The Off-Key Bard
History

This Day in History — The Deal That Put Microsoft at the Center of Personal Computing

On this day in 1980

On November 6, 1980, Microsoft signed with IBM to supply an operating system it didn't own, then bought 86-DOS for about $75,000 and kept the right to resell.

The Off-Key Bard enters a computer industry still searching for its future. It is November 1980, and the personal computer is no longer a laboratory curiosity or a hobbyist's expensive experiment. Apple, Commodore, Tandy and others are already selling machines. One of the most powerful names in computing, though, has been watching from the sidelines. IBM is preparing to enter the market in secret. And a small software company is about to sign a contract that will change its future.

"The company promising to supply IBM's new operating system doesn't actually own an operating system to deliver."

On November 6, 1980, Microsoft signed an agreement with International Business Machines to provide an operating system for the personal computer IBM was secretly developing. It became one of the most consequential business deals in computing history. At the time it looked less like a triumph than a gamble. Microsoft was known for programming languages, and the operating system it had promised to supply was still owned by someone else.

IBM Comes Knocking

IBM's PC project ran out of Boca Raton, Florida, under William C. Lowe and Philip "Don" Estridge. The company decided to buy key components, including the operating system, from outside vendors instead of building everything itself. IBM first contacted Microsoft in July 1980. According to the Wikipedia history of Microsoft, the link ran through Bill Gates's mother, who served with IBM CEO John Opel on a United Way board. IBM chose Intel's 8088 chip, which has a 16-bit design internally but an 8-bit external bus, partly to control costs.

Microsoft was a natural choice for programming languages. It had been founded on April 4, 1975, in Albuquerque by Gates and Paul Allen after they wrote a BASIC interpreter for the MITS Altair 8800. But IBM needed an operating system for the new machine, and the dominant one was CP/M, from Gary Kildall's Digital Research. Its 8080 and Z80 versions were the de facto standard of the era.

According to the Gary Kildall entry in Wikipedia, Gates suggested that IBM talk to Digital Research.

The Kildall Story

The familiar story says Gary Kildall lost the IBM contract because he went flying while IBM's representatives waited. The historical record is considerably more complicated. When IBM visited Digital Research in August 1980, Kildall was away meeting another customer, while his wife and business partner, Dorothy McEwen, and company attorney Gerry Davis handled the initial discussions. According to research published by the Computer History Museum, Kildall returned that afternoon as scheduled to discuss technical matters. The idea that IBM simply left because he preferred flying to conducting business does not adequately explain what happened.

A more substantial obstacle was the proposed business arrangement. IBM wanted broad control over the operating system it would use, while Digital Research had an established licensing business built around CP/M and preferred to receive royalties for individual copies. The negotiations failed, and IBM returned to Microsoft for an alternative. Some details remain disputed because participants later offered differing recollections, but the evidence does not support reducing Digital Research's loss of the contract to a single missed meeting. The outcome reflected disagreements over licensing, commercial expectations and the pressure to deliver IBM's new computer on schedule.

A Borrowed Operating System

The operating system IBM ended up with came from Seattle Computer Products. In April 1980, SCP's Tim Paterson, then 24, began writing a replacement for CP/M on the 8086 because Digital Research had not delivered a 16-bit CP/M. Internally it was called QDOS, for "Quick and Dirty Operating System," and by August it had been renamed 86-DOS.

Paterson modeled it on CP/M's interfaces so existing programs would be easier to port. The similarity later drew accusations. Kildall came to believe it had copied CP/M, though his lawyer said the law was too unclear to sue. Paterson denies using CP/M code, and in a defamation suit over a 2004 book, the court granted summary judgment that no defamation occurred.

What the Contract Said

The contract was signed on November 6, 1980. Sources agree on the date and that IBM wanted an operating system for its new machine. The Computer History Museum and the Centre for Computing History both describe it that way. They say little about its terms, and the accounts that do give terms disagree.

Jimmy Maher's history of the PC says Microsoft presented a final proposal on September 30, 1980, offering to license software to IBM for a royalty on each copy and not sell it outright, and that the contract paid Microsoft $700,000 to begin porting software. Wikipedia's article on Microsoft, however, describes the deal as a contract to provide a version of CP/M. The exact terms remain unsettled.

What was not in doubt was that Microsoft did not yet own the operating system it would deliver. In December 1980, Microsoft licensed 86-DOS from Seattle Computer Products for $25,000. SCP knew Microsoft had a major customer but did not know for certain that the customer was IBM, although Tim Paterson later recalled that people at SCP suspected it. Microsoft hired Paterson in 1981 to help adapt the software for IBM's machine.

On July 27, 1981, Microsoft purchased the remaining rights to 86-DOS for an additional $50,000, bringing its original licensing and acquisition costs to approximately $75,000. Seattle Computer Products retained a license to use the software, but Microsoft controlled the rights needed to supply IBM and license versions to other computer manufacturers. SCP later sued Microsoft over its handling of the transaction, and the dispute ended in an out-of-court settlement reportedly worth nearly $1 million.

IBM was not seeking to own the software. According to Sams, IBM wanted Microsoft to keep ownership of what it built, saying he wanted "this to be their product." That choice mattered more than any price.

The IBM PC Arrives

IBM introduced the Personal Computer, model 5150, on August 12, 1981. Built around Intel's 8088 processor running at approximately 4.77 MHz, its entry-level configuration cost $1,565 and included 16 KB of RAM but no disk drives. A practical setup with a monitor, floppy drives and other peripherals cost considerably more. IBM offered three operating-system choices for the machine: PC DOS, CP/M-86 and the UCSD p-System, although they were not all available at launch.

Price decided the matter. PC DOS cost $40, and CP/M-86 cost $240. One survey found 96.3 percent of PCs were ordered with PC DOS and 3.4 percent with CP/M-86. Kildall suspected IBM had set the gap on purpose, but that is his claim and not an established finding.

The Clause That Mattered

PC DOS and MS-DOS were the same system sold under two names. Microsoft kept the right to license MS-DOS to other manufacturers, and within a year it had licensed it to more than 70 other companies. The Centre for Computing History calls those revenues a turning point for the company.

That is where the clones came in. IBM used mostly off-the-shelf parts and published full technical documentation, so the hardware was easy to copy. The BIOS, with its copyrighted code, was the hard part. Compaq wrote a clean-room replacement, announced its portable in November 1982, and shipped it in March 1983 at $2,995 with Compaq DOS, which was nearly identical to IBM's PC DOS 1.10. Lotus 1-2-3, released on January 26, 1983, was the first killer application of the IBM PC and gave businesses a reason to buy compatibles. Software followed hardware, and hardware followed software.

Every compatible sold needed an operating system. Microsoft did not have to build the machines.

From DOS to Windows

MS-DOS kept growing. Version 2.0, released in March 1983 alongside IBM's PC XT, added support for hard disks and hierarchical directories, substantially expanding what the operating system could do. Windows 1.0 arrived on November 20, 1985, as a graphical operating environment built on DOS. Windows 95 followed on August 24, 1995. Windows 98 and Me still belonged to the DOS-based Windows family, with Me becoming its final consumer release. Windows XP, released on October 25, 2001, united Microsoft's mainstream home and business Windows products around the NT kernel.

IBM and Microsoft began working together on OS/2 in August 1985. It shipped in text-mode form in December 1987. The partnership broke down around 1990 as Windows 3.0 sold millions of copies, and Gates ended it in a May 1991 memo. The company that had once depended on IBM's decision to enter the market had built a position that did not depend on IBM at all.

A contract signed, a system sought,
A borrowed start, a future bought.
From blinking prompts to screens aglow,
A world of PCs soon would grow.

Microsoft did not invent personal computing. It did not write the first microcomputer operating system, and it did not write the software that became MS-DOS. Paterson's work at SCP supplied the base, IBM's engineers built the machine, and Digital Research had already established the ideas.

What Microsoft did was sign the right contract and keep the right to license beyond IBM. That one distinction turned a supplier relationship into a position at the center of an industry. It also left questions about competition and control that were still being argued decades later.

Sources

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