April 22, 2024 • 4hr 23min

Microsoft

Acquired

Microsoft, founded by Bill Gates and Paul Allen in 1975, rose from humble beginnings to become the most valuable company in the world and a dominant force in the personal computer industry. This episode tells the story of Microsoft's meteoric rise during the first 20 years of the PC era.

Microsoft

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Key Takeaways

Microsoft was founded in 1975 by Bill Gates and Paul Allen to develop programming language interpreters for the new microcomputer market. (4:22)
Microsoft's big break came in 1980 when IBM chose them to provide the operating system and programming languages for the IBM PC. Microsoft retained the rights to license the software to other PC manufacturers. (41:34)
As the IBM PC standard took off, Microsoft rode the exponential growth of the personal computer market, becoming the linchpin of the ecosystem by controlling the operating system and key productivity applications. (1:02:03)
Microsoft succeeded by betting on the future - graphical user interfaces, office productivity software, Windows as an operating system, and the enterprisefication of PCs. (1:38:37)
Microsoft built an unassailable business through the powerful combination of scale economies, network effects, and switching costs around its operating system and applications. (2:13:28)

Introduction

Microsoft, founded by Bill Gates and Paul Allen in 1975, rose from humble beginnings to become the most valuable company in the world and a dominant force in the personal computer industry. This episode tells the story of Microsoft's meteoric rise during the first 20 years of the PC era.

Bill Gates' Early Years (3:37)

Bill Gates was born in 1955 to a prominent Seattle family. His mother Mary Maxwell Gates was a powerful businesswoman and his father Bill Gates Sr. was a superstar lawyer.
Bill excelled in math and science at the elite Lakeside School where he met Paul Allen. The Lakeside Mothers Club bought a computer terminal in 1968, sparking Bill and Paul's interest in computers.
Gates was fiercely intelligent and competitive, with one childhood friend recalling "everything Bill did, he did competitively. He never did anything simply to relax."

The Dawn of the Microcomputer (14:08)

In the early 1970s, most computing was done on expensive mainframe computers made by IBM. The idea of a personal computer was still a dream.
In 1974, the Altair 8800, powered by the new Intel 8080 microprocessor, was announced as the first "personal" computer. Gates and Allen saw an opportunity.
"Paul and I had talked about the microprocessor...it seemed obvious to us that if a tiny chip could get so much more powerful, the end of big, unwieldy machines was coming." - Bill Gates

Topics Discussed

Founding of Microsoft (38:19)

Gates and Allen approached Altair maker MITS, claiming to have a BASIC interpreter for the 8080 chip. They didn't, so Allen quickly developed one.
The interpreter worked and MITS agreed to distribute Microsoft's software with the Altair. Microsoft was officially founded on April 4, 1975 in Albuquerque, NM.
MITS was given an exclusive license to Microsoft BASIC, a decision Gates would later regret as the industry grew without Microsoft capturing most of the value.

The Business of Software (58:38)

In the early days of personal computers, software was not seen as a business - hardware companies made their own software and no one paid for it.
Gates believed software had intrinsic value and railed against "piracy." But it wasn't clear if intellectual property laws protected software.
In 1980, Congress explicitly extended copyright law to cover software, paving the way for Microsoft's revolutionary business model of making money solely from software.

Deal with IBM and MS-DOS (1:21:31)

In 1980, IBM decided to enter the personal computer market and approached Microsoft about providing an operating system. Microsoft didn't have one, so they referred IBM to Digital Research and their CP/M operating system.
The IBM deal "fell through in a nearly unbelievable way" with Digital Research founder Gary Kildall. IBM came back to Microsoft needing an operating system.
Microsoft licensed 86-DOS from Seattle Computer Products for $50,000, made modifications, and licensed it to IBM as MS-DOS. Crucially, Microsoft retained the rights to license it to other manufacturers.
The IBM PC launched in 1981 and was a smash hit. As PC "clones" rushed to market, they all licensed MS-DOS from Microsoft. A giant new industry was born with Microsoft as the central player.

Dethroning IBM (1:41:54)

By the mid-1980s, Microsoft had established itself as the leading PC software company, eclipsing IBM. The press hailed Gates as a business wunderkind.
"I can't believe I'm about to say this...there were a couple years in the late 80s where Lotus had more revenue than Microsoft and was valued higher." - David Rosenthal
In 1993, the unthinkable happened - Microsoft's market cap surpassed IBM's. The torch had been passed and Microsoft was the undisputed leader of the computing industry.

Microsoft Excel and the Macintosh (1:43:46)

Microsoft bet early on graphical interfaces as the future of computing. They hired key personnel from Xerox PARC (birthplace of the GUI) and began building applications for Apple's Macintosh.
Excel was the first GUI spreadsheet and a huge hit on Macintosh. It established Microsoft as a leader in productivity software and a power in the Mac ecosystem.
Microsoft learned a key lesson: Don't get leapfrogged by new technology. Always have an offering targeting the latest and greatest tech, even if it's not your own platform.

Birth of Microsoft Office (2:03:20)

Combining Word, Excel, and PowerPoint into an integrated "office" suite was a master stroke that made Microsoft the leader in personal productivity.
Critically, Office was a huge driver of Windows adoption. People wanted to run these powerful applications, so they wanted PCs with Windows.
Office also became Microsoft's beachhead into the enterprise. IT departments couldn't ignore such a popular, productivity-enhancing tool.

Rise of Windows and Windows 95 (2:29:11)

Early versions of Microsoft Windows were just graphical shells on top of MS-DOS. But by 1990, Windows 3.0 was good enough to be a true platform and it began to take off.
"May 22, 1990 will mark the first day of a new era in IBM PC compatible software." - PC Magazine on the importance of Windows 3.0
Everything came together in Windows 95 - the integration of Windows and DOS, built-in Internet support, plug-and-play hardware, and 32-bit architecture. It was a massive global launch and cemented Microsoft's domination of computing.

Conclusion

Microsoft's rise to the pinnacle of technology is one of the great business stories of the 20th century. Through technical acumen, business savvy, and sheer competitive drive, Gates and company did more than perhaps any other organization to bring computing to the mass market.

There were key turning points along the way:

Retaining rights to MS-DOS in the IBM deal, paving the way for massive licensing revenue
Betting early on graphical interfaces and building key productivity apps like Excel and Word
Pushing Windows to be a true operating system and a platform for the future

Through it all, Microsoft fought to make software a business, not an afterthought. They proved a company could thrive - and become the most valuable in the world - on the power of software alone.

As Microsoft takes aim at the enterprise in this next chapter, it will need to bring all its skills to bear to continue leading the industry it did so much to create. But if the past is any guide, never count them out. Microsoft has shown time and again a unique ability to spot the future and chase it relentlessly.