Bill Gates (2 page)

Both Gates and Allen had some savings when they started out. Allen had made good money at Honeywell. Gates, in addition to what he had earned as a programmer during the past few summers, had managed to amass a fair amount of money playing poker at Harvard, a fact he seems almost boyishly proud of. At the time, of course, he was in some ways little more than a boy—only nineteen—and Allen was only two years older. Gates has duly noted that in many other countries, both the business world and the public at large are much less receptive to very young entrepreneurs than in the United States, and that he was fortunate to have been born an American, at just the right time for his abilities.

There is some confusion about which of the partners came up with the name Microsoft. Gates has said that he did, but Allen, even in joint interviews, sometimes gives the impression that the final decision was his. At the beginning, however, the name was a little different: Micro-Soft. Gates told
Fortune
that the credit line in the source code of their first product was “Micro-Soft BASIC: Bill Gates wrote a lot of stuff; Paul Allen wrote some other stuff.” They had also considered calling the company Allen and Gates, but the example of IBM and others suggested that a more generic name was better in terms of a company’s longevity, at
least in the computer world. Allen and Gates, they thought, sounded too much like a law firm. It was not until 1981 that they finally got around to incorporating as Microsoft.

In Albuquerque they continued to live much like college students, sometimes going to a movie but mostly working, often very late; Gates not only slept under his desk at the office but sometimes fell asleep in meetings. Allen, who would go home to their motel to sleep, often had to be routed out of bed with a phone call from Gates. Both men admit that they had to learn business practices as they went along. All decisions were made mutually, often after hours of discussion, but they agree that Allen was the one to take the lead in suggesting new products, while Gates was out in front on the business end. They both wrote code in those days, with Allen doing more of it but Gates showing a particular flair for solving knotty problems, as had always been the case.

The press has long reported that the relationship between Gates and Allen had a tendency to erupt into huge fights. That problem goes back to the very beginning. When they were still at Lakeside School, Allen tried to go it alone on a paid project, and then found that he needed Gates’s coding input, after all.
Time
has reported that Gates replied, “OK, but I’m in charge, and I’ll get used to being in charge, and it’ll be hard to deal with me from now on unless I’m in charge.” Although they encountered serious difficulties later, both men say that the Albuquerque days were relatively free of argument. In part this may have been because they were too excited and too busy to fight.

It took them a while to realize that the low bids they were using to ensure landing a contract with companies like Texas Instruments could be raised without fear. Most companies, it turned out, were willing to pay more than
they asked. They had bid $99,000 on a Texas Instruments job simply because they didn’t quite have the guts to go to six figures. But they got over their shyness in that department quickly, as they realized that their competitors often simply couldn’t manage to do the job as fast or as well.

At the same time, however, they also found themselves promising product they hadn’t even developed yet, and having to play very serious catch-up. The Japanese company Ricoh once sent a man over just to sit in their offices and make sure they were working on an overdue project for Ricoh and not something else. By agreeing to develop software that they hadn’t yet fully thought through, they not only pushed themselves to the limit but also challenged themselves in ways that kept them ahead of their competitors. There are critics of the computer industry in general today, and of Microsoft in particular, who say that the intensely competitive nature of the industry has led to a bad habit of overpromising and of hyping new features that are hardly a gleam in anyone’s eye. Microsoft has often been accused of heralding new features not even in real development simply in order to scare off the competition. Some competitors say, “See, they were doing it even back in Albuquerque.” But Microsoft denies that it does that today, and Gates and Allen point out that in the early days the software industry was so new that it was perfectly natural to ask a hardware manufacturer what they wanted and agree to provide it with only the sketchiest idea of how to fulfill the request. They were dealing with virgin territory, and exploring it often meant saying yes to something when the path through the woods wasn’t yet clear. It was necessary to “hack” their way through in more ways than one.

While there were certainly crises in terms of developing new software, the most frightening episode in the early history of Microsoft proved to be a business matter. The initial contract they had signed with MITS called for that company to sell the Gates/Allen BASIC to their customers, rather than Microsoft’s selling it to computer owners and buyers directly. That seemed to be a smart move, since it cut down on the sales effort for Microsoft. But the contract only called for MITS to make a “best effort” to sell the software, and they soon stopped making almost any effort. The problem was that the Gates/Allen BASIC was being widely pirated, which mostly meant that people were getting the software from a friend.

The two partners went into arbitration to try to make MITS honor the contract. But the arbitration took nine months, and while it was taking place, MITS withheld payments from Microsoft. Gates and Allen say flatly that MITS was trying to “starve” them to death. As they couldn’t even pay their lawyer, they almost accepted a settlement, but a decision to hold out paid off when the arbitrator finally came down foursquare on their side. Had they lost the arbitration, they would have had to begin all over again. Both say it was a very scary period, but in the end it taught them valuable business lessons about keeping control of their own destiny; future contracts had many safeguards built into them. Microsoft is often charged with being tough to the point of ruthlessness, but Gates and Allen learned the hard way that toughness was essential to survival.

Other companies had started entering the personal computer market, including Commodore and Radio Shack, but it was the Apple II that really took off. MITS, a small company with less vision and talent, had been left behind
by the end of 1978. In addition, in 1978, Gates had entered into an agreement with a go-getting Japanese entrepreneur named Kazuhiko Nishi, or Kay. He had contacted Microsoft, and he and Gates, who were the same age, had hit it off immediately. Gates describes Kay in
The Road Ahead
as “flamboyant,” something Gates himself never was but which he clearly appreciated in his new colleague. With Kay as a go-between, Microsoft was now doing almost half its business with Japanese companies. MITS was fading away, so there was no longer any reason to remain in Albuquerque. On the first day of 1979, Gates and Allen moved their business home to the Seattle area, settling into the suburb called Belvue. They had almost a dozen employees, and almost all of them made the transfer to the new base.

Ensconced in Seattle, the company grew quickly. By early 1980, there were thirty-five employees, and Gates and Allen knew they needed management help. It had become impossible for the two of them to spread themselves thin enough to review all the new code that was being written. Gates decided to turn to an old friend from his two-year Harvard career, Steve Ballmer. Ballmer had lived down the hall from Gates their sophomore year, and they had taken courses together in mathematics and economics. As Ballmer once told
Time
, Gates would “play poker until six in the morning, then I’d run into him at breakfast and discuss applied mathematics.” Like so many others, Ballmer thinks Gates is the smartest man he’s ever met. But he wasn’t initially too sure he wanted to join Microsoft, at least right then. After Harvard he had joined Procter & Gamble as a product development manager, and then entered business school at Stanford University in California. He’d only finished one year when he was contacted by Gates, and thought he’d rather finish taking his degree. Gates asked
his mother, a very persuasive woman, to talk to Ballmer, and clinched the deal by offering Ballmer part ownership of Microsoft. By 1995, Ballmer’s percentage of the company was five percent, worth $2.7 billion, and the value of his shares has substantially increased since then.

Ballmer is credited by both Gates and impartial observers with having played a major part in the company’s success, and in the years since Paul Allen’s departure from Microsoft, Ballmer became increasingly close to Gates, serving as best man at Gates’s January 1, 1994 wedding. But the beginning was somewhat rocky. After only three weeks of getting to know how Microsoft worked, Ballmer insisted that they needed to hire another seventeen people immediately and fifty within short order. Gates was horrified. He wanted the company to be “lean and hungry” having seen other computer companies go bankrupt practically overnight, he wanted a cash cushion large enough that Microsoft could run for a year without any money coming in.

Ballmer was adamant about the need for new people. In addition, he was so angry at having his judgment questioned—right after being brought in to supposedly make just this kind of decision—that he moved out of the house he and Gates were sharing. Gates’s father stepped in to calm things down, and Bill Gates relented, permitting the new hirings to go through. It was just as well that he did. The new people, and many more, would be needed soon.

By 1980, the Apple II and other personal computers on the market were changing the minds of bigger, older computer companies about the future of the personal computer. IBM, which dominated the market for large mainframe computers, and Digital Equipment Corporation, which had been doing a booming business in what were then seen as “smaller” computers with a wide variety of applications, had been slow about seeing that PCs were the wave of the future. Indeed, Ken Olsen, the founder of DEC (whom Bill Gates had idolized as a teenager), had been debunking the PC since 1977, when he told a convention of The World Future Society, “There is no reason for any individual to have a computer in his home.” This famously mistaken judgment meant that DEC would later have to make a massive attempt to catch up, and it eventually led to Olsen’s ouster from the company.

IBM was also slow to see the possibilities of the PC, but at least it had the excuse that it was the leader in mainframes around the world. IBM was dubious, but not about to be caught entirely flat-footed, and in 1980 it made contact with Microsoft. It had a secret project for the development of PCs; if it was going to get them launched quickly, it would be necessary to go outside the company for the development of software to run the machines, rather than going through the lengthy process of trying to scale down its own mainframe software. Bill Gates had always been afraid that one of the big boys would do just that, leaving Microsoft in the dust. DEC had in fact scaled down some of its software in 1979, but because Olsen didn’t really believe in PCs to begin with, the company hadn’t gotten behind their new product in a way that threatened Microsoft.

IBM started off by playing things very cool. They sent
two executives to Seattle, but as Gates would later tell the story, these men downplayed their own importance, saying that they were just planning people and much of what they planned never happened. But they had a long discussion with Gates and Allen about where the technology was headed, and the big prospects for personal computers. They said they would like to have Microsoft’s FORTRAN and COBOL languages, and perhaps a good deal more. The meeting made Gates think back to their Albuquerque experience with Ricoh, when Microsoft had promised software it hadn’t even developed yet.

But Microsoft had a possible ace in the hole this time. It was negotiating to buy a little-known system called Q-DOS from a small rival company called Seattle Computer. If they could get their hands on it soon enough, they could license it to IBM. With Kay Nishi, their Japanese cohort, pushing them forward, Microsoft found themselves offering Q-DOS to IBM before the final papers with Seattle Computer had been signed. Two days of agonizing suspense ensued, with Gates and Allen worrying that Seattle Computer would get wind of the IBM deal and greatly raise their price. But since IBM was itself trying to keep its PC project secret, word didn’t leak, and Microsoft got Q-DOS for only $50,000. The system would prove instrumental in making Microsoft the industry giant it became.

Seattle Computer’s Q-DOS underwent many changes, of course, before becoming Microsoft’s MS-DOS. Microsoft had hired away the top engineer at Seattle Computer, Tim Paterson, and put him in charge of developing the new version. Since Microsoft also worked closely with IBM on the actual design of the IBM PC, there was a great deal of work to be done. Bill Gates and Paul Allen were still involved in hands-on development work, the actual creating
of code, in those days, and the tension that must have existed from 1980 to 1981 surfaced momentarily fifteen years later when the two men gave a joint interview to
Fortune
. In the interview, Gates brought up the fact that in the midst of the IBM project, Allen had insisted on going to see a space shuttle launch. Allen quickly put in that it was the
first
space shuttle launch and that he had gone down to Florida and flown back the same day, being absent less than thirty-six hours.

Originally designed for the Intel 8088 or 8086 microprocessing chips (and later for more advanced chips), MS-DOS was a powerful 16-bit operating system, using the then standard character-based mode that would be superseded by the graphical interface developed for the Macintosh three years later. The original MS-DOS had a memory limit of 640K, but that too would eventually be surpassed. Even with the advent of the graphical Windows operating system, MS-DOS continued to provide the underlying support. The initial MS-DOS system was considered fast, but as more powerful microprocessing chips were developed by Intel, it was updated to operate at much greater speed. A great deal of Microsoft’s success can be attributed to the fact that in MS-DOS it created an operating system that could serve as a sound basis for succeeding generations of more sophisticated operating systems and endless software applications.

Although the IBM PC would be in direct competition with the Apple II, Microsoft also developed its first application for Apple Computer in 1980. This was the Softcard for Apple II, which allowed that computer to run the CP/M operating system of Digital Research. But at the time, it was the relationship with IBM that Gates and Allen saw as the central building block for the future. Microsoft was
not paid a great deal for its development work for IBM—less than $200,000—but Gates made certain that their contract with IBM allowed for Microsoft’s adapting MS-DOS for the clones of the IBM PC, which the hardware giant was prepared to authorize.

Once the IBM PC was on the market, Microsoft pushed MS-DOS hard, persuading other software companies to develop applications for the operating platform. This was important, since IBM was offering a choice of software, also making available a version of Digital Research’s CP/M operating system, as well as a far more expensive UCSD Pascal P-System. Since Microsoft charged IBM only a one-time fee, the MS-DOS cost only $60, as opposed to $175 for the CP/M and $450 for the UCSD system. Gates and Allen were convinced that if they could establish MS-DOS as the system in greatest use, they could make a great deal of money down the line. Their gamble paid off, and MS-DOS won the battle within a year. What’s more, the first clones were coming out, and Microsoft was poised to cash in. In addition, new software like the Lotus 1-2-3 spreadsheet was created to work with MS-DOS.

But just as Gates and Allen arrived at this moment of triumph, Allen was diagnosed with Hodgkin’s disease. It was initially thought that he had lymphoma, an often fatal form of cancer, but even the treatment for the much more controllable Hodgkin’s disease would entail twenty-two months of chemotherapy. Although he remained a director of Microsoft and sometimes attended various other meetings, Allen backed off from his commitment to Microsoft during the two years of treatment. When he recovered, he made the decision to go off on his own to do other things. By then he was already a billionaire several times over, and he proved himself to be an astute investor in other
companies, ranging from Ticketmaster, of which he owns eighty percent, to America Online and many high-tech companies. He bought the NBA Portland Trailblazers and became one of the new owners of the Seattle Mariners, in order to keep the baseball team in Seattle. He gives millions of dollars to charity every year, the beneficiaries ranging from cancer and AIDS research to libraries and the Oregon Shakespeare festival. As a director of Microsoft, he still has official input into shaping the company, but it’s clear that he has a special place as an informal prognosticator and sounding board for Bill Gates, and that the men remain both intellectually and personally close.

With Paul Allen no longer a major force at Microsoft after his illness struck in 1982, it was up to Bill Gates to continue to build the company into the worldwide behemoth it has become. There are those who say that Paul Allen is a nicer guy than Bill Gates, and that it wouldn’t have been as ruthless a company if Allen had remained with it in his original capacity. But that ignores the fact that Gates was from the start more involved with the business end. And while Gates sometimes snaps back when charged with extreme aggressiveness, and denies many charges made against his company’s business practices, it is obvious he has run it with enormous success.

The first big step Microsoft took without Allen’s active participation was to develop a graphical interface. MS-DOS was character based. Gates explains the difference between the two formats by using a chessboard analogy: one format moves a chess piece by typing in words; the other shows a chessboard on the screen and moves the representation of the chess piece with a mouse. It may seem incredible to young computer users, but it was not until 1984 that the use of the mouse really became popular, with the introduc
tion of Apple’s Macintosh. The technology of the mouse had originally been developed by Xerox, but because of the high cost of their computers, which also didn’t use standard microprocessors, they were unable to achieve market success with this breakthrough.

The Macintosh was a different matter entirely. Microsoft’s reputation was such that Apple developed the Macintosh working closely with Gates’s company. Microsoft’s first graphical products, the word processor Microsoft Word and the spreadsheet Microsoft Excel, were created for the Macintosh.

But Gates was also working with IBM to develop a new operating system called OS/2. The two companies ran into numerous problems on this project. Some were technical, some arose from the fact that IBM laboratories were spread out across the country, leading to product turf wars, and some were a matter of developmental vision. Chris Peters, a Microsoft vice president, clarifies one of the main problems with OS/2 in
Microsoft Secrets
, a book on how the company develops its products, written with a great deal of input from Microsoft executives by Michael A. Cusmano and Richard W. Selby: “OS/2 was an attempt where they tried to change things…they tried to make things 10 percent better but completely different, and nobody wanted 10 percent better. We have a rule of thumb that things have to be twice as good before they can be different, if you’re trying for consistency.”

Gates became increasingly frustrated with the project, as did Nathan Myhrvold, the technical wizard who had joined Microsoft in 1986 when Gates bought his tiny company and hired its six-person staff. IBM, for its part, was annoyed with Gates’s attitude, and by 1989, the two companies decided to call a halt to their collaboration following the release of the first OS/2 product. Microsoft had already released its first
two Windows operating systems, in 1985 and 1987, but they had been commercial failures. The company then brought out Windows 3.0 in 1990, which overcame the 640K boundary of MS-DOS (a limitation in the amount of information that could be stored). Work was already under way on Windows 3.1, but Gates was taking an enormous risk, essentially “betting the company” on the eventual success of Windows 3.1. Without the IBM tie-in, Windows 3.1 had to be a major success. It was, becoming the standard for personal computers and swamping IBM’s latest version of OS/2.