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.
