The Most Important Turning Points in Microsoft’s History

How Microsoft ruthlessly pursued market share at any and all costs

How Microsoft’s relentless focus on “a PC in every home” almost destroyed the company

To understand Microsoft’s approach to product, we need to first understand the ideologies that shaped the company during its earliest days and how this drove Microsoft’s approach to growth. Like another Silicon Valley success story, that tale began in a Harvard dorm.

1980-1999: Building a Monopoly

In 1975, 22-year-old computer programmer Paul Allen got his hands on the January issue of Popular Electronics magazine. The cover featured an image of the “World’s First Minicomputer Kit to Rival Commercial Models,” the Altair 8800 microcomputer.

The magazine’s cover feature had given Allen an idea. With his copy of Popular Electronics in hand, Allen visited his childhood friend and fellow programming enthusiast, Bill Gates, at nearby Harvard University in Cambridge. Allen and Gates had been friends since their days at Lakeside School, a private preparatory school in Seattle, Washington, where the two boys had spent hours learning the intricacies of the school’s Teletype Model 33 ASR terminal and a huge, bulky General Electric mainframe.

Gates had been fascinated with computers since before grade school. As he learned—then mastered—a number of languages including FORTRAN and LISP, Gates flexed his programming muscles by modifying the code of a class scheduling program at Lakeside that placed Gates in classes with “a disproportionate number of interesting girls.” Gates and Allen became such accomplished programmers, they were hired by Information Sciences, Inc., to write a payroll program for the company in COBOL in 1971 when Gates was just 16 years old.

Allen’s idea was to adapt the Beginner’s All-purpose Symbolic Instruction Code—better known as BASIC—programming language for the Altair 8800. At the time, Allen was working at Honeywell, Inc., in Boston, while Gates was pre-law at Harvard after spending the previous summer alongside Allen at Honeywell. Allen successfully persuaded Gates to leave Harvard to pursue his business idea.

The Altair 8800 was a revolutionary machine. However, like many microcomputers of the age, the Altair 8800 lacked an interpreter, computer programs that executed the source code provided to them by the machine’s compiler. Allen’s idea to develop an interpreter built using BASIC was clever. A dedicated interpreter for the 8800 would make the microcomputer more appealing to hobbyist programmers like Allen and Gates. As Allen correctly predicted, it would also drive down the costs of microcomputers to the point at which developing commercial software for these machines would be a viable, profitable business. This was the real brilliance of Allen’s idea.

In March 1975, Allen and Gates contacted Ed Roberts, founder of Micro Instrumentation and Telemetry Systems (MITS), to offer him an in-person demonstration of their BASIC interpreter for the 8800. Roberts agreed, and Gates flew to MITS’ headquarters in Albuquerque, New Mexico, to present their interpreter. Roberts was impressed and agreed to distribute Altair BASIC.

On February 1, 1975, Allen and Gates sold their code to MITS for $3,000 (around $14,000 in 2018 dollars), plus a percentage of royalty payments up to $180,000 (roughly $843,000 in 2018 dollars). Allen and Gates formally registered their company name—then known as Micro-Soft, a hyphenated portmanteau of “microcomputer” and “software”—in 1976, and formally incorporated the company in New Mexico the following year.

Allen’s instincts had been right on the money. Micro-Soft’s 8800 interpreter was immensely popular with programming enthusiasts and computer hobbyists. By the end of 1976, Micro-Soft exceeded $16,000 in revenue, roughly $71k in 2018 currency. Just two years later in 1978, the newly rebranded Microsoft exceeded $1M in annual revenue thanks to the popularity of the 8800.

As the growing company’s need for skilled programmers increased, Allen and Gates made the decision to relocate from New Mexico to Washington State, having found it difficult to recruit skilled programmers in the Southwest. Microsoft officially opened its headquarters in Bellevue, Washington, on January 1, 1979. That same year, Gates negotiated an agreement with Kazuhiko Nishi and Keiichiro Tsukamoto to open Microsoft’s first international sales office in Japan, ASCII Microsoft.

Microsoft had leveraged an incredible business opportunity to essentially create an entirely new category within the nascent computing industry. However, the company’s big break wasn’t its initial agreement with MITS to develop its interpreter for the 8800, but rather, a similar agreement with IBM in 1980—a partnership that would propel Microsoft from a niche software development company to a household name.

Similar to the MITS deal, Microsoft was contracted to develop an operating system for the forthcoming IBM PC Model 5150 home computer. IBM had expressed interest in licensing a popular operating system known as CP/M (“Control Program for Microcomputers”), which was developed by Gary Kildall of the California software company Digital Research, Inc.

What happened next would cement Microsoft’s position as the world’s dominant software company for nearly two decades.

By the time Microsoft finalized the contract with IBM in November of 1980, the company’s BASIC language had many thousands of users. What Microsoft didn’t have was its own operating system product. Microsoft licensed an OS developed by Seattle Computer Products known as QDOS, which stood for “Quick and Dirty Operating System.” QDOS was similar in form and function to CP/M, making it an ideal candidate for modification—and that’s exactly what Gates did.

After licensing QDOS for just $10k, Gates set about rewriting core parts of QDOS’s code for Microsoft’s brand-new contract with IBM. In July of 1981, Microsoft purchased QDOS (which had been rebranded as 86-DOS) from Seattle Computer Products for $50,000. Microsoft then promptly repackaged 86-DOS for its deal with IBM, and the OS product became MS-DOS.

Microsoft’s purchase of 86-DOS is the first example of the kind of underhanded business practices Gates favored that came to plague the company in the 1990s. However, while Gates clearly had few issues with doing anything and everything possible to secure as much market share as he could—a position that largely defined Microsoft’s corporate culture in its early years—he was careful to avoid outright illegality.

When Microsoft purchased 86-DOS from SCP, the freedom for Microsoft to license the OS to other companies was a crucial condition of the sale. However, SCP later filed a lawsuit against Microsoft, claiming the company had intentionally omitted the fact that IBM was among the earliest licensees of 86-DOS. A court would later side with SCP, awarding the company $1M in damages.

“Ask Bill [Gates] why function code 6 [in QDOS and later in MS-DOS] ends in a dollar sign. No one in the world knows that but me.” — Gary Kildall, creator of QDOS

The propriety of Microsoft’s deal with IBM was far from an isolated incident of questionable corporate ethics. It actually characterized how Gates would run his company. Gates had always been competitive. Growing up, Gates and his siblings were frequently encouraged by their parents to compete with one another, which had instilled in Gates a strong desire to win—and this winner-take-all mentality would shape Microsoft’s growth trajectory.

In 1983, Microsoft’s revenues exceeded $55M. The IBM deal effectively launched the Microsoft we know today. The real genius of Microsoft’s contract with IBM, however, was that it gave Microsoft lasting control over MS-DOS, its QDOS clone. Practically overnight, Microsoft had essentially created and dominated the home computing software market. Before Microsoft, IBM dominated computer manufacturing because the large, bulky mainframes IBM specialized in were vertically integrated. IBM produced everything itself, from the chips and hardware to the operating systems and software. The arrival of Microsoft’s OS challenged this dominance by disaggregating this traditional model. This would later give rise to the company’s unofficial corporate philosophy of “a PC in every home.”

Microsoft’s early days also largely defined the company’s approach to sales. Allen had smartly anticipated the imminent explosion in the home computing market years before the PC began to make its way into homes across America. He had also predicted the rise of the consumer software market several years before it began to take shape. However, even then, Microsoft’s focus was on quantity, not quality. The software didn’t have to be good. There was virtually zero competition. More users meant more revenue. That was all that mattered.

The early ’80s saw Microsoft launch several of its most popular and enduring software products. In the spring of 1983, Multi-Tool Word was released for MS-DOS and Microsoft’s Xenix operating system, a Unix clone that Microsoft licensed from AT&T in the late 1970s. Multi-Tool Word was among the very first software programs to rely primarily on mouse-based input to navigate the tool’s graphical user interface (GUI). Although the tool was aimed primarily at computing enthusiasts, many users were struck by the program’s visual interface and “what you see is what you get” interface, both of which later became design mainstays in software development.