Hard Drive: Bill Gates and the Making of the Microsoft Empire (10 page)

and the always competitive Gates would have a contest to see who could write the shortest loader program. Gates won.)

Ed Roberts met Allen at the airport. He was driving an old pickup truck.

Allen had not been sure what he would find when he arrived in Albuquerque. He certainly wasn’t prepared for the giant who was there to greet him. But he was in for an even greater shock when Roberts took him to MITS.

Micro Instrumentations & Telemetry Systems Inc. was located just off famous Route 66, in a string of businesses that passed as a downtown mall. There was a massage parlor on one side, a laundromat on the other. Roberts told Allen he wanted to wait until the next morning to test the BASIC, so after a short visit he drove Allen to the most expensive hotel in town. The future billionaire didn’t have enough money to pay for his hotel room. He had to borrow extra cash from Roberts.

That night, Allen called an anxious Gates waiting back in Cambridge. He told his friend about the guy who had picked him up in a run-down pickup, told him about the low-budget operation he had seen that afternoon. They were both disappointed . . . and worried. They had thought all along they were doing business with a big, successful company. Had their efforts been wasted?

The next morning, Roberts came by to get Allen, and they returned to MITS. It was time to test the BASIC. The code was on a paper tape. Unlike the Altair kits that would be sold to the public, the machine at MITS had several perks unavailable on the public models. This Altair Was running on 7K of memory. And it was connected to a teletype. Allen would not have to read the flashing lights to understand output from the Altair. But best of all, this Altair was hooked into a paper tape reader. Allen could feed his BASIC tape directly into the machine. Otherwise, it would have meant flipping the toggle switches on the front of the Altair approximately 30,000 times in proper sequence. The only thing Allen had to key into the machine was the loader program.

Allen crossed his fingers. This was the first time he had ever touched the Altair. Any mistake he and Gates had made along the way, either in designing the 8080 simulator or coding the BASIC itself, would now mean failure.

Suddenly, the Altair came to life. It printed “memory size?” Allen entered “7K.” The machine was ready for its first instruction. Allen typed “print 2 + 2.” The Altair printed out the correct answer: “4.”

“Those guys were really stunned to see their computer work,” Allen said. “This was a fly-by-night computer company. I was pretty stunned myself that it worked the first time. But I tried not to show much surprise.”

Recalled Roberts of that historic moment when his machine was turned into a useful computer: “I was dazzled. It was certainly impressive. The Altair was a complex system, and they had never seen it before. What they had done went a lot further than you could have reasonably expected. I’d been involved with the development of programs for computers for a long time, and I was very impressed that we got anywhere near as far as we did that day.”

Later that morning, Allen found a book of 101 computer games, and ran a Lunar Lander program on the Altair. It was very similar to the program Gates had written back at Lakeside when his interest in computers was first piqued by the teletype machine in the school’s computer room. The game required the user to make a soft landing on the moon before expending all the fuel in the spacecraft. It was the first software program ever run on what would become known as Microsoft BASIC.

The personal computer revolution had begun with a game played on a small blue box with blinking lights named after the brightest star in the constellation Aquila. Thirty years earlier, people in Albuquerque had witnessed the sun come up in the south when the world’s first atomic bomb exploded in the predawn darkness near Alamogordo a hundred miles away, heralding the nuclear age. Now, another age had dawned in Albu-

querque. It began at a ragtag company located next to a massage parlor. Its prophets were two young men not yet old enough to drink, whose computer software would soon bring executives in threepiece suits from around the country to a highway desert town to make million-dollar deals with kids in blue jeans and t- shirts. Gates and Allen had ignited a technological revolution that would spread like wildfire, from the apricot and plum orchards of the Santa Clara Valley, where dreams born in garages would flourish in a great concrete expanse known as the Silicon Valley, to the lush forests of the Pacific Northwest, where Gates would eventually return home to become the youngest billionaire in the history of America.

When Allen got back to Boston, he and Gates celebrated by going out for ice cream and softdrinks. Gates had his usual Shirley Temple, the liquorless drink of 7 Up and grenadine usually given to kids who want to feel more grown up.

“We were both real, real excited,” said Allen.

They talked about what kind of licensing agreement they should make with Roberts for their BASIC. They had worked 20-hour days, sometimes longer, for eight weeks. Now it was time to make some money.

As he ate his ice cream and sipped his Shirley Temple that day in Cambridge, Gates knew there was still a lot of work to do before BASIC was ready for the marketplace. Bugs needed to be found and removed. Refinements and enhancements had to be made. Gates returned to the Aiken Computer Center, while Allen went back to work at Honeywell. But Gates soon faced a problem that could not be solved with his programming wizardry. Harvard officials had found out that he and Allen had been making extensive use of the university’s PDP-10 to develop a commercial product. The officials were not pleased.

The PDP-10 that Gates and Allen had used to develop their BASIC had an interesting history. In 1969 it was destined for shipment to Vietnam when Professor Cheatham got a call asking if Harvard wanted the machine. Since a PDP-10 cost several hundred thousand dollars, and the university didn’t have one, Cheatham naturally said yes. But how to get it on campus without causing a riot? The computer was crated and packed away in the back of a two-and-a-half-ton U.S. Army truck. This was at the height of the Vietnam War. The Army was not exactly Big Man On Campus. At Harvard, glass windows had been replaced with plastic after repeated antiwar demonstrations. An Army truck rolling down these Ivy League streets was the last thing the Harvard administration wanted to see. So the truck snuck in on a Sunday morning, about 4:00
a
.
m
.
It pulled up in front of the Aiken Computer Center, unloaded its cargo, and left before the first student saw the crimson rays of the morning sun.

Even though Harvard now had possession of the PDP-10, the military strings had not been cut. The computer was being funded by the Department of Defense through its Defense Advanced Research Projects Agency, better known as ARPA. The little-known agency was created in 1958 to find long-term military applications from civilian research projects. For a while, it was known as ARPA. The word “Defense” was later added by Congress to underscore its military mission. Many of the military’s high-tech toys have come from DARPA-funded computer research, including the Stealth fighter and so-called smart weapons used in the recent Persian Gulf War.

Although DARPA was funding the PDP-10 at Harvard, there was no written policy regarding its use.

“The attitude here was that the kids could use the machine for personal use,” said Cheatham. “But after the Gates incident, . there was tighter supervision.”

It’s not clear how much trouble Gates got into for using the computer for personal gain, or for allowing Allen, an outsider with no connection to Harvard, to use the machine. Cheatham refused to talk about the incident. But another professor said Gates was reprimanded and threatened with expulsion. Gates, however, denies this.

“There was no formal reprimand, just an admonishment for bringing Paul in on a regular basis,” said Gates. He later wrote a letter to the university administration, complaining about the lack of guidelines. Why could professors use the Harvard library to do research for books that brought them royalties, but students could not use the computer for commercial work? asked Gates in his letter. By the next year, a written policy was in place: If a student used the computers for a commercial product, Harvard had to be cut in on any profits that resulted.

After the computer flap, Gates and Allen bought computer time from a timesharing service in Boston to put the finishing touches on their BASIC.

Allen had been in constant touch with Roberts since flying to Albuquerque to test the BASIC. Soon after the trip, Roberts had asked Allen if he wanted to come work for MITS. In the spring of 1975, Roberts offered Allen the job of MITS software director. Allen accepted and left for Albuquerque. Gates went back to playing poker with the boys, and thinking more seriously than ever before about his future.

CHAPTER 3

The Microkids

T
he Sundowner Motel in Albuquerque New Mexico was in a sleazy part of town noted for its prostitutes and all-night coffee shops rather than its high-tech businesses. It was located just off Central Avenue, which is what Route 66 was called as it passed through this torrid desert town on the Rio Grande. When Paul Allen checked into the budget motel in the spring of 1975, he told the manager he was not sure how long he would be staying, but thought likely until his friend at Harvard could join him in a couple of months. Allen didn’t care about the cheap accommodations or the motel’s seedy surroundings. The important thing was that he was only a five-minute walk from MITS, where he would be spending most of his time getting BASIC ready for the Altair. Bugs had to be found and removed from the language before it was ready to be sold commercially.

Compared to his job at Honeywell in Boston, Allen had walked into a buzzing hive of disorder at MITS. Although his title was MITS’ software director, in fact Allen was the entire software department. The others employed by the company were furiously working on hardware for the Altair. The response to the
Popular Electronics
article had been nothing short of phenomenal, firing the imagination of electronics hobbyists and computer hackers across the country who had dreamed of one day owning a computer. And now they could, for the very affordable price of $397.

“You’ve got to remember that in those days, the idea that you could own a computer, your own computer, was about as wild as the idea today of owning your own nuclear submarine. It was beyond comprehension,” said Eddie Curry, who joined MITS as executive vice-president soon after Allen arrived. They quickly became friends. “Computers were things that were housed in big buildings and took up several floors and had a staff to maintain them and a priesthood to watch over them. A large part of the success of the Altair and the microcomputers that followed was the desire of people just to own one. It didn’t really matter if they could do anything with the computer. Everybody knew you could do something with them, but nobody knew what. The mere fact that you owned a computer was very prestigious.”

Curry, a childhood friend of Roberts, was in graduate school when Roberts told him his idea of a small computer for the masses. They talked a lot on the phone, running up hundred- dollar-a-month bills. Although they alternated payment of the bills, Curry couldn’t afford such extravagance while in school, so he and Roberts began exchanging tapes, which turned into sizeable creative productions, complete with sound effects, background music, comedy skits, and dramatic readings.

“We got into this sort of running discussion of where we were going in life,” said Curry, “and I asked him on one tape what his goals were for MITS and what he wanted to do with MITS. He told me his dream was to build a computer kit so everyone could have their own computer.” He and Roberts had detailed, technical discussions via tape throughout the development of the computer, even down to how much Roberts should charge for the Altair.

With MITS near bankruptcy, Roberts gambled everything on the Altair. He haPopular Electronics
issue featuring the Altair hit the newsstands. Within a few weeks, more than 4,000 orders had poured in for the computer. Almost overnight, the company’s cash balance went from about $300,000 in the red to about a quarter million in the black. The chance to own a personal computer was so appealing that thousands of people sent checks and money orders to a company they had never heard of. A few fanatics flew to Albuquerque by private plane, hoping to get their Altair faster by showing up in person.

Les Solomon, the short, bald-headed technical editor of
Popular Electronics
who had put the dummy Altair on his magazine’s cover, described the reaction that followed publication this way in the book
Hackers
, by Steven Levy:

“The only word which could come to mind was ‘magic.’. . . Most people wouldn’t send fifteen cents to a company for a flashlight dial, right? About two-thousand people, sight unseen, sent checks, money orders, three, four, five hundred dollars apiece, to an unknown company in a relatively unknown city, in a technologically unknown state. These people were different. They were adventurers in a new land. They were the same people who went West in the early days of America. The weirdos who decided they were going to California, or Oregon or Christ knows where.”

In its ads, MITS promised delivery of a computer kit within two months. But the company was unprepared for the staggering number of orders it received. It could not possibly keep up with demand. Anxious customers who sent in money for an Altair called repeatedly to find out what had happened when their machine did not arrive in the mail as promised. They were told MITS had a huge delivery backlog and they would have to wait. One frustrated hacker drove across the country and lived for several weeks in a trailer parked near MITS, waiting to take delivery of his Altair.

For their $397, these adventurers didn’t get much. The Altair came in a kit, which wasn’t for the faint of heart. The customer had to figure out how to put it together, which took many hours and was not easy. Most of the kits were never properly assembled. And even if the computer did work when it was assembled, the Altair couldn’t do very much. The first machines sold in early 1975 did not have interface boards that allowed for a teletype hookup. Memory expansion boards also were not yet available, so the Altair was all but brainless, with only 256 bytes of memory. Crude programs in complicated binary machine language could only be entered into the computer by flipping the toggle switches on the front panel hundreds of times in proper sequence. One mistake meant the user had to start over from scratch.

The 8080 BASIC computer language that Gates and Allen were creating at Harvard was not yet finished when the first Altair computer kits were shipped. Even if the software had been ready, MITS hadn’t yet designed working memory boards that would provide Altair owners enough additional memory to run BASIC. Paul Allen’s responsibility as the MITS’ software director in 1975 was to continue making enhancements to BASIC and get it ready for shipment. He and Gates talked constantly by phone on technical problems that cropped up. They both realized a new software market had been born with the Altair, and they hoped to make a lot of money from the sale of their BASIC. What they now needed was a formal partnership.

For some time, Gates had tried to prepare his parents for the fact that he might eventually drop out of Harvard to form a computer business with Allen. But this latest news took his parents by surprise. He wanted to start a company not in Seattle, his hometown, where he would be close to his family, but in

Albuquerque, of all places, way out in the deserts of New Mexico.

As Mary Gates saw it, her 19-year-old son was about to commit what amounted to academic suicide. She was dead set against her son leaving school before getting his degree. Dan Evans, the governor of Washington (and a close family friend who had once helped Gates paint the lines on the family’s pic- kleball court), had just named Mary Gates to the University of Washington Board of Regents, one of the most prestigious political appointments in the state. How would it look for her son to drop out of Harvard now, she wondered. His father was also strongly opposed to Gates starting a company before finishing his education. But though he and Mary urged their son to remain in school, both recognized that they did not have the technical background to analyze the business soundness of starting a software company.

So Mary Gates turned to a new friend, Samuel Stroum, an influential and respected business leader she had met during a United Way campaign, for help with her son. She arranged for Bill to talk with Stroum, in the hope that Stroum would convince her son to drop the idea of starting a company, at least for the time being, and continue his education at Harvard.

A self-made multimillionaire, philanthropist, and civic leader, Samuel Stroum’s advice was often sought, even by the region’s most powerful movers and shakers. Like Mary Gates, he is a regent at the University of Washington. Stroum never went to college. After World War II, he founded an electronics distribution company in Seattle and later amassed a fortune from the sale of Shuck’s Auto Supply, the Northwest’s most popular auto-parts chain. In 1975, he was one of the few people in Seattle’s business community who not only understood computer technology but had the vision to see where the computer industry was heading.

While Gates was home from Harvard on break, Stroum took him to lunch at the Rainier Club, the city’s center of power and business. Founded in 1888 and steeped in tradition, the private club was considered
the
place for lunch among Seattle politicians, powerbrokers, and corporate high-flyers. “I was clearly on a mission,” recalled Stroum of the couple hours he spent picking Gates’ brain. “He explained to me what he was doing, what he hoped to do. I had been involved in that industry since I was a young boy. He just talked about the things he was doing. . . Hell, anybody who was near electronics had to know it was exciting and a new era was emerging.”

Gates talked about the vision he and Paul Allen shared. The personal computer revolution was just
beginning
, he told Stroum. Eventually, everyone would own a computer. Imagine the money-making possibilities. ... a zillion machines all running on his software.

Not only did Stroum not try to talk Gates out of his plans to start a business, but after listening to the enthusiastic teenager he encouraged Gates to do so. “Mary and I have kidded about it for years,” said Stroum, now 70. “I told her I made one terrible mistake—I didn’t give him a blank check to fill out the numbers. I’ve been known as an astute venture capitalist, but I sure didn’t read that one right.”

When Gates finished his sophomore year at Harvard, he joined Allen in Albuquerque, though he still had not made up his mind about dropping out of school. It was a decision he would not finally make for another year and a half.

Microsoft—an abbreviation for microcomputer sofware— was born in the summer of 1975. (The name was originally “Micro-Soft;” the hyphen in the name was soon dropped.) Some accounts have reported that Gates and Allen created Microsoft out of Traf-O-Data by simply changing the name. That was not the case. The two companies were always separate legal partnerships. The initial Microsoft partnership agreement called for a 60/40 split in favor of Gates, since he argued that he had done more of the initial development work on BASIC. This was later changed to a 64/36 split. (By the time Microsoft went public in 1986, Gates owned more than 11 million shares of the company’s stock and Allen more than six million shares.)

Although Gates was independently wealthy from his parents and the trust fund left him by his grandparents, he was determined to make it on his own and not dip into that money to help finance his and Paul Allen’s new business. His parents and grandparents had taught him to be financially conservative, and that was the way he intended to run his company. There would be no unecessary overhead or extravagant spending habits with Microsoft. When Gates arrived in Albuquerque, he and Allen shared a room at the Sand and Sage Motel, which was only a slight improvement over the Sundowner. Later, they moved into an inexpensive downtown apartment.

Early that summer, MITS took the Altair on a show-and-tell road tour. Several of the company’s hardware engineers crowded into Roberts’ blue mobile home and headed across America, travelling from city to city to spread the word about Altair. The MITS-mobile, or Blue Goose, as it was quickly dubbed, carried a working Altair complete with bells and whistles not available with the computer kits being sold to hobbyists. This Altair was connected to a teletype and paper tape reader, and ran the 4K version of BASIC developed by Gates and Allen. It was a public relations show on wheels. Wherever the MITS- mobile stopped, Altair demonstrations were set up. Seminars were held in motel rooms. Hobbyists who turned out were encouraged to form computer clubs, and many did, in garages, basements, wherever they could meet to feed an insatiable appetite for information about computers and to share a passion for this new revolution and its possibilities. The MITS caravan also served as a kind of traveling MASH unit, with hardware experts offering technical surgery to frustrated Altair owners who could not get their machines to work. Gates himself made one of the song-and-dance tours in the MITS-mobile his first summer in Albuquerque. He felt it was a good marketing strategy to spread the word about BASIC as well.

The MITS-mobile was not the only marketing tactic used by Roberts to promote the Altair. He and David Bunnell, the company’s technical writer, formed a nationwide computer club with free memberships to Altair owners. Bunnell also began publishing a newsletter called
Computer Notes.
Roberts wrote a regular column for the newsletter, and Gates and Allen became frequent contributors with articles about their software. Bunnell, who had left a teaching job on a Sioux Indian reservation in South Dakota to join MITS in 1972, became good friends with Gates. Bunnell designed Microsoft’s first logo and letterhead. He would go on to become one of the country’s leading publishers of personal computer magazines.

Gates, when he was not on the road in the MITS-mobile, pulled all-nighters with Allen to further enhance BASIC. By midsummer, they had an 8K BASIC to go with the 4K version, and they were working on an “extended” BASIC that required 12K or 16K of memory. On July 22, 1975 they signed a formal licensing agreement with Ed Roberts regarding the rights to their BASIC for the 8080 computer chip. The agreement, prepared by Gates with help from his father and ah Albuquerque attorney, broke new legal ground. Gates, only 19 years old, understood not only the complex technology but the cutting- edge legal issues involved in licensing software. The agreement, which was to run for ten years, gave MITS exclusive, worldwide rights to use and license BASIC, including the right to sublicense BASIC to third parties. MITS agreed not to license BASIC to any third party without first obtaining a secrecy agreement that prohibited the unauthorized disclosure of BASIC. What would later turn out to be the most important part of the agreement was a paragraph that stated: “The Company (MITS) agrees to use its best efforts to license, promote, and commercialize the Program (BASIC). The Company’s failure to use its best efforts . . . shall constitute sufficient grounds and reasons to terminate this agreement.
...”
The contract with MITS would serve as a model for future software licensing agreements in the growing microcomputer business, and it helped establish industry standards.

Gates and Allen received $3,000 from MITS on the signing of the agreement. The agreement provided for royalties from the licensing of BASIC, with or without the accompanying sale of MITS hardware. Microsoft received $30 for each copy of its 4K version of BASIC licensed by MITS as part of a hardware sale, $35 for each copy of their 8K version, and $60 for each copy of the “extended” verion. When MITS licensed any version of BASIC without hardware, Gates and Allen received 50 percent of the sale. They also received 50 percent of the money received from the licensing of the BASIC source code. The source code would allow companies that licensed BASIC to modify it to their needs and develop application software to run on top of the high-level language.