Hard Drive: Bill Gates and the Making of the Microsoft Empire (36 page)

During another vacation, Winblad and Gates drove to a wind-swept dune called Jockey’s Ridge not far from Kitty Hawk, where the Wright Brothers learned to fly. Chairman Bill decided he wanted to learn to fly there too, enrolling in hang-gliding lessons. On his first flight, Gates nosed his glider into the bank of the dune shortly after take off, like most first-time students. On the second flight, he followed the instructor’s directions and made it to the bottom of the steep dune. By the third flight, Gates decided he had had enough instruction. He soared into the wind, disregarded orders not to turn the glider, and ended up hundreds of yards from the bottom of the hill, tangled in bramble bushes.

“Of course, he’s going to take off and glide better than any other student,” Winblad said. “It didn’t bother him at all that he had no idea how to maneuver that glider, that there might actually be some danger leaving the area.”

Gates and Winblad would assign motifs to their brief vacations together. One vacation, for example, had a physics theme—they read as many physics books as they could and listened to tapes of the Feynman lecture series Gates had brought with him. Winblad could not believe how much Gates read; the breadth of his knowledge sometimes overwhelmed her. For a simple lunch at Burger King, Gates once brought along four magazines to read, including
Scientific American
and his favorite, the
Economist.
Nonetheless, there were significant gaps in what Gates read. When a writer from the
Hew Yorker
approached him for an interview, a nonplussed Gates responded, “What’s the
New Yorker
?”

The always competitive Gates loved to test his knowledge against others’, especially when there was something to win or lose. The betting usually escalated into double or nothing, with a few side bets. One time, Gates bet with some friends about which year the MGM Hotel in Las Vegas burned down. To verify the date, the group had to call the MGM. The game went on throughout the evening, and by the end, Gates had lost about
$
1
,
200
.

“Once Bill had been betting someone and it kept going double or nothing,” said a friend of Winblad’s. “Bill made a side deal that worked out to his advantage, and someone said, ‘Isn’t that typical of Bill; double or nothing just won’t do for him.’ But that’s why Bill is Bill.”

Winblad, who is fluent in “Gates-speak,” once described Gates as “massively parallel” with “extraordinary bandwidth.” The term “massively parallel” refers to a configuration of hundreds of thousands of independent microprocessors teaming up in parallel structure, functioning like a supercomputer to solve a problem. “Bandwidth” refers to one’s intelligence, or the amount of information one can absorb.

This massively parallel man could also be very entertaining, according to Winblad. Gates was a fabulous story teller, often resorting to theatrics to make a point or tell a story over dinner.

“If he has a story to tell, it doesn’t matter if there are four people in the restaurant or a thousand,” she said. “Bill will jump up from the table, stand somewhere and start acting out the story. It’s no longer, ‘Let me recount to you what happened.’ It’s now
Hamletl
It becomes more theater than story telling. Years ago, when no one knew who Bill was, he would do this kind of stuff and who would care? But now, he’s totally, totally unconscious that half the people in that restaurant are probably mumbling to the other person, ‘Is that Bill Gates over there, jumping up and down and waving his arms?’ And this includes things like jumping up in the air, even jumping over the furniture in a restaurant to prove a point.”

According to friends, Gates and Winblad talked of marriage at one point. Winblad reportedly wanted to get married, but Gates did not. He felt he didn’t have time for a wife. Microsoft was his first love. After almost three years, the two broke up.

Before long, Gates was going out with other women. But he and Winblad would remain good friends, and her picture still hangs on the wall of his office at Microsoft.

In the winter of 1986, Bill Gates found himself in a Seattle courtroom, listening to an attorney compare MS-DOS to a dog named Spud. Seattle Computer Products, the mom-and-pop business that once owned exclusive rights to the operating system that had helped make Microsoft the second largest computer software company in the world, was suing Microsoft for $60 million. Kelly Corr, one of the attorneys for Rod Brock, owner of Seattle Computer, was trying to explain the suit to the jury in his opening remarks. It was a highly technical case that had grown to fill eight volumes and hundreds of pages in the months leading up to trial. As he began his opening statement, Corr placed a bronze statue of a dog on a table so everyone could see it.

“I bet you thought this was a case about computers,” Corr said. “Well, it’s really a case about dogs. Rod Brock used to have this mut named Spud and Bill Gates came to him one day and said, ‘I’m really into dogs and I would like to raise and breed dogs and if you give me this dog Spud I’ll turn him into a champ and as part of the deal I’ll always give you the pick of the litter.’ ”

As he sat with his mother listening to the dog story, Gates started rocking back and forth, a sure sign of interest. A lot was riding on the outcome of what was a potentially crippling lawsuit for his company.

The dispute had started months before when Brock decided to sell Seattle Computer Products. The business had gone under. About the only asset Brock had left was the license he had received when he signed over ownership rights to DOS for $50,000 that day in Paul Allen’s office back in 1981. The license allowed Seattle Computer to continue to sell DOS with its computer hardware. And Microsoft also had agreed to provide Seattle Computer with updated versions of the operating system. Since Brock did not have to pay any royalties to Microsoft for DOS, which was now an industry standard, the perpetual license could be worth millions to a company with computers to sell.

Brock planned to offer the license to the highest bidder. He had in mind someone like the Tandy Corporation. But first, he gave Microsoft an opportunity to buy back the license. In a letter to Gates, he wrote that he had decided to sell Seattle Computer, and that as Seattle Computer’s agreement with Microsoft constituted its largest asset, it would likely have “significant value” to manufacturers of computers based on the MS-DOS operating system. “We believe the value of Seattle Computer to be approximately $20 million. Before making presentations to potential buyers, we want to see if you might have an interest in purchasing Seattle Computer.”

Brock did not have to wait long for a response. Jon Shirley fired off a reply the day he received the letter, claiming to be shocked at Seattle Computer’s “exaggerated interpretation” of the agreement.

When Shirley informed Brock his license to sell DOS was nontransferable, Brock sued. Brock was represented by the firm of Bogle & Gates (no relation), one of Seattle’s largest and most prestigious law offices. Microsoft’s legal counterattack was led by David McDonald, a fluent computer programmer and Harvard Law School graduate, and a partner in Shidler McBroom Gates & Lucas.

Seattle Computer was the only company left with a royalty- free license from Microsoft to sell its money-making DOS product. In a strategic move earlier in the year, Gates had reclaimed a similar license given to Tim Paterson, the author of DOS. After leaving Microsoft in 1982, Paterson had gone back to work for Seattle Computer for only a short while before forming his own computer company, Falcon Technology. As payment for some programming work Paterson did for Microsoft, Paul Allen gave him a license to package DOS with Falcon hardware products. By 1986, however, Falcon was failing, and Paterson was considering an offer from a group of foreign businessmen who wanted to buy Falcon just to get their hands on the invaluable DOS license. Paterson met with Gates, who was irate. After some tense negotiating, Microsoft bought Falcon’s assets for $1 million, and Paterson returned to work for Microsoft, where he remains today.

The trial with Seattle Computer lasted three weeks. Gates was at the court room for much of the time, usually accompanied by his mother. Both he and Paul Allen had to testify. In the end, an out-of-court settlement was reached while the jury was deliberating. Microsoft paid Seattle Computer $925,000 and reclaimed the critical license for DOS. Brock’s lawyers later took a straw poll of the jury and found it leaning 8-4 in his favor. Two jurors said their minds could have been changed by the majority had the deliberations lasted longer. All Brock needed was a 10-2 vote to win his suit.

As part of the settlement, attorneys for both sides agreed not to discuss details of their eleventh-hour negotiations to end the dispute. But Brock had been willing to settle all along for about a half-million dollars. Gates, however, refused. He told Microsoft’s lawyer he had paid for DOS once; he was not going to pay for it again.

During the trial, Microsoft did offer Brock $50,000 to settle, an offer that was quickly rejected. Once the jury was sequestered for deliberations, the offer went up about $100,000 every couple of hours. Corr was surprised that Gates did not try to cut his losses and settle sooner before trial. “I used to sit there in court and say to myself, ‘Why’s this guy [Gates] in trial here wasting his time everyday? His time is so much more valuable. If he could buy Brock out for a half-million, it would be money well spent. . . .’ I wasn’t sure if he was just trying to squash Brock on the principal of the thing or what. . . . These guys [Microsoft] play hardball. They grind people. It almost doesn’t make good business sense.”

But after the trial, it made good business sense to Corr to go out and buy some of Microsoft’s stock, which had nearly tripled in value since the company went public nine months earlier. “I thought, They are very hard-nosed businessmen, very tough. And they now have a lock on the market.’ ”

A number of people in the computer industry with complaints about the way Microsoft did business with them contacted the firm of Bogle & Gates when the trial was over and inquired about starting litigation of their own against Microsoft. No suits were ever filed as a result of those calls, but the complaints did show a deepening resentment of Microsoft’s growing power and the way Chairman Bill exercised it.

Kelly Corr had occasion to square off against Microsoft’s lawyers again not too long after the Seattle Computer settlement, this time in federal court in San Francisco over one of the first software piracy cases in the country. Authorities in the Bay Area had seized a boatload of pirated MS-DOS software. A group of Taiwanese entrepreneurs with an outfit called VCCP (Very Cheap Computer Products) claimed they had a legitimate license to sell copies of MS-DOS. Microsoft said thiey did not and sued. Although Corr had been hired to represent VCCP, he was not being paid as the case dragged on in pre-trial arguments. His Taiwanese clients would sometimes call him at home in the middle of the night, promising to pay up. They didn’t. Finally, frustrated at doing so much expensive legal work for his firm for nothing, Corr decided to quit the case. But in federal court, an attorney must have the judge’s permission to withdraw. Motions must be heard. Usually, opposing counsel is only too happy to agree to the withdrawal knowing their chance of winning the suit would strengthen considerably. But in this case, Microsoft opposed Corr’s withdrawal. Seeing Corr’s big Seattle law firm tied up in court, unable to make any money, was to their liking. It was payback time for the million-dollar judgment in the Seattle Computer case.

“Why did they do this?” Corr asked rhetorically. “You tell me. Like I said, they play hardball.”

During negotiations of the million-dollar settlement with Seattle Computer, lawyers for Microsoft, in an attempt to get Rod Brock to settle the case cheaply, told him that even if he won the civil suit, he would lose in the end. Microsoft, they said, was working on a new operating system with IBM that would eventually make DOS look like the Model A Ford of the fast-moving personal computer industry.

“They kept saying, ‘Even if you win everything, it’s going to be worth squat two years from now because everyone is going to be in on this new operating system,’ ” said attorney Kelly Corr. “In hindsight, who was kidding who on that one?”

The operating system Microsoft was referring to, still under development in late 1986, was secretly known at the time as OS/2. It was designed to harness the power of a second generation of personal computers that were replacing the original PCs. When OS/2 was announced publicly in April of 1987, both Microsoft and IBM predicted it would become
the
operating system of the 1990s for personal computers. Instead, OS/2 turned out to be a huge flop. The joint venture between Microsoft and IBM produced not a Cadillac but an Edsel. The venture’s failure would shake the computer industry to its very foundation.

The story of OS/2 is still being written. No one can say how it will end, or what surprising turns the plot will take. But the story begins in 1984, with a new personal computer called the PC/AT.

After the brilliant success of its PC, Big Blue had followed with several marketing disasters, the most notable of which was the $699 PC Junior, with a keyboard that one reporter described as resembling pieces of “Chiclets” chewing gum. Unfortunately for IBM, the tag stuck. But on August 14, 1984, two years and two days after the original PC had been unveiled in New York

City, IBM introduced the PC/AT (“AT” stood for Advanced Technology), a computer built around Intel’s powerful new 80286 chip that ran on DOS 3.0. This computer, unlike the PC Junior, featured a streamlined keyboard based on IBM’s popular Selectric typewriter. Don Estridge, the leader of the original Project Chess team, was counting on the PC/AT to make up for the disappointment of the PC Junior. IBM needed a hit, and even though the price for the PC/AT started at about $4,000, Estridge was convinced the new computer would attract customers who wanted to take advantage of the more powerful 286 chip.

The PC/AT had been developed with typical IBM secrecy, under the code name Salmon. This time, IBM even got Microsoft to install chicken wire in the ceiling of the room where about a dozen prototypes of the prized computer were kept. Microsoft programmers, busily perfecting the third version of DOS to run on the machine, jokingly called the room the Fish Tank.

Gates did not share IBM’s enthusiasm for the 286 chip. He described the chip as “brain dead.” He wanted IBM to wait and build its next computer around an even more advanced chip that Intel was working on, the 80386. The decision by IBM to go ahead with a personal computer strategy based on the 286 chip would prove to be a major blunder.

“Estridge ignored what Bill was telling him about the 386 and decided to introduce the 286 machine, and that was the key decision that created all the problems,” said Stewart Alsop, editor and publisher of PC
Letter
and a respected authority on Gates and Microsoft. Estridge knew Gates was right about the 286 chip, but Estridge was under pressure from higher ups at IBM to market a successful PC after the failure of the PC Junior, according to Alsop. Estridge figured the 286 machine could keep the corporate dogs in Armonk off his heels until Intel’s 386 chip was ready, probably by 1986.

Although the PC/AT was introduced with DOS 3.0, Gates realized the operating system was being pushed to the limits.

Something new was needed—a replacement for DOS. In 1985, Gates signed a long-term joint development agreement with IBM to create a new operating system from scratch, known at the time as Advanced DOS. Eventually, it took the name OS/2. IBM saw the new operating system as part of a grand strategy to link computers of all kinds, big and small. IBM wanted an operating system that would allow it to connect personal computers to its mainframes.

But the project soon ran into major technical problems because of the flawed 286 chip, which made it difficult for the chip to handle old software written for MS-DOS machines under the new operating system. Gates did not want to continue wasting time and money trying to develop the new operating system for the 286 chip. Unfortunately, the one person at IBM whom Gates might have been able to convince, Estridge, was killed on a stormy August evening in 1985 in the crash of Delta Air Lines Flight 191 at the Dallas-Forth Worth Airport. Though they often disagreed, Gates and Estridge had gotten along famously— probably because Estridge
would
argue with Gates. They had respected and trusted each other. Now Gates had to deal with Bill Lowe, who took over the Entry Level Division at Boca Raton. Although Lowe had convinced the corporate brass at IBM to approve Project Chess in 1980, he did not have Estridge’s technical competence. Gates and Lowe professed mutual respect, but they had an arm’s-length relationship.

“You now have a guy in charge who knows nothing about computers,” Alsop said of Lowe.

Gates tried to make his case regarding the 286 chip, but Lowe would not listen. The new operating system, he said, had to work on the 286 chip. That chip represented the future. IBM had invested too much in the PC/AT and it could not abandon those customers.

In early 1986, during a retreat for Microsoft’s application development team, Gates ranted at what he called IBM’s “fucked up” strategy, according to one of the programmers who was there. “Bill said, ‘Screw the people with the ATs; let’s just make it [the new operating system] for the 386, so they can upgrade.’ ”

It was left to Compaq to do what IBM refused to do. In September of 1986, Compaq introduced a PC with Intel’s 386 chip. The other clone computer makers had been waiting for IBM to make the move to the 386. After all, it was IBM that had always set the standard. When Compaq jumped in and took the lead, its gamble paid off handsomely. The Compaq Deskpro 386 was the most powerful personal computer on the market. By the time the fall Comdex rolled around that year, some of those other clone computer makers were showing off machines compatible with Compaq, but not IBM. According to Alsop, at the time Compaq introduced its new computer, IBM had not ordered a single 386 chip from Intel. IBM apparently had decided the chip was better suited from minicomputers. But once the Compaq Deskpro was out, IBM realized it had seriously miscalculated—and not only by ignoring the 386. Apple’s Macintosh with its user-friendly graphics was finally starting to do well, and IBM did not have a graphical user interface in the works to go with the new operating system it was developing with Microsoft. Lowe finally realized IBM had to have a graphics system for OS/2—as Gates had been telling him all along.

Thus the stage was set for a fateful meeting between Gates and Lowe in Armonk, New York.

Gates would later tell Alsop that when he met with Lowe, he figured he had no chance of getting IBM to go along with developing Windows for OS/2.

“Gates walked in there thinking he had lost the account, when in fact he could have gotten anything he wanted,” Alsop said. “He had been working so long and so hard to get IBM to buy into Windows and the 386 and he hadn’t gotten anywhere. So he goes in and right off the bat offers to do whatever Lowe wants. Well, Bill Lowe, being a smart guy, takes advantage of it. . . . At that point Lowe drove a stake into the ground and said, ‘Here are the things we are going to stand on.’ ”

Lowe told Gates IBM wanted OS/2 to run on the 386 chip, but he insisted it first work on the 286. He also agreed to license Windows for the new operating system but insisted the name be changed to Presentation Manager. More importantly, he convinced Gates to revise the graphical user interface and incorporate concepts of a graphics system used in IBM mainframe machines. What this meant, however, was that Microsoft’s Windows for DOS would not be compatible with Windows for OS/2. Gates had wanted Windows to run with both systems.

Why would Gates, the ultimate tough-nosed negotiator, roll over so easily in dealing with Lowe? Gates was uncharacteristically deferential toward IBM executives, according to several Microsoft managers. Whenever he talked with someone from IBM, it was as if his mother was in the room with him. Gates was on his best behavior.

“Bill sort of had two modes,” said Scott MacGregor, the Windows development manager Gates hired away from Xerox PARC. “For all the other OEMs he would be very confident and very self assured, and feel very comfortable telling them what the right thing to do was. But when he worked with IBM, he was always much more reserved, and quiet, and humble. It was really funny, because this was the only company he would be that way with. In meetings with IBM, this change in Bill was amazing.”

MacGregor said he left Microsoft partly because he thought the company was making some strategic mistakes in the joint development work with IBM on OS/2. “IBM wanted to merge Presentation Manager and OS/2, and there were those of us [on the Windows team] who didn’t feel like it was the right direction,” MacGregor said.

Eventually, Windows began to take a back seat within the company in the push to develop Presentation Manager. At one point, after the meeting between Gates and Lowe in 1986, Steve Ballmer wanted to kill Windows entirely, arguing that Microsoft was splitting its resources by sticking with Windows. Ballmer was just being a good soldier. He had been responsible for maintaining good relations with IBM almost from the day Jack Sams first called on Microsoft from Boca Raton in the summer of 1980.

“I know from conversations with people at Microsoft in environments where they didn’t have to bullshit me that they almost killed Windows,” said Alsop. “It came down to Ballmer and Gates having it out. Ballmer wanted to kill Windows. Gates prevented him from doing it. Gates viewed it as a defensive strategy. Just look at Gates. Every time he does something, he tries to cover his bet. He tries to have more than one thing going at once. He didn’t want to commit everything to OS/2, just on the off chance it didn’t work. And in hindsight, he was right. Ballmer, because it was his job to keep the IBM account, wanted to go all the way. He wanted to make IBM happy.”

Although Microsoft stuck with Windows, it soon had only a handful of people working on the project, a far cry from the more than 30 programmers who worked non-stop getting the first version of Windows out the door. The emphasis at Microsoft clearly had shifted to OS/2 and Presentation Manager.

For the programmers at Microsoft, working with IBM became a clash of very different cultures. Compared to free-spirited Microsoft, IBM was as stodgy as some of the command names it wanted to incorporate into Presentation Manager. IBM insisted that Microsoft change the name of some of the zippy commands Gates had used in Windows. For example, the “Zoom” and “Icon” commands, which shrank the size of the work space, were changed to “Maximize” and Minimize” in Presentation Manager.

Big Blue managed the OS/2 project by committee, and it took a long time to get things done through such formal channels. While Microsoft programmers worked in small, tightly integrated teams, IBM took just the opposite approach. It had hundreds of people working on OS/2 in Boca Raton and at the IBM lab in Winchester, England. Programmers working on the OS/2 project at IBM were only too aware of the company’s ineffective bureaucratic structure. The
Wall Street Journal
reported on an allegorical memo making the rounds among IBM programmers that told how IBM lost a rowing race to Microsoft. An IBM task force, appointed to look into the loss, found that Microsoft had eight people rowing and one steering, while IBM had eight people steering and one rowing. The task force recommended that the one rower should row harder.

Neal Friedman, the young programmer who had joined Microsoft after seeing the “Today” show feature on Gates, recalled spending a couple days in Boca Raton trying to work out some technical problems on OS/2. Wherever he went, an IBM chaperone followed, even to the restroom. An IBM manager had to sign for him just to get access to a computer.

“The project was extremely frustrating for people at Microsoft, and for people at IBM, too,” Friedman said. “It was a clash of two companies at opposite ends of the spectrum. At IBM, things got done very formally. Nobody did anything on their own. You went high enough to find somebody who could make a decision. . . . You couldn’t change things without getting approval of the joint design review committee. It took weeks even to fix a tiny little bug, to get approval for anything.”

On the other hand, Microsoft ended up adopting some IBM methods. IBM was fanatical about testing a product during the development stages. Friedman said when he joined Microsoft, there were on average two testers for every 40 programmers. After a couple of years working with IBM on OS/2, Microsoft had nearly one tester for every programmer.

IBM publicly announced the joint OS/2 project with Microsoft in April 1987. At the same time, IBM also introduced what it said was its next generation of personal computers, the PS/2 (for Personal Systems). The new machines represented an aggressive effort by IBM to regain lost industry momentum. The clone makers had been trouncing IBM in the marketplace for several years, and IBM had lost control of the personal computer market. Clones were selling as much as 30 percent below the