In the summer of 1980, the most powerful computer company on Earth needed a favor from a startup that had fewer than forty employees. IBM — a company so synonymous with computing that people simply called it "Big Blue" — had decided to build a personal computer. And it had decided to build it fast.
The project was code-named "Project Chess," run out of a skunkworks in Boca Raton, Florida, under an engineer named Don Estridge. To hit its punishing deadline, IBM broke every one of its own rules. Instead of designing every chip and writing every line of code in-house, as was the company's custom, it would buy off-the-shelf parts and license software from outsiders. In July 1980, an IBM team flew to Seattle to talk to a small software house that had made its name selling programming languages: Microsoft.
The phone call that reshaped an industry
Microsoft's specialty was languages — BASIC, FORTRAN, COBOL. It did not, at that point, have an operating system to sell. When IBM asked about one, Bill Gates did the honorable thing: he pointed them down the road to Digital Research, the company run by Gary Kildall whose CP/M was the dominant operating system of the era. It was the obvious choice; CP/M ran on nearly every serious microcomputer of the late 1970s.
What happened next has become one of Silicon Valley's most retold legends. IBM's representatives went to Digital Research — and the deal never came together. The exact reasons are still debated: a disagreement over IBM's strict non-disclosure agreement, unease about IBM's terms, a licensing model that didn't fit. Whatever the cause, IBM left without an operating system, and it came back to Microsoft with a blunt question: could you supply one?
Gates and Paul Allen said yes — before they actually had anything to sell. It was the same audacity that had launched the company in 1975, when they promised Altair BASIC before it existed. Now they had promised IBM an operating system they did not own.
Quick and dirty
Luckily, the answer was sitting a few miles away. A local outfit called Seattle Computer Products had built a machine around Intel's new 8086 processor, and when the CP/M version for that chip was late, one of SCP's engineers, Tim Paterson, had written his own operating system to fill the gap. He called it QDOS — the "Quick and Dirty Operating System" — later renamed 86-DOS. Its design borrowed heavily from CP/M, which made it familiar to programmers and easy to write software for.
Microsoft moved decisively. It licensed 86-DOS from Seattle Computer Products for a modest sum — around $25,000 for the initial non-exclusive rights — and then, in July 1981, bought the software outright for $50,000. Paterson himself came to work at Microsoft to help turn his quick-and-dirty creation into the polished product IBM would ship. Reworked and rebranded, it became MS-DOS, and in IBM's own machines, PC DOS.
The clause that built an empire
Here is the part that made it the deal of the century. IBM, confident that the real money in computers was in hardware, agreed to pay Microsoft a flat fee for the operating system rather than a royalty on every machine. In return, Microsoft made one quiet but decisive request: it would license DOS to IBM, but it would keep the right to license its own version to anyone else.
At the time it looked like a footnote. IBM was getting exactly what it wanted, and Microsoft was pocketing a fee for software it had bought cheaply. But that single clause meant Microsoft — not IBM — owned the operating system that the industry was about to standardize on. When the IBM Personal Computer, model 5150, shipped on August 12, 1981, running PC DOS 1.0, it became an instant hit. And the moment other manufacturers began building machines that could run the same software, they all had to come to one place for the operating system.
IBM had lent Microsoft its credibility and its enormous market. Microsoft had kept the thing that mattered: the license. Big Blue thought it was buying a component. It had, in fact, handed a thirty-person startup the keys to the next decade of computing.
Next: the clones arrive — Compaq reverse-engineers the IBM PC, and MS-DOS begins its march onto every desk in the world.
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