Right place right time
Although Gates rightfully earned credit for building one of the fastest growing and most profitable companies ever established, Microsoft started out on a shaky foundation. Gates and Allen had sold their first commercially developed software for $3,000 and royalties. Before long, however, Microsoft found itself unable to cover its overhead. Even though Gates and Allen received royalties, their software was also pirated by computer hackers. This piracy led Gates to write an Open Letter to Hobbyists, which said that computer software should not be copied by the then relatively small computer community without the developers permission. Gates also recognized at this point in time that the future of computer software lay in owning a standard software package to be used on most computers.By the late 1970s the computing giant IBM had plans for marketing a personal computer for home use. They approached Microsoft to develop the standard operating system for their home computer models. Gates and Allen then went out and purchased for $50,000 an operating system called Q Dos, which had been developed by Seattle Computer. Q Dos was compatible with the Intel processor that IBM intended to use. The two then adapted the Q Dos system and presented it to IBM. Money magazine quoted Gates as recalling, We bet all our resources on that system (July 1986).
Gates had learned well his early lessons in the software business. He insisted that IBM make Microsoft the exclusive software licensee for their home computers, meaning that all IBM products would have Microsoft operating systems. Furthermore, Gates negotiated a contract that allowed Microsoft to retain the right to manufacture and license the software, which he and Allen had named MS DOS, to other manufacturers. Because there were three other operating systems for microprocessors at that time, Gates didnt own the sole industry standard. But he was well on his way. He and Allen made MS DOS the most attractive system to computer manufacturers because Microsoft offered a flat fee license rather than a per unit contract. Gates and Allen also encouraged software developers to create programs that would broaden their systems capabilities. Their strategy was a huge success because manufacturers initially saved money. In addition, the software developers had an easier job designing such single applications as word processing for use on computers made by other manufacturers.These negotiations demonstrated that Gates was willing to defer immediate earnings for much greater future profits. His plan was based on building a mass of users for Microsoft products, which would mean the company would own the industry standard. Once Gatess company owned the standard, it could then revert to selling its software at per unit prices rather than general licenses.
While the contract with IBM placed Microsoft on its way to legendary business growth, it also established a precedent for what some considered Gatess unsavory business practices. When he and Allen had approached Seattle Computer, the softwares original developer, they omitted to mention that they were in negotiations with IBM to develop their operating system. Seattle Computer later sued Microsoft on the grounds that it had hidden its relationship with IBM in order to purchase Seattles system at what turned out to be a bargain basement price. The two companies came to an out of court settlement without Gates or Microsoft admitting to any guilt or duplicity in the original purchase.