted in the court opinion comparing the Apple II and Franklin’s ACE 100 computer:

  Apple produced evidence at the hearing in the form of affidavits and testimony that programs sold by Franklin in conjunction with its ACE 100 computer were virtually identical with those covered by the fourteen
Apple copyrights. The variations that did exist were minor, consisting merely of such things as deletion of reference to Apple or its copyright notice. (5) James Huston, an Apple systems programmer, concluded that the Franklin programs were “unquestionably copied from Apple and could not have been independently created.” He reached this conclusion not only because it is “almost impossible for so many lines of code” to be identically written, but also because his name, which he had embedded in one program (Master Create), and the word “Applesoft,” which was embedded in another (DOS 3.3), appeared on the Franklin master disk. Apple estimated the “works in suit” took 46 man-months to produce at a cost of over $740,000, not including the time or cost of creating or acquiring earlier versions of the programs or the expense of marketing the programs.46

  And the changes Franklin made were exceptionally minimal, such as changing the eight letters that spelled “Apple II” when booting the computer to instead read “ACE 100.” So what was Franklin’s defense that was promptly rejected by the judge at the appeals court? Franklin argued that operating systems would not be covered by copyright, and that copying Apple’s operating system was further permissible because Franklin did not have the capability of developing its own similar operating system: “Franklin did not dispute that it copied the Apple programs. Its witness admitted copying each of the works in suit from the Apple programs. Its factual defense was directed to its contention that it was not feasible for Franklin to write its own operating system programs.”

  The judge promptly rejected Franklin’s contention that an operating system was not covered by copyright. And Bill Gates immediately knew how important this ruling was for Apple, Microsoft, and all other firms developing various software applications and operating systems; in fact, Microsoft was extensively involved with many providers, including Apple. Gates took the opportunity the next month to write a celebratory “Opinion” piece that was published in the New York Times. Gates knew that if Franklin had won, then the future of Apple, Franklin, and Microsoft would be imperiled by copies of their software freely made by companies in other countries. He celebrated that the court had ruled “all computer software, whether it appears on a floppy diskette or is etched into the silicon chips deep inside a computer, is protected by United States copyright laws.” Gates had been claiming for years that software development would (eventually) stop in the United States without the protection, and that courts in Europe had already decided that software could be copyrighted. Gates noted that the software industry was still nascent and computers would be easier to use given more investment by the various competitors in the market. He also described a very fragmented industry, with thousands of competitors—not a limited few competitors—working to reach the market with their software: “Imagine the disincentive to software development if after months of work another company could come along and copy your work and market it under its own name …. Without legal restraints on such copying, companies like Apple could not afford to advance the state-of-the-art.”47

  At this point, there was room for Apple’s Jobs and Microsoft’s Gates to celebrate; the U.S. judicial system had finally—for good—decided the software critical to each firm’s success was protected.

  As PCs were taking off and millions of new users were becoming familiar with MS-DOS, Gates participated in a 1983 Apple event that was set up as a game show. In one of the many contradictory public statements he made over time, he described the Macintosh to be released in January 1984 as the most revolutionary idea. That Macintosh initiative was being led by Steve Jobs and Gates said:

  to create a new standard takes not just making something that’s a little bit different, it takes something that’s really new and captures people’s imagination. And the Macintosh, of all the machines I’ve ever seen, is the only one that meets that standard.48

  Microsoft was also working on a project for IBM-PCs in 1983. It was called “Windows.”

  1984—The original Macintosh was released on January 24, 1984, with an iconic commercial shown a few days before during the Super Bowl. Microsoft was firmly connected with Apple, Gates was developing ideas for Windows, and Apple and Gates were both building off the work at Xerox PARC, which had not been able to make innovations related to a paperless office into a successful business.

  They showed that it was easier to instruct a computer if you could point at things on the screen and see pictures. They used a device called a “mouse,” which could be rolled on a tabletop to move a pointer around on the screen. Xerox did a poor job of taking commercial advantage of this groundbreaking idea, because its machines were expensive and didn’t use standard microprocessors. Getting great research to translate into products that sell is still a big problem for many companies.

  Microsoft CEO Bill Gates in 1984 (age 28 or 29), nine years after the founding of the firm. (AP Photo)

  We worked closely with Apple throughout the development of the Macintosh. Steve Jobs led the Macintosh team. Working with him was really fun. Steve has an amazing intuition for engineering and design as well as an ability to motivate people that is world class.

  It took a lot of imagination to develop graphical computer programs. What should one look like? How should it behave? Some ideas were inherited from the work done at Xerox and some were original.49

  As 1984 was drawing to a close, Gates was again supporting the Macintosh in the media over the IBM PC.

  Chapter 4

  DEVELOPMENT OF PRODUCTS USED TODAY (1985–1998)

  1985—ELIGIBILITY (DATING AND BUSINESS PARTNERSHIPS)

  In early 1985, Bill Gates was rated by Good Housekeeping magazine as one of the “50 most eligible bachelors.”1 There was at least one error in the magazine’s description; he was 29 years old rather than the listed 28.

  In June 1985, Microsoft signed a Joint Development Agreement with IBM to make an operating system called OS/2, signed by William H. Gates on page 43.2 Microsoft did the development but was also working on versions of Windows in the background. So we have Microsoft selling MS-DOS to anyone making a computer similar to an IBM, software to Apple, an operating system to IBM, while working on its own operating system and selling applications to any consumer with a checkbook. No matter who wins this round of the technology evolution, Microsoft will again profit.

  Although Windows was announced in 1983, the first release came on November 20, 1985. Microsoft had become known for quick turnarounds on projects, so some computer experts began to believe that Windows was vaporware in the years between the announcement and the release. The term vaporware has many connotations—it can be a product the company wants to release but became a lower priority or not technologically feasible. Vaporware can also be a product that was never intended to exist, in which case it is announced to confuse competitors or nudge a competitor out of the market. As Microsoft announces: “On November 20, 1985, two years after the initial announcement, Microsoft ships Windows 1.0. Now, rather than typing MS–DOS commands, you just move a mouse to point and click your way through screens, or ‘windows.’ Bill Gates says, ‘It is unique software designed for the serious PC user.’”3

  Apple did not think Windows 1.0 was unique enough. And Steve Jobs was no longer at Apple, although he would return in 1996. The company had hired a CEO to be the business face of Apple in 1983; John Sculley was famously recruited by Jobs with the line, “Do you want to spend the rest of your life selling sugared water, or do you want a chance to change the world?” The Macintosh did not meet sales projections and the battle between Jobs and Sculley led to a battle where Jobs was left with no team. In fact, Jobs took the removal of his staff as being fired in a very harmful way:

  I was out—and very publicly out. What had been the focus of my entire adult life was gone, and it was devastating.4

  Jobs was “devastated” for part of 1985 but recovered quite well. He responded by starting another computer company called NeXT and a computer-based animation company called Pixar, which would create many popular movies thre
e decades later. And those responses meant his path with Apple—and with Microsoft—would intersect again.

  1986—MICROSOFT SELLS STOCK AND BECOMES PUBLICLY TRADED

  In 1986, Microsoft became a publicly traded company and thus everyone could buy and sell shares in the company at will. For Gates, this was a major change in a company he had firmly controlled for more than a decade already; he would now be accountable to others who had queries about Microsoft stock. And he was not happy about the prospects, although selling shares of stock would allow Gates to take money out of Microsoft whenever he wished:

  “The whole process looked like a pain,” he recalls, “and an ongoing pain once you’re public. People get confused because the stock price doesn’t reflect your financial performance. And to have a stock trader call up the chief executive and ask him questions is uneconomic—the ball bearings shouldn’t be asking the driver about the grease.”5

  So why does a firm decide to become publicly traded on a stock market, especially a firm where the chief executive officer (Gates) had expressed little desire to be involved in a process allowing individuals or businesses to call and ask about the company and the company’s prospects? There are multiple reasons for becoming a publicly traded company.

  On the initial sale of stock by Microsoft to the public, the firm would receive a substantial inflow of cash. The amount of that inflow would be the product of the number of shares sold times the price per share (less a commission to the banking firms that helped sell the shares). Acquiring cash through a stock sale can be viewed as safer than acquiring cash through borrowing money (debt), which would require periodic interest payments. While there would be more owners of the firm—a share of stock is a partial ownership of the firm—the company would now be able to use the cash raised from the initial stock sale to make investments that allow expansion and new products.