A side effect of becoming a publicly traded company, with a listing on a stock exchange, is that the founders or existing owners now have an easy way to sell part—or all—of their ownership in the company. The founders of Microsoft, such as Gates and Allen, immediately held shares of stock that were worth many millions of dollars as part of the initial public offering (IPO) process. These shares can be sold by the major executives of the firm in the future, as long as those executives follow rules that prevent individuals with insider knowledge from trading shares on upcoming good (or bad) news.
MICROSOFT AS AN INCREDIBLE WEALTH GENERATOR
In order for a corporation to grow, the products or services offered by the corporation have to be desired by customers (whether business or individuals). For the first 11 years of Microsoft’s existence, the company was very closely held and never had issued an IPO, which means there were no shares of stock issued that could be bought and sold readily. The average investor could not purchase stock in Microsoft until the official IPO on March 13, 1986, when a single share of MSFT stock sold for $21. Shares of Microsoft can still be bought or sold by individuals on the NASDAQ stock market under the symbol MSFT.
Microsoft used the proceeds from selling the IPO shares at a fortuitous time in the development on technology for businesses of all sizes as well as consumers. Due to the rapid creation of wealth in the firm, one share bought on the first day Microsoft was available would have grown to 288 shares if held for the entire growth spike in Microsoft’s first 25 years as a public company.6 Like many fast-growing companies, Microsoft issued routine stock splits to keep the price accessible to more investors. The extensive growth in computing—and Microsoft—in this era made many Microsoft investors and employees quite wealthy.
The growth of the company made Bill Gates—the largest shareholder and CEO—an exceptionally wealthy individual, often listed as the wealthiest person in the world over the past two decades. In fact, the position of wealthiest individual in the world has only been held by three people over the past two decades: each year, the listing has been topped either by Bill Gates, his good friend Warren Buffett (of Berkshire Hathaway), or Carlos “Slim” Helu (of Mexican telecommunications firm América Móvil).
OS/2 AND WINDOWS 2.0 RELEASED
The first version of OS/2 was released in December 1987 per the agreement with IBM. The second version of Windows was also released in December 1987. Both of these products were written by Microsoft, so the firm again benefitted no matter which product was more successful. In 1988, Gates suggested that OS/2 could be the most important operating system of all time, another intrinsically contradictory statement:
I believe OS/2 is destined to be the most important operating system, and possibly program, of all time. As the successor to DOS, which has over 10,000,000 systems in use, it creates incredible opportunities for everyone involved with PCs.7
Microsoft, under Gates, was a clear beneficiary of having multiple “most importants,” considering he had extolled the virtues of MS-DOS, Apple’s MacIntosh, Microsoft Windows, and now IBM’s OS/2. Independent of which platform became dominant Microsoft would benefit and continue to grow as long as the market for home computers continued to grow.
APPLE COMPUTER INC. VERSUS MICROSOFT CORPORATION
In 1988, Apple filed a lawsuit against Microsoft based upon the use of the graphical user interface (GUI) in the Windows operating system. Bill Gates was not amused, and his relationship with the new Apple CEO (Sculley) was not as strong as his relationship with Jobs.
A step back in history reminds us that Steve Jobs (of Apple) and Bill Gates (of Microsoft) were not the originators of the GUI that was the focal point of the lawsuit. In fact, both learned about the concept of a GUI from Xerox’s Palo Alto Research Center (PARC). Xerox, as the owner of PARC in the 1970s, examined its strategic options in the market for operating systems and did what any potential rights owner of that invention would do.
Xerox filed a copyright lawsuit against Apple the next year. Industry observers immediately thought that 1989 was a little late, as the Macintosh was no longer a “new” item on the market. Why would Xerox not file a lawsuit against both Apple and Microsoft? That was a simple business matter. Microsoft never claimed ownership of the idea of the GUI, while Apple was attempting to own the rights to the concept. If the courts decided that Apple “owned” the rights to all operating systems with a GUI, Apple would receive licensing revenue for what had been an idea developed by Xerox. This scenario took a while to sort out; Xerox sued Apple for using its invention, while Apple sued Microsoft for ostensibly stealing an idea both firms derived from Xerox.
This story has roots that had gone back at least three years. Steve Jobs had been pushed out of influence at Apple by John Sculley and the board of directors. And Sculley didn’t like the idea that Microsoft would be releasing Windows 1.0. Even years later, Gates’s disdain was apparent in talks with Jim Carlton related to the first legal nudges before the lawsuit. Carlton captured the thoughts of both Gates—who knew of the same GUI at Xerox PARC as Steve Jobs saw in November 1979—and Charles Simonyi, the software application expert Gates had specifically hired from Xerox PARC. Gates knew that both companies had been similarly inspired, and that Apple intentionally withheld information that would have been trade secrets to actually be within dispute.
Gates was hopping mad. He had not stolen anything from Apple, he insisted then and continues to insist now. The whole idea of GUIs had originated not with Apple, he points out, but with Xerox. “The father of the Mac is Xerox. The father of Windows is Xerox,” Gates says. Charles Simonyi, Microsoft’s in-house GUI maestro, compares the similarities between Windows and the Macintosh to those found in different automobile models. “When you decide to build an automobile, you’re not going to change the steering wheel,” Simonyi says. “They all have common ancestry. This was such a silly and pointless argument that they were falling into.”8
No one ever disputed that the idea of a GUI came from Xerox. If Xerox had immediately sued, the outcome might have been different. Xerox lost the case against Apple, Apple lost the case against Microsoft, and the escapade ended in 1994, with each of the three firms spending a lot of money on lawyers but essentially making no progress.
MICROSOFT WAS USING E-MAIL IN THE 1980s
In a 1988 interview with Success Magazine, Gates noted that Microsoft was already using electronic mail: “We have electronic mail here—that is, we send messages to each other electronically over our computers. So, if you have a brainstorm all of a sudden, you can send your idea out immediately, and only to the people you think should be involved.”9
SMALL-MARKET WINDOWS 3.0 IS A BIG SUCCESS
On May 22, 1990, Windows 3.0 came out, rapidly surpassing sales of OS/2. In 1992, Gates noted that OS/2 became an IBM-only initiative: “We always thought the best thing to do is try and combine IBM promoting the software with us doing the engineering. And so it was only when they broke off communication and decided to go their own way that we thought, okay, we’re on our own, and that was definitely very, very scary.”10
At some time near this point, Microsoft adopted an HR practice called stack ranking, which the company confirmed as being in place for multiple decades when cancelled in 2013. Under that evaluation system, supervisors had to grade every team member on a ranking scale from 1 to 5, and a predetermined proportion of team members had to be rated as unacceptable. This practice was described later as leading to dysfunction among teams and high-achieving workers intentionally avoiding work with other high achievers, specifically to avoid the possibility of low rankings.11
In 1993, there was debate whether Microsoft was too powerful. Gates describes the market for server hardware: “‘This is a hypercompetitive market,’ Gates says. ‘Scale is not all positive in this business. Cleverness is the positive in this business.’”12
He goes on to note that due to the cost of development, applications were now generating more profit than operating syst
ems, although that was only a very recent pattern in Microsoft’s history. Windows 3.0 in 1990—the product that relegated OS/2 away from Microsoft into an IBM-only project—was the operating system that brought Microsoft Word to the mass market. Even a former IBM executive who became the CEO of another firm commented at the time that the fear of Microsoft in the software market should dissipate over time: “Today, everyone is in fear of Microsoft. But in the end, everyone will compete. There are thousands of Bill Gateses out there who will find pieces of this market and win them.”13
Bill Gates with Intel CEO Andy Grove in 1993. Microsoft’s software runs extensively on Intel processors. (AP Photo/Barry Sweet)
THE INTERNET (WHICH MAY BE A TIDAL WAVE)
Microsoft’s awareness that something very dramatic was going on around the Internet really came from employee[s]…so he became a change agent at Microsoft… And people looked at that, they looked at the other memos they had saying similar things, and we said, boy, this is profound.14
On May 26, 1995, Bill Gates sent forward an e-mail memorandum called “The Internet Tidal Wave” to the executives of Microsoft and the staff who reported to him directly. In that memo, Gates made some very strong claims about the implications of the Internet and Microsoft. In many respects, he was correct while assigning the Internet “the highest level of importance,” going forward to say the “Internet is the most important single development to come along since the IBM PC was introduced in 1981.” For a company known extensively for operating systems, that would be a huge development. And he clearly understood the concept of reinforcing feedback in terms of what would lead to an explosion in the growth rate of Internet use, stating that he believed almost all computers would be used to connect to the Internet and: “Most important is that the Internet has bootstrapped itself as a place to publish content. It has enough users that it is benefiting from the positive feedback loop of the more users it gets, the more content it gets, and the more content it gets, the more users it gets.”15
He got some aspects of the Internet entirely wrong. Although he saw that HTML would dominate, he thought that other existing protocols, “FTP, Gopher, IRC, Telnet, SMTP, NNTP,” would still be used. Most personnel in the computer industry have not used four of those six protocols since shortly after Gates’s memo in 1995 (if ever).
What bothered Gates most about using the Internet early in 1995? Even before the founding of Google, he said “it is easier to find information on the Web than it is to find information on the Microsoft Corporate Network.” While surfing the Internet of 1995, he did find a lot of Apple QuickTime files online for movie advertisements, as well as Adobe PDF files—even the government was using them—but not a single file type with a Microsoft extension (e.g., a Word document).
And then there was Netscape, where Gates wanted to get people to switch to Microsoft’s alternative, saying “we need to offer a decent client (O’Hare) that exploits Windows 95 shortcuts. However this alone won’t get people to switch away from Netscape.” O’Hare, we find out later, was Microsoft’s code-name for the very first version of Internet Explorer. And he also talked about Blackbird, which was intended to be an alternative to the HTML pages we see on the web daily (although he already conceded that HTML would be the standard).
Gates also mentioned a specific fear. And that was common in his talks throughout time. Even when Microsoft was market-dominant, he did not believe that the success of the company was fully assured. He believed the Internet could lead to the generation of very cheap products that would essentially allow for limited capabilities like the browsing of the Internet: “One scary possibility being discussed by Internet fans is whether they should get together and create something far less expensive than a PC which is powerful enough for Web browsing.”16
Funny that Gates should mention the possibility of a PC alternative that would be far cheaper and have the capability of using the web. While basic computers with Windows 95 capability started around $1,000, the idea of an alternative had already been postulated by Larry Ellison, one of the other stars of the early days of micro-computing, CEO and cofounder of Oracle software:
“Here’s what I want,” said Ellison. “I want a $500 device that sits on my desk. It has a display and memory but no hard or floppy disk drives. On the back it has just two ports—one for power and the other to connect to the network. When that network connection is made, the latest version of the operating system is automatically downloaded. My files are stored on a server somewhere and they are backed up every night by people paid to do just that.”17
Consumers did find a product similar to the one Gates feared in 1995 and that Ellison had mentioned. The product just took 18 more years to arrive, with the Google Chromebook that did not run Windows, updated automatically, stored information in the cloud, and was a cheap means of connecting to the Internet for approximately $200, rising from a “negligible” share of the reseller notebook market in 2012 to 21 percent in 2013.18
Windows 95 was the first version of Windows that a user would associate with Windows today. The product was released on August 24, 1995, and was one of the largest product launches in history. Gates took the stage to introduce the brand new operating system, and avoiding the marketing campaign was all but impossible. In fact, Segal noted that the advertising campaign for Windows 95 was believed to be the single largest advertising campaign in history through that point in time, with rumors suggesting that the Rolling Stones made a fortune simply for licensing one of their songs for the product launch: “Twelve million dollars was spent simply securing the rights to a theme song for the hoopla, the opening chords of the Rolling Stones hit ‘Start Me Up.’”19
At the time, Segal noted exceptionally costly marketing campaign could be risky, and implied that expensive launches have been accompanied by massive failures in the past, including the Ford Edsel. He also passed along the rumor—ostensibly started by the Rolling Stones—that Microsoft paid $12 million to use one of their songs (the real total was “only” $3 million). The potentially risky campaign paid off immediately. Windows 95 would sell 40 million copies in the first year after being released, plus Microsoft was able to sell its applications—like MS Word—that were optimized for the operating system.20 This was an exceptionally lucrative bet for Microsoft and was a central theme of the trial that began in 1998.
1996—GATES FEARING FAILURE
Customers tell me they worry that Microsoft, by definition the only source for Microsoft operating system software, could raise prices of slow down or even stop innovation. But if we did, we wouldn’t be able to sell our new versions. Existing users wouldn’t upgrade, and we wouldn’t get any new users. Our revenue would fall, and other companies would come in and take our place. The positive-feedback mechanism helps challengers as well as the incumbent. A leader can’t rest on its laurels because there’s always a competitor coming up from behind.21
1997—GATES VIEWING WINDOWS AS THE ONLY OPTION
Gates was worried that Sun was becoming a competitive threat with Java, and was having a meeting with developers who were asked to test coding an application for the Internet instead of writing the code to operate within Windows. A team leader who was speaking for the Internet team’s attempt started his presentation and encountered Gates’s temper before leaving the very first slide, as Windows had yet to be mentioned: “Why don’t you just give up your options and join the Peace Corps?” Mr. Gates is said to have thundered. “Hasn’t anybody here ever heard of Windows? Windows is what this company is about!”22
This was a little harsh for Gates, who is known for frequently being abrasive in meetings. In fact, there’s one phrase a presentation can elicit from Gates that is described as proudly adopted by the recipients: “‘That’s the stupidest thing I’ve ever heard,’ and victims wear it as a badge of honor, bragging about it the way they do about getting a late-night E-mail from him.”23
MICROSOFT’S APPLE INVESTMENT
August 6, 1997. While Bill Gates mai
ntained a multiple-decade run as CEO of Microsoft, Steve Jobs had previously been ousted from the company he had cofounded. Jobs had been completely detached from Apple for more than a decade (1985 until 1996), when Apple acquired the second computer company Jobs founded, NeXT. Now Jobs was in-charge of Apple again, albeit as the Interim CEO, and the firm was in a difficult financial downturn.
In the lead-up to the Microsoft antitrust trial that would define the firm in the late 1990s, what occurred next would seem unthinkable to many. Microsoft made a cash investment in Apple at a time when Apple needed cash.24
And the symbolism of the event—Microsoft helping a struggling Apple after previous lawsuits from Apple, while Microsoft was already under judicial sanctions—was not lost on many observers, as Jobs was standing on stage and Gates was projected on a large movie screen above him. Not only did observers comment about the event, Jobs did as well. Rick Webb noted:
In 1997 in Boston I had the pleasure of witnessing in person what Steve Jobs called “my worst and stupidest staging event ever.”
Onstage at Macworld Boston, Jobs announced his settlement of legal disputes and a partnership with Microsoft. And in a move eerily reminiscent of his landmark 1984 advertisement, Bill Gates’ satellite-broadcast image filled the hall, a looming face looking every bit the overlord out of place. He was the Orwellian big brother we had come to despise. People booed as he spoke. In the end, the deal was probably a good thing, but the symbolism was catastrophic.25
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