IBM’s Personal Computer venture.

In 1980, the main players in the computer business were small, upstart companies. Microsoft was a tiny company with 40 employees and a niche business selling programming languages, such as BASIC, to be packaged with computers. Apple’s proprietary Apple-DOS was the dominant operating system and had the biggest share of the market. The most successful OS for non-Apple computers was CP/M, developed by Gary Kildall of Digital Research.

When IBM decided that it had to enter the “microcomputer” business quickly, Bill Lowe, then a senior executive, was placed in charge of the operation. Lowe reached out to Gary Kildall of Digital Research to discuss IBM’s grand plans. However, Kildall refused to sign the NDA agreement and did not attend the initial meetings, arguing that the current version of CP/M supported only 8-bit machines while the IBM PC would be a 16-bit machine. At the time, Microsoft did not sell an operating system, but the failure to reach an agreement with Digital Research pushed Lowe to contact Bill Gates, who was eager for the business and offered to try to provide a 16-bit operating system.

Paul Allen, Gates’s partner, knew of a local company, Seattle Computer, run by Tim Paterson, which was developing the technology QDOS. Gates negotiated the operating system agreement with IBM, while simultaneously, Allen negotiated to buy QDOS from Paterson, to which he agreed to sell the rights for $50,000. Either deal could probably stand alone as one of the best business deals of the Computer Age.

Gates immediately recognized the importance of retaining ownership of the program. Because of IBM’s size and antitrust history—not to mention the virtual nonexistence of competing 16-bit operating systems around—IBM could not negotiate so easily for total ownership.

More important, it was not an exclusive license. Because IBM was required by a 1956 consent decree to publish extensive information about all its hardware and software, Gates and company believed that IBM’s entry would transform the market and make it expand rapidly. Microsoft was in a position where it could sell DOS to each of IBM’s competitors.

The IBM Personal Computer (PC) spawned the next generation of the computer revolution. IBM made billions from PCs, but by setting the industry standard with open architecture and a nonproprietary operating system, it may have cost itself hundreds of billions in sales lost to competitors.

Microsoft, of course, emerged victorious. Accurately foreseeing the future, IBM’s entry coincided with an unprecedented boom in computer development and sales by other companies, which tended to use an operating system compatible with IBM’s. Microsoft was able to strike much better deals with these other companies and sold more than 100 million copies of MS-DOS.

Kildall from Digital Research remained a pioneer, though the preferred position of MS-DOS in IBM’s computers doomed CP/M with IBM and the coming clones. Kildall eventually sold Digital Research for stock then valued at $80 million. He died following an altercation at a bar in Monterey, California, in 1994 but remains a part of Silicon Valley folklore.