Hard Drive: Bill Gates and the Making of the Microsoft Empire (13 page)

“They were very distraught,” remembered the Reverend Dale Turner. They might have taken comfort, however, in knowing that Harvard’s official records listed their son as having left “in good standing.” In fact, he is still considered by the university to be on a leave of absence. Harvard, it seems, does not like to admit someone would drop out and not intend to come back and graduate someday.

After leaving Harvard, Bill Gates put all his considerable talent and energy into Microsoft. There were no more distractions to divert his focus from the company. Over the next five years, in fact, he would take only two vacations of a few days each.

The most pressing problem at Microsoft when he arrived in Albuquerque in January of 1977 was the business relationship with MITS, which he found more and more frustrating. There was so much money to be made, he felt, were it not for the fact that Microsoft was still a legal and financial captive of MITS. The imposing figure of Ed Roberts had cast a giant shadow over Microsoft’s otherwise bright future.

The licensing agreement with MITS prevented Microsoft from selling 8080 BASIC to companies without the approval of MITS. Roberts had said he would not block a sale unless it were to a competitor. This was not a problem at first because the Altair had no rivals. But within two years of the
Popular Electronics
article, dozens of computer hardware companies had joined the revolution. In early 1977, Commodore hit the market with its PET computer, named after the trendy and popular pet rocks of the day. And down in Texas, the huge Tandy
Corporation
was running tests on a microcomputer called the Radio Shack TRS-80, which was expected on the market soon. Out in the Silicon Valley of California, a new company that had been started in a garage was about to offer the fruit of its labors—the

Apple II. The industry was growing up fast, and a language company like Microsoft that allowed computer users to utilize their machines more effectively stood to reap a financial harvest.

While Gates looked at these new computer hardware companies and saw new markets for Microsoft’s products, Roberts saw them as a threat. Inevitably, he and Gates were headed for a collision. Although the two had argued, yelled, and screamed at each other almost since the day they met two years earlier, Roberts realized he was dependent on Gates. Had the young software creator left MITS and taken Allen with him, MITS would have been in serious trouble, particularly if Microsoft forged an alliance with a new hardware company. So there were limits on how far Roberts could go in arguing with Gates. On the other hand, Gates knew Roberts was not his equal when it came to understanding computer software. Arguably, no one was. Part of the problem for Roberts in dealing with Gates was that Gates knew he was good, and at times he could be obnoxious. He did not hesitate to call someone “stupid,” or an “idiot,” including Roberts.

One heated blow-up between the two had occurred in

“During our recent discussions involving the potential of granting ADDS a license to market MITS Extended BASIC, we were having difficulty establishing terms that would mutually satisfy the long-range marketing objectives of both companies. After further consideration of the potential problems, we feel that it is in the best interests of both ADDS and MITS to discontinue our efforts to try to enter into a license agreement.” Roberts went on to note that ADDS “should be aware that MITS holds exclusive rights to the BASIC software programs developed by Mr. Gates and his partners, and that any commitments regarding the rights to the BASIC program, or any modified versions or portions of it, by anyone other than MITS personnel, are not authorized.”

Roberts also fired off a letter to Microsoft, notifying Gates and Allen that he had told ADDS and Delta Data that MITS would not license BASIC to them because of “market conflicts.” Roberts also added in his letter, “All other third party deals, e.g., Intel, Motorola, etc., appear to be at a standstill due to a variety of reasons. Let me again reiterate my desire that you not contact directly any potential third party customer without our approval and involvement.”

Microsoft faced an even more serious problem. Roberts was thinking of selling MITS and moving to Georgia to buy a farm. The likely buyer, Pertec, a company specializing in disk and tape drives for microcomputers and mainframe computers, had made it clear that the licensing agreement with Microsoft was part of any sale. MITS had grossed about $13 million in 1976, but the Altair, which had gone supernova, was now a collapsing star. Without the licensing agreement, MITS had little value. BASIC, not the Altair, was the MITS cash cow.

When Gates learned of the pending sale, he knew he and Allen had to do whatever it took to get BASIC back. Since signing the
agreement
with MITS, Gates and Allen had received almost $180,000 in royalties, including roughly $105,000 for the licensing of BASIC when accompanied with the sale of MITS hardware; $10,000 from the licensing of BASIC without the sale of hardware; and $55,000 from the licensing of the BASIC source code. Because the agreement provided for a $180,000 royalty cap, Microsoft could not make much more money from BASIC unless they could break away from MITS. On April 20,

The licensing agreement required that any disputes that arose would be settled by arbitration. But a couple weeks after receiving Microsoft’s letter, Roberts filed for a restraining order in Bernalillo County District Court in Albuquerque. A judge granted his motion: Until the licensing dispute was resolved, Microsoft could not license its 8080 BASIC. Roberts said he went to court when he found out Microsoft was negotiating to license BASIC to Texas Instruments, which was about to come out with a microcomputer of its own. Texas Instruments, of course, had helped to undercut the market when MITS was a struggling calculator kit company.

It would take several months to resolve the matter, and for what would be the only time in the company’s history, Microsoft faced money problems.

“It was tough that spring and summer,” recalled Steve Wood. “There wasn’t any revenue coming in. We had a little coming in from FORTRAN, which we had just started shipping, and we had a little coming in from 6800 and 6502 versions of BASIC. But those were not huge revenue streams.”

On May 22, 1977, Roberts sold MITS to Pertec. It was essentially a stock swap—Roberts walked away with several million dollars worth of Pertec stock.

When the chief counsel for Pertec came to Albuquerque to assess the situation and talk with Gates, he took one look at the long-haired, scraggly, 21-year-old and decided the legal battle against Microsoft was going to be easy. Roberts had warned Pertec that it would have its corporate hands full with Gates, but no one listened to him. “Pertec kept telling me I was being unreasonable and they could deal with this guy,” Roberts said. “It was a little like Roosevelt telling Churchill that he could deal with Stalin.”

Eddie Curry talked Gates into meeting with Roberts and the Pertec lawyer. They gathered in a conference room at MITS, while Curry waited outside. Within minutes, he could hear the three screaming and shouting. Curry was worried that Gates was taking a real beating. He placed a frantic call to Allen over at Microsoft, advising him to phone Gates and tell him they needed to discuss an urgent business matter. It was a ruse to get Gates out of the room. Allen made the call and rushed over to MITS to wait for Gates to come out. Curry recalled that when Gates emerged, “Bill told Paul in a very loud voice something like, ‘These guys think they’ve got me over a barrel, but I’m holding my own.’ And then he went right back in. Well, I didn’t worry about him after that.”

It was obvious that talking wasn’t going to settle things. The dispute finally went to arbitration. In addition to underestimating Gates, Pertec made another mistake. The company wrote a very explicit letter to Microsoft, saying it would no longer market BASIC or allow it to be licensed because it considered all other hardware companies competitors. The letter turned out to be the key piece of evidence in the
arbitration
hearing, in that it went completely counter to the “best efforts” provision in the licensing agreement. “It weakened their case,” said Wood. “They came in very arrogant, essentially saying, ‘We are this huge multimillion dollar company and you are just a handful of kids and we are not going to take you seriously.’ And that was a big mistake.”

The hearing went on for three weeks, from eight in the morning until about five at night each day. “It looked like big giant Pertec was picking on these poor nineteen- and twenty- year-old guys and trying to steal their life’s work,” said Roberts. “That’s how they played it and it played pretty well. ... I told Pertec they needed to deal with Gates hard. But they didn’t. It was a fatal mistake. It turns out he won everything.”

It was a complex and highly technical case. If the arbitrator had had to decide the dispute based on his understanding of the technology, Microsoft might still be waiting for a ruling. “I don’t think he had a clue to what anybody was talking about,” said Curry. Instead, the arbitrator ruled on the legal merits. Microsoft, he decided, owned the rights to BASIC and could market the product as it saw fit.

“If Pertec had prevailed, there might not be a Microsoft today,” said David Bunnell. “Whether Gates was right or wrong, it was in the best interest of the PC business that he prevailed.”

After the Pertec decision came down and the log jam of customers waiting for BASIC broke loose, Microsoft never had to worry about money again.

Ed Roberts stayed on with Pertec for a couple years, then returned to his mother’s birthplace in the quiet heart of Georgia, where he used some of his new wealth to buy a farm. A few years later, he sold the farm and entered medical school—he had always wanted to be a doctor. Today, he’s a family physician in Cochran, a town of about 5,000 south of Macon. Few of the townspeople know that Roberts once built a tiny computer called the Altair, which shone like a Christmas star in the night sky during the early days of the personal computer revolution. A dozen years after the light went out and Roberts left Albuquerque, he is still bitter when he talks about Gates, perhaps because Gates went on to such great success, while Roberts became something of a Robert Goddard, the scientist who laid the foundation of modern rocketry and then was all but forgotten by history. The world will never appreciate what Ed

Roberts did for the computer industry, said his friend Eddie Curry.

Roberts still maintains that MITS was the rightful owner of the BASIC that helped make Gates a billionaire several times over. He does not dispute that Gates and Allen were the authors. But MITS, he said, footed the bill for the development costs that turned BASIC into a marketable product for microcomputers. He estimated that Gates and Allen used several hundred thousand dollars’ worth of computing time while working on BASIC at MITS. “I was naive,” Roberts said* “It sounds
self-serving
now, but I was really concerned with not trying to screw those guys. Bill was only 19 and Allen only a couple years older, but it turns out they were a lot older than I was—Bill was for sure. Paul is a totally honorable guy.”

What Ed Roberts understood, and Pertec learned the hard way, was that Bill Gates’ looks were deceiving. Although he looked more like a stockroom office boy than a corporate executive, Gates proved himself to be a formidable businessman. At age 21, he was as comfortable sitting in his office negotiating tough deals with much older executives in three-piece suits as he was programming long into the night in front of a computer terminal, eating cold pizza and swigging down Coke.

The skinny kid with the dandruff and uncombed mop haircut not only understood software as few in the industry did, but he had the business and marketing savvy to run a very profitable company in a highly
competitive
environment. He understood the underlying issues in negotiation that were not immediately apparent, and he was confident that he could handle them correctly. Given his white-hot drive, and his determination to trounce the opposition, to do whatever had to be done to dominate the software market, this rare combination of technical genius and managerial acumen was an unbeatable combination.

Steve Wood recalled executives coining to Albuquerque and being taken back by the long-haired Microkids. “Their reaction was, ‘Who are these kids? Where’s their leader?’ Then Bill would take charge of the meeting and within ten minutes that wouldn’t be an issue anymore.” Typically, these business meetings were held with men in their thirties and forties, who came dressed in conservative business attire. With important visitors, some of the Microsoft programmers would wear slacks instead of jeans and try to get Marc McDonald to wear shoes instead of sandals. But that was the extent of their effort to conform to formal business etiquette.

“Looking back on it now, that must have been pretty funny,” said Wood, “but at the time we pretty much ignored it. We didn’t even think about it. We had the products these guys needed and wanted. We thought we knew what they needed to do in terms of their product development strategy and their hardware. And we felt we understood that better than most of them did, and we told them that and we just kind of expected they would listen and pay attention. And for the most part they did.”

Although the legal battle with MITS and Pertec lasted throughout much of 1977, the pace of work at Microsoft never slowed. The company worked on new languages, such as COBOL, and continued to market FORTRAN, as well as BASIC for chips other than the 8080.

Gates spent much of his time farming the OEM market. An OEM, or original manufacturer, is the brand name under which a product is sold. When a car buyer purchases a General Motors car with Goodyear tires, General Motors is the OEM because it buys the tires to use on equipment General Motors sells. In the case of the computer industry, an OEM would buy a computer from another manufacturer, build it into their own equipment and then sell the complete package, ready to run. Many OEMs, for example, made high-tech computer equipment for hospitals, such as imaging systems. Others specialized in graphics or robotics. But they all needed a high-level language such as BASIC or FORTRAN for their machines. It was a very lucrative market, and Microsoft received a substantial portion of its early revenues from contracts with OEMs.

While Gates cut the OEM deals, Allen concentrated on programming and figuring out what needed to be done next. It was a synergistic relationship.

“I always focused on new ideas and creating new technology,” Allen said. “Bill would occasionally jump in and get involved in that, but he was always more focused on the business side, more attracted to the business relationship side of things.”

At Harvard, Gates had read business books like other male students read
Playboy.
He wanted to know everything he could about running a company, from managing people to marketing products. He even checked out books on corporate law. He put his studies to good use at Microsoft. He not only negotiated the deals, he also wrote the contracts, as Wood found out one day when he met with Gates to discuss a nondisclosure licensing agreement for FORTRAN, for which Wood had written the code. Gates quickly drafted the agreement. According to Wood, Gates seemed to know more than the lawyers did. Not only did Gates understand what needed to be done, but he was able to do a lot of the contract writing himself, saving Microsoft expensive expert legal advice.

“Bill did it all,” said one of the programmers. “He was the salesman, the technical leader, the lawyer, the businessman. . . . You could go on and on.” Gates did get legal help on some of the company’s big-money contracts. One such contract was the one Gates closed with Tandy. Around the Fort Wortfi area in Texas, the Tandy Corporation was known as the “McDonald’s of the Electronics World.” Founded as a leather business in 1927, it had stores around the country by 1962, when it bought a chain of nine mail-order electronics stores called Radio Shack. By 1975, Radio Shack had hundreds of stores nationwide. After the Altair hit the market, Radio Shack hired a couple of engineers to develop a microcomputer. The TRS-80, built around Zilog’s Z80 chip, made its debut in August in 1977 at New York City’s Warwick Hotel. It cost $399 and was distributed through Radio Shack stores across America. In its first month, more than

In negotiating with Tandy to supply BASIC for the TRS-80, Gates had met John Roach, at the time a vice-president in charge of marketing. He and Gates hit it off. Roach became something of a mentor to Gates, teaching his young and eager student business and marketing strategy. Within four years, Roach became the president of Tandy.

Not only did Microsoft hook up with Tandy in 1977, but the company also licensed BASIC 6502 to Apple for the Apple

“Bill’s approach, and you can still see it now in things like Windows, was always to go for creating a standard, to get the market share,” said Wood. “He just hated to turn down business. If it meant we had to drop our price to get the business, he was typically much more willing to argue that we do that. . . .

“In Albuquerque, whenever we had pricing discussions or arguments, the way we would decide how much to charge an OEM customer is we would sit down and say, okay, what are they asking for? How long is it going to take us to do that? Of course, we would always underestimate that. Then we’d sit down and say, okay, how much do we think these guys will pay? How much can we get out of these guys? How much is
reasonable
to expect them to pay? How bad do we want this business? Bill would always be arguing for a lower price and a more aggressive schedule. ‘Oh, we can do that in three months. Let’s just charge them fifty thousand because we really want to get the contract.’ Paul would argue for a higher price, saying, ‘Let’s try and get more money from these guys.’ We usually ended up somewhere in between.”

Although Gates spent most of his time taking care of business, he still involved himself with some of the technical work at Microsoft. He loved programming and would compete with his employees, occasionally participating in some of the informal contests the Microkids held to see who could write a program in the fewest lines.

In the book
Programmers At Work,
Gates is quoted as saying: “In the first four years of the company, there was no Microsoft program that I wasn’t involved in actually writing and designing. In all those
initial
products, whether it was BASIC, FORTRAN, BASIC 6800 or BASIC 6502, not a line of code went out that I didn’t look over.”

Gates acknowledged his style rubbed some of his programmers the wrong way. “It’s kind of painful sometimes if you have somebody else working on the project. They never code stuff exactly the same way you like to see it coded. I remember when we were working on BASIC, I’d go back and recode other people’s section of code, without making any dramatic improvements. That bothers people when you go in and do that, but sometimes you just feel like you have to do it.”

It was bad enough that Gates rewrote other programmers’ code. But at least once he also got credit for their work. When Microsoft published the MS-DOS Encyclopedia, the preface to this huge technical manual credited Gates for developing Standalone Disk BASIC. In fact, the program was developed by Marc