6

It is well-known that on a sunny day in 1980, when the IBM representatives came knocking on the door of Digital Research, Gary Kildall was still in the air on the way back from visiting another customer, which got the meeting off to a bad start. By the time he got there, his wife Dorothy had objected to signing the one-sided IBM nondisclosure agreement, which further displeased the blue-suited contingent. From the accounts I can find, the third strike came in a subsequent meeting when IBM wanted to purchase CP/M outright for a flat fee and DR insisted on royalties.

IBM subsequently licensed MS-DOS (nee QDOS) from Microsoft in a deal that involved royalty payments and a nonexclusive license; the latter aspect turned out to be consequential indeed. I find it interesting that they gave Microsoft better terms than they were willing to offer DR. Perhaps they liked Microsoft better, perhaps Microsoft being also the vendor of languages had more bargaining power, perhaps word came down from on high that the son of Mary Gates was due some slack, perhaps IBM just realized they were running out of time and options? I haven't been able to find any clear indication of why.

I am particularly curious though about exactly what deal DR was offered. The phrase 'purchase outright' could be taken as a proposed sale of CP/M in its entirety, but since it was essentially their only product, that would have amounted to a sale of the company, so that sounds unlikely. I'm guessing most likely it would've been the deal Commodore gave Microsoft for what became CBM BASIC 2.0: a perpetual nonexclusive royalty-free license for that particular version. But would it have allowed or involved IBM maintaining it themselves from that point on? Or would they have come back to buy future versions from DR? (Bill Gates hoped Commodore would do that; he didn't count on Jack Tramiel seeing too little value in software.)

And if it would indeed have been a nonexclusive license, does that mean history would have unfolded essentially as it did in our timeline, just with the PC clones running CP/M instead of MS-DOS?

So: what exactly were the terms that IBM offered and Digital Research turned down?

Edit:

Okay, found a dimly-remembered reference at last!

https://arstechnica.com/gadgets/2017/07/ibm-pc-history-part-2/

"One point Gates carefully stipulated: Microsoft would licence all of this to IBM, not outright sell it to them, and would expect to be paid on a per-copy royalty basis... On November 6 [1980], Microsoft and IBM officially signed the contract, which immediately paid Microsoft $700,000 to begin porting all of this disparate software to the new architecture."

So IBM did pay for the porting work. That makes sense; it would be weird to expect a relatively small company like Microsoft to be completely out-of-pocket on that.

But the part about Microsoft insisting IBM pay a royalty per copy, flat-out contradicts sources quoted by answers so far.

That matter is further discussed in answers to Did IBM encourage Bill Gates to retain the rights over PC-DOS? and while some of those details contradict each other or other sources, the best synthesis looks like: Microsoft tried to insist on royalties, IBM refused (though with a flat fee closer to the $200k they offered DR) but was willing to make the license nonexclusive.

  • Mind to add sources for the claims about 'purchase' ? – Raffzahn Jan 10 at 23:12
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    @Raffzahn I didn't have links to hand, but traal gives references in the accepted answer. – rwallace Jan 10 at 23:15
  • Sorry, but neither of his links uses the phrase (or even the word purchase allone) your question is based on. So when asking this, some reference beside your memory would still be helpful. – Raffzahn Jan 10 at 23:25
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    @Raffzahn Okay, found a reference at last. – rwallace Jan 11 at 21:11
  • While it' a nice article, i can't find any passage for your claims about outright purchase. – Raffzahn Jan 11 at 23:45
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The sticking point: IBM wanted to pay a flat $200,000 license fee to get a royalty-free license in perpetuity. Kildall wanted more.

Bill Gates came up with a similar operating system. He gave DOS away to IBM for $50,000 and figured, correctly, that he could get rich by licensing the system to other computer manufacturers.[1]

Now, earlier in the year Seattle Computer Products who produced an 8086 computer kit hired Tim Patterson [sic][2] to create an operating system to run on their machine. Digital Research were slow in producing CP/M-86 and SCP thought it was hurting sales of their computer, so Tim wrote a system with the look-and-feel of CP/M for the new machine and called it the Quick and Dirty OS, QDOS. SCP started shipping QDOS in August and they showed it to Microsoft in September when Microsoft modified the BASIC for the machine. So, there right under Microsoft's nose was an operating system just at the time when they needed one. In October Paul Allen from Microsoft contacted SCP and for just $50,000 bought the rights to sell QDOS, without telling SCP that it was for IBM.[3]

Gates, Steve Ballmer and Microsoft's Bob O'Rear met with IBM in Boca Raton and agreed that Microsoft would coordinate the software development process for the PC. According to Allen, under the contract signed that November, IBM agreed to pay Microsoft a total of $430,000, including $45,000 for what would end up being called DOS, $310,000 for the various 16-bit languages, and $75,000 for "adaptions, testing and consultation."

What's notable about this is that IBM apparently was expecting Microsoft to ask for more money upfront or at least as for a per-copy royalty, but instead Microsoft wanted the ability to sell DOS to other companies.[4]


References:

[1] Young, J. (1997, July 7). Gary Kildall The DOS that wasn't. Retrieved from https://www.forbes.com/forbes/1997/0707/6001336a.html

[2] The correct spelling is "Paterson" according to the man himself: http://dosmandrivel.blogspot.com/

[3] (1998, 1 August). A Short History of CP/M. Retrieved from http://landley.net/history/mirror/cpm/history.html

[4] Miller, M. (2011, August 11). The Rise of DOS: How Microsoft Got the IBM PC OS Contract. Retrieved from https://uk.pcmag.com/opinion/111712/the-rise-of-dos-how-microsoft-got-the-ibm-pc-os-contract

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    So Microsoft actually made a hefty loss on the IBM deal per se (the fee only barely covered what they paid SCP, so they were out of pocket for all the work they put into it); Bill Gates was purely gambling on the rise of the clones. Interesting! I wonder what IBM thought Gates was thinking. And if Kildall regretted missing the deal so early, it means he was a better strategist than he is sometimes made out to be. – rwallace Jan 11 at 1:01
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    @rwallace Based on an interview with Bill Gates in Triumph of the Nerds, Microsoft also included BASIC in that $50,000 deal. – a CVn Jan 11 at 15:10
  • Hmm, found a couple of references that give different figures, see edit to post. – rwallace Jan 11 at 21:12
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    @rwallace Added more numbers with another reference. I wish the contract itself were available for examination! – traal Jan 11 at 21:41
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To my knowledge there was never an intention by IBM to 'purchase' CP/M. They planned the same deal as with any other package, OS, language or application, they acquired to be available under their brand at system introduction:

A single, non exclusive, one time license fee, independent of sales figures or time.

This strategy is quite understandable, considering that IBM wasn't sure about the success of the PC. A one time payment also did fit quite well IBMs internal project accounting structure, as it could be booked like a purchase .. one of the usual strange effects of a large company:))

For CP/M this almost was changed, as the OS was seen by IBM as a must as only machine independent OS within the capabilities of the PC, promising easy conversion of customers from other systems due compatibility. The often cited NDA was only a minor issue, and they where already about to give in, when Mr. Gates made his pitch. And the rest is history.

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    Could you add sources? – Thorbjørn Ravn Andersen Jan 11 at 2:13
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    "They planned the same deal as with any other package" - I'm pretty sure IBM sold lots of products on a per-license royalty basis, is this really "any", or even "mostly"? – Maury Markowitz Jan 11 at 15:23
  • For the PC project , it was this scheme. Ofc, IBM is a larger company than just the (back then) tiny PC division. – Raffzahn Jan 11 at 16:47

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