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Microsoft Corporation

HistoryLink.org Essay 2294 : Printer-Friendly Format

In 1975, two young men from Seattle founded a company that would be to the Computer Age what the Ford Motor Company was to the Automobile Age. Like Henry Ford, William H. Gates III (b. 1955) and Paul Allen (b. 1953) transformed a new technology by building on the inventions of others, creating a mass market for what had once been a novelty for the few. Their company -- originally called Micro-soft, an abbreviation for microcomputer software -- helped change the living, working, and recreational habits of hundreds of millions of people around the world.

A Small Box That Blinked

The Microsoft odyssey began with the Altair 8800: a small, rectangular box that had no keyboard or screen and didn't do much more than blink. A mockup appeared on the cover of the January 1975 issue of Popular Electronics, with a headline hailing the "World's First Minicomputer Kit to Rival Commercial Models." For the teenaged Bill Gates and his high school buddy Paul Allen, the Altair -- named after a distant star in the constellation Aquila -- pointed the way to a dazzling future.

In the years since then, stories about Gates and the early days at Microsoft have become part of our national lore. The precocious child of a prominent family in Laurelhurst, Gates set out to read the entire World Book Encyclopedia when he was eight, and got to the Ps before being distracted by other interests. At 11, he won a dinner at the Space Needle by memorizing the Sermon on the Mount. In high school, he scored a perfect 800 on the math portion of the Scholastic Aptitude Test. To use a Gatesian idiom, he showed early evidence of massive bandwidth.

A Kid Thing

Gates was 13 when he was introduced to computers at the Lakeside School, a private prep school known for its rigorous academic standards. Lakeside had a teletype machine that could communicate with a computer in downtown Seattle. Gates and other students, including Allen, were immediately captivated. In those days, computers were huge things, housed in big buildings and tended by legions of technicians. "I realized later part of the appeal was that here was an enormous, expensive, grown-up machine and we, the kids, could control it," Gates wrote in The Road Ahead. "We were too young to drive or to do any of the other fun-seeming adult activities, but we could give this big machine orders and it would always obey" (Gates, 1-2).

However, getting time on the computer was costly, and this is what drove Gates and Allen into the software business. After quickly running through a fund provided by the Lakeside Mothers' Club, they paid for computer time by selling their programming skills. They made $20,000 in one summer alone -- an extraordinary amount for high school students -- with a program to analyze traffic data for municipalities.

In late 1972, Gates (by then a senior) and Allen (a sophomore at Washington State University) were hired to help computerize the Bonneville Power Administration's power grid for the Northwest. After Gates entered Harvard University in 1973, Allen got a programming job in nearby Boston so the two could continue working together.

It was Allen who spotted the story about the new microcomputer in Popular Electronics. The Altair 8800, available in kit form for $397, had only 256 bytes of memory (a byte represents a single character). "You could get the lights on the front panel to blink, but that was about all," Gates recalled (Gates, 16). Nonetheless, Gates and Allen were convinced that there would be a market for software for the Altair and the other desktop computers they believed would follow it. For the next eight weeks, the two worked feverishly to adapt a version of an existing computer language called BASIC (Beginner's All-purpose Symbolic Instruction Code) for the Altair. By the fall of 1975, they had officially "shipped" (released) their program, licensed it to Altair's manufacturer, and formed Micro-soft. (They dropped the hyphen one year later.)

In January 1977, Gates dropped out of Harvard (although technically, he is merely on an extended leave) to work with Allen and half a dozen other programmers at Microsoft's headquarters in Albuquerque, New Mexico, near the Altair manufacturing plant. From the beginning, the company bet on software, not hardware: on the codes that tell computers what to do rather than on the computers themselves. Microsoft soon branched out from the Altair to software for computers made by other manufacturers, including Apple Computer Inc., Commodore Business Machines, and the Tandy Corporation.

The Deal with IBM

Gates, who was already wealthy because of a family inheritance, never dipped into his personal fortune to finance the fledgling company -- he didn't need to. By December 1978, when Microsoft left Albuquerque to move into leased office space in Bellevue, it was selling more than $1 million worth of software a year. Two years later, Gates brokered the deal that would give Microsoft one of the most powerful revenue streams in the history of American business: an agreement to provide an operating system for a new personal computer, or PC, being developed by the International Business Machines Corporation.

IBM's first choice as a software partner was Digital Research, then the leading producer of operating systems for microcomputers. Operating systems are the central nervous systems of computers, changing chips and circuit boards into something that can respond to directions. Microsoft had specialized up to that point in computer languages such as BASIC, which occupy a middle layer between the operating system and software applications such as word processing. IBM approached Microsoft after failing to reach an agreement with Digital. Microsoft, which did not have an operating system of its own at the time, acquired one from another, smaller company and began adapting it for the IBM PC.

Microsoft (then a company with $7 million in annual sales and fewer than 40 employees) negotiated an extremely favorable contract with IBM (an industrial giant with revenues approaching $30 billion a year and an international work force of more than 325,000), gaining the right to sell versions of what became known as MS-DOS (Microsoft Disk Operating System) to other computer makers. Because the IBM PC was assembled from standard parts, it was easy for competitors to make copies. By December 1982, Microsoft had licensed DOS to 50 other manufacturers. Millions of IBM "clones" were being sold, and most were powered by MS-DOS.

Gates was assisted in his dealings with IBM by Steve Ballmer, a classmate from Harvard who joined Microsoft in June 1980. Allen resigned from Microsoft in early 1983 after being diagnosed with Hodgkin's disease, a form of lymph cancer. He later recovered, and has devoted his time since then to interests ranging from sports to music; he remains on the company's Board of Directors. Ballmer is the company's current (2000) chief executive; Gates holds the title of "chairman and chief software architect." Gates, with an estimated net worth of $90 billion; Allen ($30 billion), and Ballmer ($19.5 billion) occupied positions one, three, and four, respectively, on Forbes magazine's list of the wealthiest people in the world in 1999.

Not a Nerd

The success of MS-DOS made Gates a national figure. He appeared on the cover of Money magazine in November 1982; People magazine selected him as one of the 25 most intriguing people in the United States of 1983; he made the cover of Time in 1984. Journalists invariably remarked on his appearance, describing him as a boyish-looking technoid with oversized glasses, unruly hair, and scruffy clothes. According to Time, he looked "like an undernourished graduate student." In fact, Gates never fully conformed to the nerd image. He's athletic, a skilled water skier and ice skater; a master poker player; a good dancer, and someone whose love of fast cars has often left him on the wrong side of the radar gun. Besides, as he pointed out in one of his syndicated columns for The New York Times in 1996, "I've never used a pocket protector, so I can't really be a nerd, can I?"

Whatever else might be said about him, it seems clear that Gates has a tremendous ability to predict which ideas will catch on and which will not. In 1983, an idea he thought would catch on was the graphical user interface (GUI), which allows computer programs and files to be represented by icons and other graphics on the screen. Xerox developed this technology in the early 1970s at the Palo Alto Research Center. Microsoft unveiled its version with the first release of the Windows operating system (its successor to DOS) in November 1983. The Apple Computer Corporation later unsuccessfully sued Microsoft for copying the "look and feel" of the operating system used in Apple's Macintosh computer. When asked about the similarities between the two systems, Gates reportedly joked that he and Apple co-founder Steven Jobs had lived next to a rich neighbor named Xerox and when he (Gates) broke in to steal the television set, he discovered Jobs had already taken it.

Early versions of Windows were not successful, but releases beginning in 1990 with Windows 3.0 cemented Microsoft's domination of the market for IBM-compatible computer operating systems. Meanwhile, the company also moved into software applications, creating the programs that allow computers to perform specific tasks, such as word processing and spreadsheets. It also began producing CD-ROMs (Compact Disk -- Read Only Memory), beginning with Bookshelf, a collection of ten reference books on a single disk, and later including Encarta, Microsoft's popular interactive encyclopedia.

Microsoft on the Information Highway

But nothing had as much impact on the company's later history as a series of steps involving Microsoft and the Internet. Gates and his top executives were relatively slow to recognize the potential of the Internet, but by 1995 they had embraced it unconditionally. Microsoft's efforts to position itself on the "information highway" eventually attracted the attention of the Department of Justice and the attorneys general of 19 states. The company had already settled one antitrust case involving its Windows operating system. Its decision to incorporate an Internet browser, called Explorer, in the 1995 version of Windows led to renewed scrutiny. On May 18, 1998, after a two-year investigation, the Justice Department and the states sued Microsoft, claiming the company had illegally used its monopoly over operating systems to limit consumer choice in the market for browsers.

Efforts to settle the case failed. On April 3, 2000, Federal Judge Thomas Penfield Jackson ruled that Microsoft was a bullying monopolist that had engaged in "predatory" business practices, "placed an oppressive thumb on the scale of competitive fortune," and "trammeled the competitive process."

Microsoft immediately vowed to appeal. Gates went on a public relations offensive, appearing in a national television ad campaign and meeting with President Clinton and members of Congress. Microsoft also took out full-page advertisements in newspapers across the country, defending its record and touting its successes. Even so, investors pummeled the company's stock, pushing it to a 52-week low by April 14, 2000. The stock fell even further two months later, when Jackson ordered that Microsoft be broken into two separate companies.

The company appealed to both the United States Supreme Court, which refused to hear the case, and to the U.S. Court of Appeals for the District of Columbia. On June 28, 2001, the appeals court upheld Jackson's conclusion that Microsoft had violated antitrust laws but it rejected the proposed breakup. The court also ordered Jackson off the case, concluding that he had "seriously tainted" the proceedings by making derogatory comments about the company during and after the trial. U.S. District Judge Colleen Kollar-Kotelly was picked at random to replace him.

Pressured by the new judge, the Justice Department and nine of the states reached a settlement on November 2, 2001. However, the District of Columbia and nine other states rejected the agreement, saying it did not impose sufficiently stringent penalties on Microsoft.

Antitrust Settlement

One year later, in a decision that was widely seen as a victory for Microsoft, Judge Kollar-Kotelly approved the settlement. Under its terms, Microsoft will be required to share some technical data with software developers; to stop restricting what icons, menus or services computer manufacturers install in their products; and to avoid retaliating -- or even threatening to retaliate -- against computer makers who use or promote non-Microsoft software. The judge firmly rejected the harsher remedies requested by the non-settling states, including one that would have forced Microsoft to divulge the blueprints for its popular Internet Explorer web browser.

The ruling brought an end to the government's four-year-old antitrust case, although the company faces other legal difficulties, including lawsuits filed by such competitors as Sun Microsystems and AOL Time Warner; several class-action lawsuits on behalf of consumers nationwide; and an antitrust investigation by the 15-nation European Union. Still, Gates was clearly relieved by the decision, calling it "a fair resolution" and "a major milestone."

By any measure, Microsoft has become an industrial giant, with more than 50,000 employees worldwide and annual revenues of more than $28 billion. It has created an estimated 10,000 millionaires by offering stock options to employees. The company controls 90 percent of the market for computer operating systems and 95 percent of the market for office software. To promote its presence on the Internet, Microsoft has entered into partnerships with companies in many industries, from cable television to telecommunications. It already provides 30 percent of the software that allows graphics, sound, video, and animation to be delivered over the Internet, and is seeking to expand that market. It is also making inroads in new areas such as business software and mobile devices such as wireless phones.

Nevertheless, Microsoft executives have often behaved as if their company were still a scrappy start-up, fighting for survival against crushing competition. The corporate culture seems driven by nervous energy and a certain paranoia. "We've spent the past 25 years thinking of ourselves as a small, aggressive company playing catch-up to industry giants," Chief Executive Steve Ballmer said midway through the antitrust case, "even though at some point along the way, we became a large company" (The Seattle Times).

In her ruling, Judge Kollar-Kotelly took note of the company's tendency to bully its competitors, warning that she would be closely monitoring its compliance with the agreement. "Let it not be said of Microsoft that "a prince never lacks legitimate reasons to break his promise," she wrote, quoting Renaissance philosopher Niccolo Machiavelli, "for the court will exercise its full panoply of powers to ensure that the letter and spirit of the remedial decree is carried out." Ballmer, sounding somewhat chastened, said Microsoft "has learned and grown through the experience of the last four years," adding, "I want to be clear that we have heard both those who support us and those who have criticized us" (Seattle Post-Intelligencer).

Sources:
James Wallace and Jim Erickson, Hard Drive: Bill Gates and the Making of the Microsoft Empire (New York: John Wiley & Sons, Inc., 1992); Randall E. Stross, The Microsoft Way: The Real Story of How the Company Outsmarts Its Competition (Reading, Mass.: Addison-Wesley Publishing Company, Inc., 1996); Janet Lowe, Bill Gates Speaks: Insight from the World's Greatest Entrepreneur (New York: John Wiley & Sons, Inc., 1998); Michael A. Cusumano and Richard W. Selby, Microsoft Secrets: How the World's Most Powerful Software Company Creates Technoloogy, Shapes Markets, and Manages People (New York: The Free Press, 1995); Bill Gates with Nathan Myhrvold and Peter Rinearson, The Road Ahead (New York: Viking Penguin, 1995); The Seattle Times, April 4, 2000; (www.microsoft.com/MSCorp/Museum/Timelines); D. Ian Hopper, "Court Reverses Breakup of Microsoft," Seattle Post-Intelligencer, June 28, 2001 (seattlep-i.com); Transcript of Microsoft News Conference on US District Court Ruling, (http://www.microsoft.com/presspass/trial/nov02/11-01newstranscript.asp); Dan Richman and Charles Pope, "A Clear Victory for Microsoft," Seattle Post-Intelligencer, November 2, 2002, p. 1.


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Bill Gates, ca. 1995
Courtesy Bill Gates


L to r, top: Steve Wood, Bob Wallace, Jim Lane; Middle: Bob O'Rear, Bob Greenberg, Marc McDonald, Gordon Letwin; Bottom: Bill Gates, Andrea Lewis, Marla Wood, Paul Allen, December 7, 1978
Courtesy Microsoft


 
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