How Microsoft Survived the Odds
15 March 2010 David Lester
Many businesses, big and small, will have been having a tough time, feeling disheartened and struggling to stay afloat. David Lester's new book, How they Started, looks back over the past few decades to find inspiration and hope from well-known brands that started, survived and thrived in an economic downturn. Here he looks at how Microsoft faced adversity, fierce competition and a recession to emerge as a global corporate powerhouse.
Microsoft is one of the world's largest corporations, making around £10bn in profit on revenues of around £40bn. Yet it began in the same way as many others, with two ambitious young people who had a dream.
Bill Gates was born in Seattle into an affluent family and was gifted at maths but otherwise unremarkable. He attended a private school, and in 1968, in his first year there, the school acquired its first computer. Gates would spend hours in the computer lab using the machine, and it was here he met Paul Allen, a fellow pupil, but two years older.
At the age of 13, Gates and fellow pupils were handed their first 'IT project', for the Computer Center Corporation ('C-Cubed'). The company, recently established in Seattle, owned a mainframe computer that the school's terminal was hooked up. The company director was impressed with the students’ skills and tasked them with finding bugs in their software, in return for unlimited time on the computer after normal working hours.
Gates says of that period: "It was when we got free time at C-Cubed that we really got into computers...then I became hard core. It was day and night."
Gates enrolled at Harvard University in 1973, and it was here he met fellow student Steve Ballmer, who was studying maths and science and who would later play a significant role in Microsoft's history. But much like his days at school Gates found himself missing classes on a regular basis to indulge his passion for computers. He even considered quitting college to look for a job and had several interviews.
By 1973, the US had officially entered a period of recession. Over the next two years, while the recession deepened, Gates continued to study at Harvard, but he also kept in close touch with Allen, who was now working for computing company Honeywell, based in Boston. After earlier forays into the business world they knew they wanted to set up their own business, and were on the look-out for the right time and opportunity to do so.
In January 1975, Allen came across a trade magazine for the computer industry, Popular Electronics, featuring a new computer called the MITS Altair 8080 on the cover. Thousands of people had already placed orders for one, eager to get their hands on what was then a revolutionary piece of technology. These computers had to be assembled from a kit and programmed in binary code using switches on the front panel.
Unsurprisingly, this appealed only to electronics enthusiasts: Gates and Allen felt sure that this was the opportunity that they had been waiting for.
Just a few days after the magazine had come out announcing the Altair, they phoned Ed Roberts, the head of MITS, to offer him a BASIC program for the Altair. Roberts explained that he had had many such calls, and that the first people to deliver a program that worked would get a deal.
"We realised that the revolution might happen without us," said Gates. "After we saw that article, there was no question of where our life would focus."
Sensing their first real opportunity to start a computer business, Gates and Allen set about writing the software. Allen worked on a program to imitate the Altair’s system as closely as possible, working at nights after his day job, while Gates worked both day and night writing reams of code for the BASIC language itself.
Eight weeks after the phone call to Ed Roberts, Allen flew to Albuquerque, New Mexico to meet MITS. None of the company's executives believed the program would work, and indeed just one bug could have stopped it. But Allen used BASIC to get the Altair to add two plus two, and the machine gave the watching crowd the answer: four. The program worked.
For their part, Gates and Allen received a royalty of between $30-$60 for every copy sold and MITS agreed to promote and market their software. When their BASIC program was sold together with an Altair it would typically cost around $50, whereas when sold separately, the price could be as much as 10 times higher.
Despite being independently wealthy from a trust-fund he had inherited, Gates was determined not to use that money for his business, so he and Allen kept their costs to a minimum, hiring a room in a dingy Albuquerque hotel to start with.
However, as orders for Altairs flooded in, they soon hired two friends from the computer club at their school in Seattle to help them work on debugging BASIC and the other programs for the Altair. Strangely enough, though, despite MITS being barely able keep up with demand, sales of the software remained in the low hundreds. Gates soon figured out why – his version of BASIC had been pirated and was being distributed freely among Altair users.
He wrote a letter to a trade magazine, bemoaning the fact that people expected software to be free. If this were the case, how would developers be paid? The letter gained considerable support from business partners and was to lead to paid-for, copyrighted software becoming the industry standard. It was not only the letter that was significant, but how it was signed – ‘Bill Gates, general partner, Micro-Soft’. The name, which combines the first syllables of the words microcomputer and software, was thought up during the summer. Gates and Allen soon dropped the hyphen.
Microsoft takes shape
In 1976 Gates formally dropped out of Harvard to concentrate on Microsoft full-time. The business hired new programmers and moved into its first offices, on the eighth floor of a bank building in Albuquerque.
MITS may have been the company that launched both he and Allen towards fame, but less than two years later it was holding back Microsoft’s growth potential. MITS was still struggling to keep up with the demand for Altairs, and was facing serious reliability issues with some key components. Meanwhile, there were dozens of new competitors, many of whom wanted to license a version of Microsoft’s BASIC. Gates negotiated deal after deal with these companies, but under the terms of their existing contract MITS refused to approve them, on the basis that they were too competitive. Gates, feeling deprived of an enormous income, was enraged.
Before long, however, MITS was struggling, and in 1977 it was sold to Pertec Computer Corporation, which, with the Altair in decline, wanted the rights to BASIC. Gates and Allen knew that they had to wrestle back control of their program somehow, as their original contract with MITS had set a limit on how much they could be paid and they now knew the market potential for it was substantially larger.
They consulted Gates's father, a lawyer back in Seattle. A clause in their original contract stated that MITS had to use its 'best efforts' to sub-license the BASIC program, and Microsoft was able to prove that by refusing to sanction deals with other manufacturers MITS was in breach of the contract. Following a three-week long hearing Microsoft used this to reclaim the rights to its program, then set about selling versions of it for computers built by other manufacturers, such as Commodore's PET, Tandy's TRS80 and Apple's Apple II, which were all taking off. Gates, a voracious reader of business books, negotiated the deals, while Allen concentrated on programming.
The bigger picture
By now Gates and Allen had what at the time seemed like an extraordinarily ambitious target for their company: they wanted a computer on every desk and envisioned a future with Microsoft on every computer.
Over the next three years the founders added new programs, mainly other programming languages. Then in 1978 they relocated, and although most technology companies at the time were based in California, the business moved to Seattle, close to where Gates grew up and where his family still lived.
The move coincided with a rethink of the business. In keeping with the original vision, Gates knew that for it to thrive he would need to come up with something bigger and more ambitious than BASIC software systems. He wanted to tap into the burgeoning market for operating systems and word processing software. He also needed to get more sales expertise on board, so turned to his college friend Steve Ballmer, who joined Microsoft as business manager and who soon became an expert at promoting and marketing the company.
What would turn out to be one of the century's greatest business opportunities presented itself towards the end of 1979. Gates had found out that hardware manufacturer IBM, the world's leading manufacturer of mainframe computers, was looking for an operating system for a new personal computer (PC) it was to launch shortly. This was its first attempt to make a substantial impact in the PC market, which it could see was growing rapidly. As IBM wanted the product made in a short space of time, it decided not to build its own computer from scratch, but to buy-in different elements from other companies.
Gates decided that Microsoft should be the company to create the operating system IBM needed, so it bought an existing software system and used this as the basis for a new operating system they called MS-DOS (Microsoft Disk Operating System). Microsoft put nearly half of their programmers (there were around 60 by this time) to work on this system over the period of a year.
Microsoft then attempted to license it to IBM. This was a very competitive battle, with other software companies also keen to work with IBM on what they all thought would be an enormously successful new product launch. In the end Microsoft won, and negotiated to license their operating system to IBM on a royalty basis (having learnt from its experience with MITS, Microsoft was insistent it retained the rights to the program) so that every time a copy of MS-DOS was sold, IBM would pay a fee to Microsoft. IBM agreed, and signed the deal that became the making of Microsoft as we now know it.
Just one year later, in 1981, MS-DOS became the industry standard and more than doubled sales at Microsoft – from $7m in 1980 to $16m. Just a year later, however, having been diagnosed with Hodgkin’s disease, an illness that could be treated, Allen took the decision to leave the business to focus on other interests.
Where are they now?
Microsoft went public in 1986, listing its shares on the NASDAQ, the USA’s stock market for young, fast-growing companies. Investors who bought shares at the time and held onto them have seen spectacular growth since, as the company has been one of the best ever performers on the stock market.
Gates stepped down as chief executive in 2000, with Steve Ballmer taking over. In 2008 Gates announced he was focussing on a career in philanthropy; he remains chairman of the business. Microsoft®, MS-DOS®, Windows® and Office® are trademarks of the Microsoft® group of companies.
This extract is taken from How They Started in Tough Times by David Lester, available from http://www.crimsonpublishing.co.uk.