IBM executives, racing to build a personal computer to compete with Apple, finalized arrangements with the small Seattle software company Microsoft to provide the operating system for the new machine—an operating system Microsoft did not yet own but would quickly acquire and adapt as MS-DOS. The agreement, letting Microsoft retain licensing rights, would prove to be one of the most consequential contracts in the history of technology.
In the spring of 1980, IBM's Project Chess team was scrambling under enormous time pressure to bring a personal computer to market fast, and had turned to the small Seattle firm Microsoft, run by 24-year-old Bill Gates and Paul Allen, for the programming language BASIC. Around this time, as talks widened, Microsoft agreed to also supply the machine's operating system, despite not actually possessing a suitable one.
Gates and Allen, thinking quickly, purchased a rough operating system called 86-DOS (nicknamed QDOS, 'Quick and Dirty Operating System') from a small company called Seattle Computer Products for around $75,000, without disclosing to its creator, Tim Paterson, that IBM was the ultimate customer. Microsoft refined this into PC-DOS for IBM while shrewdly retaining the right to license the same software—rebranded MS-DOS—to other computer manufacturers.
That licensing arrangement, seemingly a minor detail to IBM executives focused on hardware margins, became the foundation of the entire personal computer industry's software economics and ultimately of Microsoft's dominance. When the IBM PC launched in August 1981, and when clone manufacturers proliferated through the decade, nearly all of them needed MS-DOS, transforming a small language-tools vendor into the most powerful software company on Earth.
Key people: Bill Gates, Paul Allen, Tim Paterson