Hard Drive: Bill Gates and the Making of the Microsoft Empire (15 page)

-Wallace arrived in May and went to work developing BASIC for Texas Instruments. Another programmer was hired as well. With the Pertec mess finally settled, and Microsoft free to license BASIC, the money flowed in at warp speed from such companies as Commodore, Apple, Radio Shack, NCR, General Electric, Texas Instruments, Intel, and various OEM customers.

“Just a plain version of Disk BASIC went for $50,000, and we could make the thing in a couple of hours,” recalled Marc McDonald.

Every couple months, Microsoft’s bank account grew by $150,000 or more, and Wood would buy a $100,000 certificate of deposit. (Microsoft put all its early money in CDs.) In addition, the market in Japan was about to open up. Since signing the one-page agreement with Gates the year before, Nishi had been doing missionary work in Japan for himself and Microsoft. His biggest sale came when he convinced Kazuya Watanabe, a manager with the electronics giant NEC, to build Japan s first personal computer. He then persuaded Watanabe to fly to Albuquerque in 1978 to talk with Gates and Allen about software for the computer.

Gates met him at the airport in his Porsche. The visit was short, but Watanabe was impressed with Gates and Allen and the work Microsoft had done developing languages for American computers. When he returned to Tokyo, he sold the NEC executives on producing the country’s first microcomputer and convinced them that they should hire Microsoft to supply the software. The NEC PC 8001 debuted the next year. Within three years, virtually every brand of Japanese computers available had some form of Microsoft software running on it.

“Microsoft played a big role in our decision making,” Watanabe later told the
Wall Street Journal.
“I always felt that only young people could develop software for personal computers people with no tie, working with a Coke and a hamburger- only such people could make a personal computer adequate for other young people.”

And that pretty much described the atmosphere Watanabe had found at Microsoft. Looking back on those times 14 years later, Wood tried to explain Microsoft’s phenomenal early success: “It was more the character of the people than any particular moment. One of the real keys, and this has always been true of Microsoft, was we were able to anticipate the markets pretty effectively. ... We were always a year or two ahead of where the demand >yas really going to be. But we were generally guessing right. A lot of it was Bill’s and particularly Paul’s ability to see where some of the stuff was going to go. A lot of people are able to see things like that, but we had just an enthusiasm, a real high level of drive and ambition. There wasn’t anything we couldn t do. Okay, so no one has done this for a personal computer before, so what? We can do it. No big deal. And nobody even thought about whether some of the things we were doing were feasible or not. We just said we can do them. We overcommitted ourselves. We missed deadlines. We consistently underestimated the time it would take to do a project, and we committed to too many of those projects at a time. But we always got it done. And it generally tended to be pretty successful.”

Because of that success, Gates never had to use his family’s wealth or venture capital to bankroll the company. Microsoft was bootstrapped from the beginning. By the time Gates began scouting for a new location for the company in Seattle in the summer of 1978, Microsoft’s revenues for the year were closing in on the million dollar mark.

“We were driving hard,” said O’Rear. “But we played hard, too.” Before the summer ended, the last one they would spend in Albuquerque, the entire Microsoft team took time off for a camping and water-skiing trip to Elephant Butte Reservoir on the Rio Grande south of Albuquerque near Truth or Consequences. The break was needed. The upcoming move to Seattle would make great demands on everyone. Shortly before the picnic, Gates leased new offices in the Old National Bank building in Bellevue, across Lake Washington from Seattle. Microsoft would again be on the eighth floor—suite 819, The new phone number was an easy one to remember—8080, the number of the Intel chip that had made it all possible only four years earlier. Getting that telephone number from the phone company may have been made easier by the fact that Mary Gates served on the board of Pacific Northwest Bell.

Everyone working for Microsoft in Albuquerque planned to make the move to Bellevue except for Miriam Lubow, who decided to stay behind because of her husband’s business. Steve Wood’s wife, Marla, had been working at Microsoft as a clerk since spring, and she was being groomed to take Lubow’s place. Marla had no secretarial skills and didn’t know a thing about bookkeeping, which at Microsoft was still done on a ledger. Shortly before the move to Bellevue, she “lost” one of the hundred-grand
certificates
of deposit.

“There was a little bit of a panic trying to figure out where it was,” she recalled. “It was in there somewhere, we just couldn’t put our hands on it.”

One more programmer was hired before the big move— Gordon Letwin, who was recruited personally by Gates. Letwin had designed a BASIC for Heath-kit, and during a Gates presentation to a roomful of Heath-kit managers, Letwin had brashly suggested that his BASIC was better. Clearly, Letwin had the right stuff to work for Microsoft, and Gates later suggested as much. When Heath-kit ended up licensing BASIC from Gates, Letwin made the move to Microsoft. Some years later, he would become the architect of Microsoft’s OS/2 operating system.

A few weeks before the move, Bob Greenberg, who had won a free photo session, decided Microsoft needed a company portrait. Everyone paid the studio photographer an extra 50 cents to be included. The picture of the Microsoft Eleven taken that day would later become famous, appearing in
People, Time, Newsweek, Fortune, Money,
and other magazines across the country. With the exception of Gates, who looked like a high school freshman, the nine men in the picture looked more like part of a Berkeley peace march in the 1960s than employees in a computer software company.

The move to Seattle took place in December and January. Steve Wood supervised the installation of a new computer at the Seattle office—Microsoft was finally getting its own computer system, a quarter-million-dollar, high-end DEC 20. Microsoft had to cash in some of its
certificates
of deposit to pay for the new computer because Digital would not extend the company a line of credit. Microsoft was too new a company to have any real assets, according to Digital.

Once the computer was installed, several programmers, including McDonald and Allen, went on ahead to get the system up and
running
. Gates and the others stayed behind in Albuquerque to keep things running there. Finally, in January, it was their turn to leave, too. One of the last employees to leave, Bob Wallace, while driving along Route 66 towards Seattle in his Honda Civic, noticed a green dot appear in his rearview mirror. Moments later, it shot past him at well over a hundred miles per hour. It was Bill Gates in his Porsche.

“He was anxious to get moving,” Wallace recalled. “All this driving was a waste of time. You couldn’t be programming.”

Gates did make two unscheduled stops on the 1400-mile trip back home to Seattle. He was pulled over twice for speeding, caught both times by the same airplane flying above the stretch of highway, an unseen
speed trap
in the sky for which the radar detector in Gates’ car was of no use. But one ticket or two didn’t matter to him. Microsoft was in high gear, just like the Porsche, and Gates was not going to let anything slow him down.

CHAPTER 4

Hitching a Ride with Big Blue

It
would prove to be the most
important business meeting of
his career, and Bill Gates didn’t have a tie.

He had spent a sleepless night on Delta’s red-eye flight from Seattle to Miami, memorizing business and technical information for his meeting with IBM. He, Steve Ballmer, and Bob O’Rear were scheduled to meet with IBM executives at their Entry Level Systems facility in Boca Raton. Gates carried with him the final report on how the jeans-and-tennis-shoe programmers at Microsoft could work with the white-shirt-and-wingtip crowd at IBM on Project Chess, codename for the top secret IBM effort to develop a personal computer.

The meeting was scheduled to begin that morning at ten o’clock, and it would determine once and for all whether IBM and Microsoft were to do business together. For two months, the companies had been holding unprecedented secret talks.

Never before had Big Blue, as IBM was known, considered letting an outsider play such a critical role in developing one of its computers. Now it was time for Gates to deliver the consulting report that IBM officials had been waiting for. Time was short. The personal computer that IBM was developing had to be ready in ten months. Could a small language company like Microsoft meet such a demanding schedule?

Gates faced two days of tough questioning from the IBM task force. At age 24, he would have to hold his own against much older and more experienced executives. Ballmer, his pal from Harvard who used to listen to him unwind after those late- night poker games, had come along to provide support, along with O’Rear, the “old man” among Microsoft’s programmers. Although Ballmer had been part of the Microsoft team for only a few months, and did not have a technical background in computers, he did have street-smart business instincts. He was also someone Gates could confide in.

On the nonstop, overnight flight to Miami, the three friends, wired from excitement and lack of sleep, poured over the final report, making last-minute revisions and corrections. Part of the report had been prepared by Kay Nishi, and his contribution needed a lot of editing. It had been written in what was jokingly referred to at Microsoft as “Nishi English.” There had been no time to polish the document before leaving Seattle. “We’d been working for a day or two on the proposal,” recalled O’Rear. “We just kind of ripped the proposal off the printer and dashed for the airport, then reviewed it on the flight down.” The report proposed that Microsoft supply four high-level languages— BASIC, FORTRAN, COBOL, and Pascal—for IBM’s new microcomputer. More significantly, it proposed that Microsoft develop the computer’s disk operating system, or DOS.

Their plane landed at Miami International Airport about eight o’clock in the morning. After picking up their luggage, Gates, Ballmer, and O’Rear ducked into an airport restroom and quickly changed into suits. It was then that Gates discovered he had forgotten to bring a tie. But they barely had enough time to make the meeting up the coast, let alone go shopping beforehand.

Normally, Gates was not big on appropriate dress. But after all, this was IBM. Gates knew he would be pelted with questions by the executives waiting for him in Boca Raton, and that he would be judged not only on his answers, but how he appeared and how he handled himself. He simply
had
to have a tie, even if it meant arriving late for the meeting. He could always say the plane was late. But to those men in white shirts and blue suits, there could be no excuse for showing up without a tie.

As their rental car sped north along Interstate 94 from the Miami airport toward Boca Raton, a worried Gates stopped at a small department store and waited for it to open so he could buy a tie. The store doors were unlocked at ten o’clock, and minutes later Gates was standing at the counter in the men’s clothing department, buying a conservative-looking tie. Then he was back in the car, speeding toward Boca Raton and the meeting that was supposed to have already started.

In the back seat, Bob O’Rear watched the Florida landscape rush by. As the technical person in charge of designing Microsoft’s proposed operating system for IBM’s new computer, his stomach was tied up in knots from the strain of the last few hectic hours on the plane. How quickly everything was happening, like the blur of scenery outside the car window, he thought to himself. It had been only a year and a half since he had moved his family from Albuquerque to Seattle. Now Microsoft, a company with seven million dollars in annual sales and fewer than 40 employees, was about to go into business with IBM, an international giant with revenues approaching thirty billion dollars a year and a work force more than half as large as the population of Seattle.

That Bill Gates should be speeding along the south Florida coast toward a rendezvous with destiny on a fall morning in 1980 was a matter of luck rather than brilliant maneuvering, many industry pundits would later argue. Even Gates acknowledged that had it not been for a break or two, things might have turned out very differently. But there was more to it than just luck. He and Paul Allen had strategically positioned Microsoft so that it was in the right place at the right time when IBM broke with tradition and went looking for a software vendor for its entry into the personal computer market.

They made one of these strategic moves early in 1979, soon after Microsoft set up shop on the eighth floor of the Old National Bank building in Bellevue. Intel had recently released a new chip called the 8086, and although some in the trade press suggested it would never become an industry standard like the 8080 chip, Gates and Allen believed otherwise. They were certain this new chip would become the engine for the next generation of personal computers. As a result, they asked Bob O’Rear to begin work immediately on a BASIC for the 8086.

It had been four years since the Altair appeared on the cover of
Popular Electronics.
The 8080 chip had indeed become a standard, and the industry had invested heavily in programs that ran only on that chip. But it was never intended to supply the brain power for the advanced needs of microcomputers. Its makers at Intel had envisioned the 8080 chip going into such things as traffic light controllers. With the 8086, however, Intel’s engineers had designed a microprocessor especially for the personal computer. Technically speaking, the 8086 chip represented 16-bit architecture, rather than the 8-bit architecture of the 8080 chip. This meant it could process packages of information of up to a million characters at a time, while the 8080 chip was limited to 64,000 characters. Intel’s new chip could run rings around the old chip. Not only was the new chip many times faster, but it could run much more sophisticated software programs.

When O’Rear began developing 8086 BASIC for Microsoft, no one in the industry had built a microcomputer using the new chip. O’Rear borrowed a page from the work of Gates and Allen in the Aiken computer lab at Harvard when they developed 8080 BASIC without an Altair. O’Rear simulated the 8086 chip on a DEC computer. A couple months later in the spring of 1979, O’Rear had his simulated BASIC running. However, he still didn’t have an 8086 computer.

Just down the freeway in Tukwila, Washington, at a mom- and-pop computer business called Seattle Computer Products, was a man who did have an 8086 computer—Tim Paterson. An electronic hobbyist since high school, Paterson was a thin, fast- talking, bearded programming whiz with a fondness for faded jeans. He had hacked away on his first microcomputer at the University of Washington in 1976, when his roommate bought an IMSAI 8080 with a 4K memory board. Like the Altair that it imitated, the IMSAI was mostly good for fun and games. That same year, Paterson saw a notice posted in the university computer lab that the Retail Computer Store in Seattle was looking for a salesperson. Paterson applied for and got the job. He soon became friends with Rod Brock, a frequent customer who owned Seattle Computer Products. When Paterson graduated from the university in early 1978, he went to work for Brock as his chief technician and programmer. At the time, Seattle Computer Products built memory boards for microcomputers, but after Paterson attended a local seminar on Intel’s just-released 8086 chip in late summer of 1978, he convinced Brock that his company should design a central processing unit, or CPU, around the new chip. The CPU is the heart of a computer. Paterson had a prototype 8086 CPU board working by May 1979, and he took his “computer” over to Microsoft. “We were helping them because Seattle Computer heeded an 8086 BASIC and Microsoft was working on one,” Paterson recalled. “It was a remarkable coincidence that we got our hardware working about the same time they had a BASIC simulator. But they didn’t know if their

BASIC would work, so we brought over the real computer and gave it a go.”

Unlike the 8080 BASIC which ran the first time Allen fed it into the Altair at MITS in Albuquerque, the 8086 BASIC did not work the first time it was loaded into Paterson’s machine. But a few minor bugs were soon eliminated, and before the end of May Microsoft had a working 8086 BASIC—just in time to show it off at the upcoming National Computer Conference in New York City, the computer industry’s yearly fair. A software distribution company known as Lifeboat Associates had invited Microsoft to share its ten-by-ten foot booth at the fair, and Paul Allen had invited Paterson to come along and show Microsoft’s 8086 BASIC running on Seattle Computer’s machine.

“Our boards looked great sitting up there on display,” said Paterson. “We had a terminal with 8086 BASIC running and you could type on it and make it do anything you wanted.”

As usual when it came to industry shindigs like the NCC, Microsoft was well represented. Gates and Allen were there, as well as O’Rear, Kay Nishi, Steve Wood, and his wife Marla. Chris Larson also made the trip. He was still enrolled at Princeton, but worked summers at Microsoft.

Paterson had a cheap hotel room on the other side of town, but Gates checked his team into the plush Park Plaza, where kings and presidents usually stayed when they came to the Big Apple. Gates and Allen had adjoining rooms, which they quickly turned into the company’s first “hospitality suite.”

“It wasn’t something a lot of industry people did back then,” recalled Wood. “We decided to have a cocktail party in the suite.”

Later that night around two o’clock, when, as Wood put it, “none of us were feeling any pain and the guests had cleared out,” the Microkids got a bag of bottle rockets that Larson had brought along, found an empty booze bottle, opened a window in the suite, and set up a launch pad. For the next hour or so, they shot rockets out over neighboring Central Park.

While Gates and Allen were entertaining guests in the hospitality suite during the conference, Kay Nishi was out rounding up more business from Japan. One night during the conference, Nishi showed up at the Plaza Hotel with about a dozen executives from Japanese hardware companies who were interested in doing business with Microsoft. “They didn’t have a place to stay, so we told them they could spend the night in the suite,” said Wood. “We called housekeeping and told them to send up about ten roll-away beds.”

Microsoft’s 8086 BASIC drew a lot of attention at the National Computer Conference in New York City that June of 1979, but not nearly as much as a slick electronic spread sheet program that was unveiled on an Apple II computer. The brainchild of 26-year-old Dan Bricklin, VisiCalc was demonstrated for the first time at the conference, although it would not be sold commercially for several more months.

VisiCalc, short for “visible calculator,” was a software program that solved complex “what if” financial-planning problems by establishing mathematical relationships between numbers. When the value of one number changed, the program calculated the effect, if any, on other numbers. The possibilities of such an applications program were limitless. You could use VisiCalc to determine, for example, how the profits of your small business might be affected if labor costs rose or more product was produced, or how a tiny change in the price of stock could affect the value of your portfolio.

Bricklin had conceived the idea of an electronic spread sheet in 1978 during his first year at Harvard Business School. When Bricklin approached one of his Harvard professors for advice on his idea for a spread sheet program, the professor suggested he talk with one of his former students, Dan Fylstra, who had recently started a small software-marketing company called Personal Software. Fylstra liked Bricklin’s idea, and loaned him an Apple II computer for the project. Bricklin then enlisted the help of Bob Frankston, a programmer he had become friends with while at MIT. They spent the winter of 1978 developing what would become known as VisiCalc, and in January of 1979 Bricklin started his own firm, Software Arts, in a refurbished chocolate factory in the Boston suburb of Wellesley. He and Frankston then signed a contract with Personal Software to market VisiCalc. Although sales were sluggish at first, VisiCalc eventually took off and became one of the hottest-selling software products in the personal computer industry.

About the same time VisiCalc hit the market in the fall of 1979, a company called MicroPro began selling a word processing program called WordStar. Application products such as VisiCalc and WordStar represented a potentially vast and lucrative new market for software developers, a fact not lost on Bill Gates. Microsoft was only in the language business when Gates got his first peek at VisiCalc during the New York City computer fair. Useful applications, he knew, could turn the public on to computers the way the Altair had turned on hobbyists. Applications represented a product for the consumer, the so- called end user of the rapidly growing personal computer industry.

A, few months after Gates and other Microsoft employees were shooting off bottle rockets from a window of the Plaza Hotel, Microsoft announced it was establishing a consumer products division. Gates hand-picked a friend, Vern Raburn, to head the new division.

Gates and Raburn had first met when Microsoft was located in Albuquerque. In 1978, Raburn and a partner started a small software company and began selling a version of BASIC for microcomputers, until one day they got a letter from a lawyer representing Microsoft. Microsoft claimed that Raburn and his partner were illegally selling BASIC. “The letter said cease and desist or we will sue your ass,” said Raburn, who got on a plane and flew out to Albuquerque for a face-to-face showdown with Gates. “I met with Bill and said ‘What is the meaning of this!?’ He proceeded to explain it to me. I said, ‘You know, you’re right.’ ” So Raburn went back and dissolved the partnership. Raburn then went to work for a company called GRT in Sunnyvale, in the heart of the Silicon Valley.

“My impression [upon first meeting Gates],” recalled Raburn, “was he was just another one of those computer guys. But we had some things in common. We enjoyed driving fast cars.”

They soon became friends. When Gates had business in California, he and Raburn got together to race go-carts at the Malibu Grand Prix. Raburn quickly learned about Gates’ competitive fires, which burned white hot in or out of a go-cart. “Bill is competitive-plus,” said Raburn. “Race car drivers have a phrase for it: Red mist. They get so pumped up they get blood in their eyes. Bill gets red mist.”

Raburn joined Microsoft shortly before VisiCalc came out. In hiring Raburn to head the company’s consumer products division, Gates had picked the man he wanted to help orchestrate Microsoft’s move into applications software like VisiCalc. Gates had laid the second foundation for his company’s future growth.

Up to this point, Microsoft had been producing only languages. In the consumer products division, Raburn presided over the introduction into the market of best-selling Microsoft software applications such as Typing Tutor and a game called Adventure.

“We really tried to win, and when you have multiple products, you have a better chance of winning,” said Steve Smith, Microsoft’s first marketing director and genuine business manager. Smith had joined Microsoft in July of 1979, shortly before Raburn. “Let me tell you what I think occurred to Bill: We were out there with multiple products (languages) and we’d sell them, and we just weren’t able to become a much bigger company than Digital Research or MicroPro. . .. What we realized at that time was we had a lot of products, we dominated the languages business, but the only product that really made a lot of money for us was BASIC. That’s because you had to have a copy of BASIC on every computer to make the applications run. And then we saw WordStar, and realized that MicroPro was a one product company. And then we saw VisiCalc. Now we had no intention of being a one product company. What we realized was we needed to be in those markets.