IBM Signs A Deal With The Devil

IBM PC-DOS 1.0November 6, 1980

IBM and Microsoft formally sign an contract whereby Microsoft will create an operating system for the in-development IBM PC. During the summer of 1980, IBM was originally interested in licensing the popular CP/M operating system, but the inability to come to an agreement with Digital Research led IBM to ask Microsoft if they could develop an operating system similar to CP/M. Microsoft was already going to work with IBM to deliver their BASIC programming language for the IBM PC, but they did not have an operating system. However, Microsoft knew that a small company named Seattle Computer Products had developed an operating system similar to CP/M called QDOS, for Quick-and-Dirty Operating System. Microsoft suggested to IBM that QDOS could work as the IBM PC’s operating system. IBM asked Microsoft to license and further develop the operating system, which led to the formal contract on November 6, 1980. After the contract was signed, in December 1980 Microsoft would license the QDOS operating system to begin development of the IBM PC version. In July of 1981, just weeks before the IBM PC would ship, Microsoft purchased full rights from SCP for what was now called 86-DOS. IBM PC-DOS was the name of the operating system that would ship on the IBM PC, but it was Microsoft that wholly developed the operating system after acquiring it from SCP.

Microsoft shrewdly included a clause in the agreement that allowed them to sell the operating system to other companies under the name MS-DOS. It was this clause that changed the course of technology history, opening the door for Microsoft to become the dominant technology company of the PC era. Microsoft seemed to understand that by controlling the operating system, the underlying hardware became less relevant. IBM obviously did not consider this concept, nor did they foresee that companies would be able to successfully clone their hardware platform. Once companies were able to clone the hardware, they needed an operating system. Microsoft was more than happy to provide them with that operating system, which by design was completely compatible with IBM’s PC-DOS. Once IBM lost control of the platform they created, power shifted to the one major commonality between the IBM-compatible clones: Microsoft’s operating system. It was IBM’s name that pushed the IBM PC into prominence, but it was the combination of hardware cloning and Microsoft licensing the operating system that created the dominant platform of the PC era, crushing nearly all competing personal computer platforms in the process. Without this seemingly minor clause in this pivotal contract, the history of the PC era could have been quite different than it was.

  • Brad Acker

    Very nice summary of the events leading up to and surrounding this moment in tech history and great analysis of the ramifications of the pivotal contract. It still seems more logical to me that IBM should have been more willing to work out a deal with Gary Kildall, as he was the innovator in early PC operating systems. Gates, according to most accounts, even referred IBM to Kildall. Why IBM was so quickly NOT able to reach a deal with Kildall, but to sign a deal with a young, unexperienced, and seemingly forthcoming Gates who admitted he’d have to buy the operating system from someone else is an important piece of the puzzle. Historians know that John Opel was very friendly with Gates’s mother, and no doubt the IBM PC team knew that Opel would be pleased if IBM could work out a deal with Gates. The other side of the story may be that Gary Kildall’s alcoholism played a part in IBM’s quick reluctance not to want to work out a deal with Kildall, but no one has ever mentioned that for fear of a legal backlash.

    In any event, there is no doubt that luck plays an important part in much of amazing history.

    • Deborah J. Boyd

      The fact that Bill Gate’s father was a contract lawyer that had written contracts for some of the biggest companies in America helped too. What is even more interesting is that IBM made more money because of the “standard” and as a reward or repayment they got WATSON. The cognitive computer has even written a cookbook and designed a dress but when I get to talk to Watson …together we will solve the World’s problems & establish Peace on Earth by 2027! With Ginny as CEO &&& Chairman of the Board …all things are possible. Love & Peace, Deborah a non-profit in the Commonwealth of Virginia.

  • Thank you! Based on what I’ve read, my feeling is that there was definitely a hesitancy on IBM’s part to work with Kildall. Why exactly that was is a mystery. However, I think it was a combination of Kildall’s surliness, IBM’s urgency, and Gates’ opportunism. IBM’s skunkworks team was trying to get the PC to market in one year. They had little time to waste. In Gates they found an expert in the microcomputer world and he was basically leading them by the hand through the software side of things. Gates was already providing some software for the PC and as soon as they ran into issues with Kildall, I can imagine a scenario where Gates saw an opportunity to insert himself and work a lucrative deal. IBM’s skunkworks team was more than happy to let Gates run with it for various reasons, but I’m sure it was as much due to their tight timeframe as anything. By trusting Gates to get the job done, they could focus on other things. It probably is as simple as that, but there are details that would be very interesting to uncover for sure.

    I used to think that Gates was mostly lucky. But the more I’ve studied, I realize that luck was actually the smallest factor. Yes he was somewhat lucky to be in the situation he was in. But I think he put himself in that position over the years. And then once he had certain opportunities in front of him, he made some very shrewd decisions. Snatching the OS deal when he didn’t have one to offer is an example. The clause in this contract being another example. He seemed to have some incredible insight about the personal computer market and was taking advantage of IBM’s position every chance he could. I’m not sure many other people would have had the ambition and guts to do what he did to IBM over the years.

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  • Deborah J. Boyd

    Let me tell you the rest of the story! Prior to the PC, IBM had always built big systems for governments and large companies. Originally they leased everything. The US Federal Government decided IBM was getting too big and should sell their equipment if people wanted to buy it. I have no idea who originated the PC but the CEO & many of the top MEN at IBM thought very few people would want a PC. I honestly think the contract was signed by a lawyer representing IBM that had little or no knowledge of computers. He may or may not have read the clause that gave Bill Gates & Microsoft the right to sell the software (that later became Windows) to anyone which meant someone who knew what they were doing could reverse engineer the hardware. The decision to make DOS = Windows the standard was the best thing for America. The only real competitor was Apple. Now part 2 was when USA Federal Government via Al Gore split DARPA and created the Public Internet. You have seen nothing yet. I finally have a woman as CEO of IBM and she is an engineer while most of the CEOs before her came from sales and marketing. So far she has been one of the best CEOs I have ever seen. Stay tuned for part 2 = Deborah, Queen of Peace works with Watson to solve the Worlds problems and establish Peace on Earth b 2027.

    • Joe90

      Yes you haven’t a clue, at the time IBM was dealing with a decade long antitrust case to do with their software and services. They would sell their computers to anyone, they made most of their profits fromS&S, MS offered a no exclusive licence & IBM were happy to agree to prove to prove they weren’t abusing their position (~70% global computer revenue). As for Apple, they weren’t in the top 10 US computer companies by revenue when the IBM PC came out. Also AG had nothing to do with the internet, it had become international by 1983.

  • Joe90

    So you’re saying that IBM told MS “go license that OS then charge us for it, because it would be stupid for us to speak to them”. 😂

    • Not exactly. IBM asked MS if they could develop an OS. Microsoft said they didn’t have one but they knew of a company that had an OS similar to CP/M, which is what IBM wanted in the first place. So IBM’s group, a small skunkworks team with a tight deadline, told MS to handle the details, including further development, and deliver a working OS to them. The moral of the story is that when working on a tight deadline with limited resources, companies can make decisions that seem silly in hindsight.