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.

  • 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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