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Paterson’s firm was struggling to make ends meet, so Allen was able to negotiate a savvy deal with his friend. After initially acquiring just a nonexclusive license, Allen went back when an IBM deal looked likely and bought Paterson’s software outright, without telling him why. “We ended up working out a deal to buy the operating system from him, for whatever usage we wanted, for fifty thousand dollars,” Allen recalled.96 For that pittance Microsoft acquired the software that, after they spruced it up, would allow it to dominate the software industry for more than three decades.

But Gates almost balked. He was uncharacteristically worried that Microsoft, which was wildly overcommitted with other projects, might not have the capacity to gussy up QDOS into an IBM-worthy operating system. Microsoft had only forty ragtag employees, some of whom slept on the floor and took sponge baths in the morning, and it was led by a twenty-four-year-old who could still be mistaken for an office boy. On a Sunday at the end of September 1980, two months after IBM first came calling, Gates gathered his top team to make the go or no-go decision. It was Kay Nishi, a young computer entrepreneur from Japan with a Gatesian intensity, who was the most adamant. “Gotta do it! Gotta do it!” he squealed repeatedly as he bounced around the room. Gates decided he was right.97

Gates and Ballmer took an overnight flight to Boca Raton to negotiate the deal. Their 1980 revenues were $7.5 million, compared to IBM’s $30 billion, but Gates was gunning for an agreement that would allow Microsoft to keep ownership of an operating system that IBM would turn into a global standard. In its deal with Paterson’s company, Microsoft had bought DOS outright, “for whatever usage,” rather than merely licensing it. That was smart, but what was even smarter was not letting IBM force Microsoft to make the same arrangement.

When they landed at the Miami airport, they went to a bathroom to change into suits, and Gates realized he had forgotten a tie. In an unusual display of fastidiousness, he insisted that they stop at a Burdine’s department store on the drive to Boca in order to buy one. It did not have the full desired effect on the crisp-suited IBM executives waiting to greet him. One of the software engineers recalled that Gates looked like a “kid that had chased somebody around the block and stolen a suit off him and the suit was way too big for him. His collar stuck up and he looked like some punk kid, and I said, ‘Who the hell is this?’?”98

Once Gates began his presentation, however, they quit focusing on his disheveled appearance. He wowed the IBM team with his mastery of details, both technical and legal, and projected calm confidence when insisting on terms. It was largely an act. When he arrived back in Seattle, Gates went into his office, lay on the floor, and agonized aloud to Ballmer about all of his doubts.

After a month of back-and-forth, a thirty-two-page deal was struck in early November 1980. “Steve and I knew that contract by heart,” Gates declared.99 “We didn’t get paid that much. The total was something like $186,000.” At least initially. But it had the two provisions that Gates knew would alter the balance of power in the computer industry. The first was that IBM’s license to use the operating system, which it would call PC-DOS, would be nonexclusive. Gates could license the same operating system to other personal computer makers under the name MS-DOS. Second, Microsoft would keep control of the source code. This meant that IBM couldn’t modify or evolve the software into something that became proprietary to its machines. Only Microsoft could make changes, and then it could license each new version to any company it wanted. “We knew there were going to be clones of the IBM PC,” Gates said. “We structured that original contract to allow them. It was a key point in our negotiations.”100

The deal was similar to the one Gates had made with MITS, when he retained the right to license BASIC to other computer makers as well. That approach allowed Microsoft’s BASIC and then, more important, its operating system to become an industry standard, one that Microsoft controlled. “In fact, our tagline in our ad had been ‘We set the standard,’?” Gates recalled with a laugh. “But when we did in fact set the standard, our antitrust lawyer told us to get rid of that. It’s one of those slogans you can use only when it’s not true.”IV101

Gates boasted to his mother about the importance of his deal with IBM, hoping that it would prove that he had been right to drop out of Harvard. Mary Gates happened to be on the board of the United Way with IBM’s president John Opel, who was about to take over from Frank Cary as CEO. One day she was flying with Opel on his plane to a meeting, and she mentioned the connection. “Oh, my little boy’s doing this project, he’s actually working with your company.” Opel seemed unaware of Microsoft. So when she came back, she warned Bill, “Look, I mentioned your project and how you dropped out of school and all this stuff to Opel, and he doesn’t know who you are, so maybe your project’s not as important as you think.” A few weeks later, the Boca Raton executives went to IBM headquarters to brief Opel on their progress. “We have a dependency on Intel for the chip, and Sears and ComputerLand are going to do the distribution,” the team leader explained. “But probably our biggest dependency is actually a pretty small software company up in Seattle run by a guy named Bill Gates.” To which Opel responded, “Oh, you mean Mary Gates’s son? Oh, yeah, she’s great.”102

Producing all the software for IBM was a struggle, as Gates predicted, but the ragtag Microsoft crew worked around the clock for nine months to get it done. For one last time, Gates and Allen were a team again, sitting side by side through the night, coding with the shared intensity they had displayed at Lakeside and Harvard. “The one tiff Paul and I had was when he wanted to go see a space shuttle launch and I didn’t, because we were late,” said Gates. Allen ended up going. “It was the first one,” he said. “And we flew back right after the launch. We weren’t gone even 36 hours.”

By writing the operating system, the two of them helped determine the look and feel of the personal computer. “Paul and I decided every stupid little thing about the PC,” Gates said. “The keyboard layout, how the cassette port worked, how the sound port worked, how the graphics port worked.”103 The result reflected, alas, Gates’s nerdy design taste. Other than causing a cohort of users to learn where the backslash key was, there was little good that could be said about human-machine interfaces that relied on prompts such as “c:>” and files with clunky names such as AUTOEXEC.BAT and CONFIG.SYS.

Years later, at an event at Harvard, the private equity investor David Rubenstein asked Gates why he had saddled the world with the Control+Alt+Delete startup sequence: “Why, when I want to turn on my software and computer, do I need to have three fingers? Whose idea was that?” Gates began to explain that IBM’s keyboard designers had failed to provide an easy way to signal the hardware to bring up the operating system, then he stopped himself and sheepishly smiled. “It was a mistake,” he admitted.104 Hard-core coders sometimes forget that simplicity is the soul of beauty.

The IBM PC was unveiled, with a list price of $1,565, at New York’s Waldorf Astoria in August 1981. Gates and his team were not invited to the event. “The weirdest thing of all,” Gates said, “was when we asked to come to the big official launch, IBM denied us.”105 In IBM’s thinking, Microsoft was merely a vendor.

Gates got the last laugh. Thanks to the deal he made, Microsoft was able to turn the IBM PC and its clones into interchangeable commodities that would be reduced to competing on price and doomed to having tiny profit margins. In an interview appearing in the first issue of PC magazine a few months later, Gates pointed out that soon all personal computers would be using the same standardized microprocessors. “Hardware in effect will become a lot less interesting,” he said. “The total job will be in the software.”106

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