As is well-known, Microsoft's negotiations with IBM to deliver PC-DOS 1.0 with the original IBM PC resulted in:

  1. IBM licensing the OS from Microsoft, as opposed to purchasing it outright.
  2. Microsoft retaining the rights to license PC-DOS to others.

The fact that PC-DOS (e.g. MS-DOS) would be licensed to IBM's hardware competitors by Bill Gates famously allowed the PC clone makers to overwhelm IBM, effectively taking over the PC market.

I have seen the story told by several historical commentators that this was somehow a grand, "4D Chess move", by Bill Gates, as he foresaw the huge opportunity for DOS if he retained all the rights and non-exclusivity for IBM.

I also know from other historical commentators that IBM's PC team (known as "Project Chess") was committed to outsourcing everything they reasonably could with the PC to ensure they got it to market quickly and in spite of internal IBM bureaucracy and politics. So, this could have factored into the negotiation too, and would fit with other decisions IBM made at the time re: PC hardware.

So, the question is whether the licensing arrangement was IBM's idea, or was it Bill Gates' foresight to ensure MS-DOS dominance no matter the hardware platform that prevailed?

Note: Conflicting sources seem likely, so I think extra weight for sources privy to the negotiation is appropriate.

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    I think a point that often gets missed is that in December 1980, when MS originally agreed to supply PC-DOS, they didn't have the rights to retain it as their own -- they were simply reselling SCP's software. 7 months later, in July 1981, they seemed to realize as the release of the PC was nearly upon them that it would be a good idea to have complete ownership, and went back to SCP and renegotiated their deal with them. This makes it unlikely that they had any kind of master plan when they were negotiating with IBM. – Jules Nov 20 at 7:05
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    I can see how, with the word "out-maneuver" being part of the question title, some might interpret it to be opinion based. Strictly speaking, knowing that would involve knowing the motivations of all individuals involved. However, I view the question as more historically motivated, "What the heck happened?" So if you look past a poor choice of wording and examine the question as a whole, I believe it is answerable with facts. I thus voted to re-open this question. – RichF Nov 20 at 14:17
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    I can see how the OLD title might have encouraged answers that are just OPINION on whether the negotiating side for Microsoft was more "shrewd" or more "lucky". The NEW title makes it clear that a good answer should offer evidence that IBM wanted the same deal and for good reasons. – Brian H Nov 20 at 14:45
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    @RichF It's always controversial when one's facts challenge a popular myth. – Brian H Nov 20 at 15:28
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    My favourite pull quote from all the various discussions of this through the years: "stories differ". I bet there isn't any discussion of this part of computer history where this phrase isn't used. – jdv Nov 20 at 21:34
up vote 41 down vote accepted

TL;DR: It was IBM's idea.

IBM never intended to buy any of the software they acquired for the PC - and MS never intended to supply any OS beside Xenix.

But MS (Paul Allen) soon recognized the potential business and acted accordingly.


The Long Read

IBM had no interest whatsoever in building up a basic software development for the PC. The strategy was licensing as many off-the-shelf products as possible to level the playing field with existing competition - mostly seen as the Apple II and CP/M world - and give the PC a comparable start. Keep in mind, that, at that time, wasn't any big scale operation, but rather a small project trying the market against much internal resistance.

The main marketing idea for the PC was to premiere with a fully developed system covering everything others had, including the software support of major products. It should present the PC as an established force instead of a newcomer.

It was all about speed, cost, and a complete offering.

They neither had the manpower nor the money to make everything on their own, so they went full licensing. In licensing there are basically three strategies,

  • Buying the product at whole
  • Buying an unlimited, one time license
  • Licensing it on a royalty scheme

The first would have meant that IBM would need to set up the capacity to maintain and further develop the product. Not exactly what the rather small team with an unclear future could do. Also it's the most costly solution.

The third would have kept them reliant on continuous support by the manufacturer and complicate calculations, while at the same time keep investment small.

Their choice for the second was to keep risk small and investment definable.

This strategy created also the only caveat they placed on the whole process: Whoever wanted to license his product for the PC at startup had to sign an NDA to abstain from any, even the slightest comment about the project and his or IBM's involvement. It's often said that this was what killed CP/M as OS choice, as they didn't want to sign up the NDA at first. The real factor was that Kildall insisted on royalty based licensing.

In fact, IBM was almost ready to bite and go that way, as CP/M was de facto the OS for next to every software package they intended to use, with no viable alternative in sight. And that's where Microsoft joined the picture.

Microsoft had no intention to go into the OS market (*1). Their business was languages. They were selling for years successfully CP/M with their SoftCards and happy about the deal. Continuing their language business with the PC - even better, without the investment to do SoftCards and reselling CP/M, was all they wanted.

Before the first machines where handed out, IBM did only share some specs, including CPU Type, RAM configurations, and some BIOS information. Next to all developers did start working on 8086/88 S100 bus systems and working on BIOS level, or using some in-house done CP/M alike - or CP/M-86 as well, as it was available already about 8 months before the PC. Microsoft did use S100 bus systems from Seattle Computer Products - as well as their CP/M ripoff called QDOS - a combination many others used as well. SCP was one of the early suppliers of x86 S100 systems.

So when Bill Gates had a meeting with some IBM representatives, and heard about their problems with Kildall's idea of a royalty based system, he jumped in, and offered to supply a CP/M-like system, since he figured he could license it from SCP without much trouble. This would not only make sure that the languages deal went through, but also reduce development effort, as it was already the environment they developed for. For Gates it was only meant to be a pass-through job with the chance to make a few more bucks atop of what SCP would ask.

He bought a single non-exclusive one-time payment license from SCP, turned around, and sold it to IBM. That way IBM got a mostly CP/M compatible operating system they could even brand as their own (PC-DOS) to allow software companies to port their existing CP/M software. Perfect solution for MS as well as IBM.

Most important, MS could sell their languages to IBM as well as in addition direct to customers. MS-DOS as a business was only picking up after the PC and slow. It wasn't until about a year later, that MS did actively market MS-DOS (*2) This MS-DOS 1.25 deal also included GW-BASIC for the first time as complete replacement for the IBM BASICA.

It's important to note, that it wasn't until 1985 (!) That MS-DOS 3.2 was available as first stand alone boxed product by Microsoft for (compatible) generic PCs (via manufacturers). Until then, each PC manufacturer had to license their DOS especially for their machine. No matter how compatible or not (*4). And it wasn't until DOS 5, before it became an end-customer product.

Well, it was all against their policies and sheer luck... and the rest is history.


*1 - Well, not entirely true, they just had no intention of making something as primitive as their existing MS-DOS again. MS was, at that time, heavy focused on Xenix. Gates believed that Unix was the future and Xenix was his bet. It was published in summer of 1980 for 8086, 68k, and PDP-11 machines (I think Z8000 as well later on). That's even before IBM contacted MS, and MS licensed QDOS.

All the work put into DOS 2.0 making it more Unix-like was meant to position it as a gateway product toward Xenix. DOS 2.0 should make users comfortable with Unix and software portable toward Xenix. They didn't foresee that implementing the most user notable parts of Unix (directories and redirection) to DOS would make it less likely for them to move anyway.

*2 - Well, there were two contracts with Lifeboat (*3) for Generic x86 machines and Sirius for the Victor 9000. And it wasn't until again much later when Columbia Data Products bought MS-DOS for their MPC, the eventually first (mostly) PC-compatible system.

*3 - it might have been the Lifeboat deal that made Gates realize the potential, as they originally tried to by the whole QDOS rights form SCP at ~200k, which did not work out, so they just licensed MS-DOS on a per-copy basis.

*4 - I still remember making good money translating DOS 3.0 manuals for some Taiwanese company into German. Of course I did never peek into the existing German copies of other manufacturers... that would have made the job way too easy:) Yes, back then each, and every had their own manuals and their own translations:)

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    "[Gates] bought a single non exclusive one time payment licence from SCP, turned around and sold it to IBM." -- It's perhaps worth noting that MS actual bought DOS from SCP twice: originally (December 1980) they bought a royalty free license for a cost variously reported as either $25,000 or $100,000; they then returned (July 1981) and purchased exclusive rights for either $50,000 or $200,000. – Jules Nov 20 at 6:55
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    @Jules Yes, except they even didn't buy the whole thing the second time, as SCP retained rights to sell 86-DOS after that. MS had to pay another Million or so in 1985/86 (in time for DOS 3.1) as result of a court case to fully own MS-DOS. – Raffzahn Nov 20 at 12:36
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    And indeed, it turns out that Gates may have been right about Unix, as the emergence of Linux and Apple's adoption of BSD as the base for OS X bear witness. Windows will surely be with us for a long time yet, but I'm presently inclined to think that Unix will still be there when Windows fades away. – John Bollinger Nov 21 at 22:45
  • "The real factor was that Kildall insisted on royalty based licensing." Well now that sounds a lot more plausible than the usual story that Kildall blew off the IBM reps to go and fly his plane and nobody else in Digital Research would sign the NDA. Unfortunately, it's also a lot more boring. – JeremyP Nov 22 at 9:43
  • @JeremyP To my knowledge it was both. The NDA part did happen. He wasn't there when the IBM reps showed up first. They demanded the NDA to be signed frst, and his whife didn't wasn't sure if that is a good idea - it was the days before the mobile phone, even for rich people :) A few days later MS jumped in. DR reoined 3 month later when Kildall learned about the MS-DOS API and threatened to sue IBM over it. But that's a different story. – Raffzahn Nov 22 at 13:55

My wife began work at MSFT in the downtown Bellevue office in late 1981 (approx employee #90-ish) just a couple weeks before the company's move to the highway 520 building next to the Burger King on everyone's speed-dial. She worked with Jeff Raikes and Trisha in CorpComm. Though not software developers, CorpComm people interfaced with many departments and based on those conversations and other reading of mine, this is what I have come to understand regarding MSFT's involvement with the early IBM PC.

Yes, most of PC-DOS was based on SCP's CP/M like OS "QDOS"(?). Mr. Gates III's mother Mary Gates was on the same non-profit board as an important IBM exec. I believe that is originally how Bill found out about the unpublicized work a small team at IBM was doing to develop the IBM-PC. Aside: It's always "IBM-PC" to me because I had a DG-PC: Digital Group Inc personal computer in 1977. A non-S100 motherboard using the Z-80 CPU.... but I digress.

I do not think the owner of SCP: Mr. Kidall, got along all that well with Mr. Gates so Paul Allen (RIP) acted as the intermediary for most of the licensing negotiations between MicroSoft and Seattle Computer Products. SCP was expecting to receive a lump sum fee AND a royalty from MicroSoft to license the SCP version of CPM which Mr. Gates would modify somewhat before in turn supplying it to IBM, receiving Mr. Gates - hoped an ongoing royalty as well. Bill being Bill he ultimately wanted to keep the royalty stream for himself and so at the 11th hour Paul Allen delivered a final draft contract to Mr. Kidall with the lump sum payment but sans any royalty ... take it or leave it. "Iced" SCP had little choice and signed over non-exclusive use of QDOS to MicroSoft, receiving only one payment rumored to be approx $50k.

Here now is where I think things get interesting and my understanding of events differs again from narratives posted above. White dress shirt IBM contract negotiators had no interest in giving little MicroSoft from Podunk NW Washington ANY in-perpetuity royalty payments ... full stop. MicroSoft would receive a one time payment of approx $250k. MicroSoft was contracted by IBM to supply some modifications to a version of CPM so it would run on the new IBM-PC using IBM's BIOS which IBM held exclusive copyright to. BIOS was the key. And as we shall learn Bill knew it even as the white dress shirt IBM negotiators did not.

Mr. Gates very much wanted a royalty, really really really wanted the risk free, work free, manufacturing free stream of revenue pouring into MicroSoft, from the sweat of IBM's manufacturing prowess, but IBM would have none of it. I mean are you kidding, Big Blue paying tiny MicroSoft a forever royalty for a quick onetime software mod job ? Cash the check kid and pretend to be grateful.

However, Bill being Bill, he cajoled and annoyed until when asked if MicroSoft could at least sell PC-DOS to other personal computer manufacturers also running BIOS, IBM relented and said sure, why not, believing (mistakenly) that because IBM owned every part of the BIOS and had no intentions of ever allowing any other company to use it, Bill would own the rights to a Black Swan. And yet Bill indeed was Bill and knew some clever software geeks could and would someday reverse engineer IBM's crown jewel BIOS.

Enter our Black Swan:COMPAQ, which did indeed reverse engineer IBM's BIOS in a clean room, at a cost of $1-million, and some could argue at a cost to IBM of monopoly control and profits in PC's, relinquishing the future of computing profits to WinTel. MicroSoft having won the right to sell PC-DOS to others now became MSFT. The business genius of Mr. Gates was seeing around corners others could not combined with corporate ruthlessness (stiffing, Icing SCP and Kidall, head faking IBM). COMPAQ changed everything and Bill knew arrogant IBM could be expected to miss it entirely. Last minute, seemingly adhoc but precisely calibrated contract changes are a talent of Mr. Gate's in my opinion. His father Mr. Gates Senior is a very good attorney, while his mother Mary Gates worked tirelessly with many non-profits in the Seattle/Bellevue area. I think Bill's admirable devotion to effective philanthropy is a testament to both.

That is my rough understanding of the events.

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    I think you have the owner name wrong. Kidall (Gary) was owner of DR (CP/M). Tim Patterson was owner of SCP. – mannaggia Nov 20 at 11:58
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    @mannaggia Almost. Tim Patterson was a programmer working at SCP and 'rented out' to MS. Rod Brock was the owner of SCP. – Raffzahn Nov 20 at 12:32
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    "Mr. Gates III's mother Mary Gates was on the same non-profit board as an important IBM exec. I believe that is originally how Bill found out about the unpublicized work a small team at IBM was doing to develop the IBM-PC." -- maybe it's how he found out, but I don't think this is really important: the idea that IBM would have launched their PC without at least talking to Microsoft about BASIC interpreters is absurd. IBM's team had decided to avoid using their own software as far as possible, and MS's BASIC was by far the most popular option they could buy. So Gates would have known anyway. – Jules Nov 20 at 15:44
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    @mannaggia That is a BIG problem with this answer. Digital Research and SCP were two different companies. SCP's DOS was NOT "a version of CP/M". – manassehkatz Nov 20 at 22:22
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    To the anonymous editor: Note that the original spelling of the company name was Micro-Soft. – Alex Hajnal Nov 20 at 22:52

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