Microsoft's Long, Strange Trip Through the Computer Age

On this day in economic and business history...

At the tail end of 1974, close friends Bill Gates and Paul Allen first learned about the Altair 8800 microcomputer, built by MITS out in New Mexico. The young programmers saw an opportunity to make that bare-bones hobby kit useful by creating a BASIC interpreter for its users, which would allow Altair owners to use the popular programming language on their new toy right out of the box (or close to it). The pair traveled to New Mexico -- Gates abandoned his degree progress at Harvard for the opportunity -- to work alongside the Altair's creators. To capitalize on their new business, Gates and Allen formed Microsoft (NASDAQ: MSFT  ) in Albuquerque on April 4, 1975.

Paul Allen would later recount the race to complete BASIC and gain the business it would create in Idea Man, an autobiography excerpted in Vanity Fair in 2011:

Some have suggested that our Altair BASIC was remarkable because we created it without ever seeing an Altair or even a sample Intel (NASDAQ: INTC  ) 8080, the microprocessor it would run on. What we did was unprecedented, but what is less well understood is that we had no choice. The Altair was little more than a bare-bones box with a CPU-on-a-chip inside. It had no hard drive, no floppy disk, no place to edit or store programs. ...

By late February, eight weeks after our first contact with MITS, the interpreter (which would save space by executing one snippet of code at a time) was done. Shoehorned into about 3,200 bytes, roughly 2,000 lines of code, it was one tight little BASIC -- stripped down, for sure, but robust for its size. No one could have beaten the functionality and speed crammed into that tiny footprint of memory: "The best piece of work we ever did," as Bill told me recently. And it was a true collaboration. I'd estimate that 45 percent of the code was Bill's, 30 percent Monte's, and 25 percent mine, excluding my development tools.

In Microsoft's first year of operation, its primary business model involved selling something like this...


Source: Wikipedia.

...to be fed into this:


Source: Wikipedia.

That's right -- the first Microsoft software came on a roll of paper tape and made a bunch of red lights blink on and off. For the first few months of its existence, it wasn't even Microsoft yet, but "Micro-Soft," hyphenated to better highlight the fact that it was software for microcomputers. Once MITS accepted Gates and Allen's BASIC, the new company quickly secured its first license from NCR. However, revenue was pretty minuscule in Microsoft's first year, and the three-man operation (Ric Weiland had joined the company after its formation in Albuquerque) banked only about $16,000.

Over the next few years, Microsoft would port BASIC to other popular machines as they entered the market, most notably the Apple (NASDAQ: AAPL  ) II. This began a decades-long relationship between the two tech giants that would offer fodder for (quite possibly) millions of articles, numerous books, and even a movie or two. In fact, some of Microsoft's early software successes were developed for Apple, including Applesoft BASIC, licensed for a flat fee of $21,000. When the Apple II became a monster hit, Gates realized that per-use licenses would probably be more profitable -- Applesoft BASIC generated only about $0.02 per machine for Microsoft.

1981 would be the year that put Microsoft on the map for good. That year, IBM (NYSE: IBM  ) launched the PC, for which Microsoft had provided MS-DOS, the operating system that would spread across the world as IBM machines were cloned by a wide range of upstarts. MS-DOS was essentially an adaptation of the dominant early operating system, CP/M, which worked well with the Intel chips IBM had used in its PCs. As IBM was offering both operating systems with the PC but selling MS-DOS at a much lower price, Microsoft soon overtook its competition and became the de facto standard PC operating system. IBM didn't pay much for MS-DOS -- Gates later recalled it as "something like $186,000" -- but it was the PC's clones that made MS-DOS a Microsoft moneymaker thanks to per-use licenses. Microsoft would also move from New Mexico to Seattle in 1981, incorporating as "Microsoft," with Gates as president and Allen as executive vice president.

By the mid-1980s, the PC was clearly the world's dominant computer system, and Microsoft was raking in the money. In the year of its wildly successful IPO -- which made Gates one of the richest Americans at the age of 31 -- Microsoft generated nearly $200 million in revenue and had more than 1,000 employees. This, of course, would be just a starting point. Within another 15 years, Gates became the world's richest man, Microsoft grew into the most valuable company on Earth, and Microsoft would become the first and only software company ever to gain a place on the Dow Jones Industrial Average (DJINDICES: ^DJI  ) , befitting its stature as the largest software company in the world by revenue.

And just think: All of that achievement began in 1975 with a strip of paper and a blinking computer hobby kit.

Nemesis rising
In a strange twist of fate, one of Microsoft's most dogged opponents was also founded on April 4. Marc Andreesen and Jim Clark got together on April 4, 1994 to found Mosaic Communications, which later became Netscape. Netscape was on the vanguard of the early Web: It was one of the first companies ever to attempt to capitalize on the Web's growth, and it created the first successful browser, Netscape Navigator. Netscape was also instrumental in developing both the widely used secure sockets layer protocol and JavaScript.

Netscape's ascent was dizzying, and it had a massively successful public offering only a year and a half after incorporation that would make it -- though still unprofitable -- a multibillion-dollar company. Microsoft did not leave the Web uncontested, however, and its hardball tactics in promoting Internet Explorer led to the high-profile antitrust suit that nearly broke Bill Gates' empire into pieces. Netscape was a key combatant in the antitrust battle against Microsoft, but it should have focused more intently on building a better product. By 1999, Netscape got an offer it couldn't refuse when AOL came calling with $10 billion. In the end, Microsoft won its antitrust suit and won the browser battle against Netscape. Today, Netscape is used only as the brand name for one of AOL's discount Internet service providers.

Is Microsoft a buy today?
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