The Rise of DOS: How Microsoft Got the IBM PC OS Contract

Perhaps the most controversial aspect of the IBM PC is how Microsoft ended up with the contract for the operating system, which would eventually make Microsoft's MS-DOS the standard and set the stage for Microsoft becoming the leading PC software company.

As usual, there are lots of conflicting reports about the details that made this happen, but it mostly seems to be a case of Bill Gates and his company seeing the right opportunity at the right time, and then executing well on the concept.

In the early PC market, Microsoft had established itself as the largest producer of computer programming languages, notably with an interpreted version of the BASIC language that had become the default standard on just about every major PC to date. Meanwhile, Digital Research Inc. (DRI) had become the leading operating system vendor with its CP/M (Control Program for Microcomputers) operating system, which was designed for the Intel 8080 processor (and later used on the Zilog Z80) and used on machines such as the Osborne 1, Kaypro II, and even the Apple II using a Z80 "Softcard" from Microsoft.

Back in July 1980, before Project Chess was formally approved, IBM first sent a team led by Jack Sams, who would be the director of software development, up to meet with Microsoft to discuss the PC market, but the talks seem to have been in general terms, with IBM not disclosing many details of the actual PC.

After the project was approved, on August 21, Sams and his colleagues went back to Microsoft and discussed licensing Microsoft's languages for the IBM PC, including not just BASIC, but also COBOL, FORTRAN, and Pascal. Microsoft had already been working on 8086-based languages for other companies, so it seemed a logical fit.

In just about every account of the meeting, IBM asked Microsoft about operating systems, and Bill Gates referred IBM to Digital Research, even getting Digital Research founder Gary Kildall on the phone to arrange a meeting for the following day.

But there are many somewhat conflicting stories about what happened when IBM went to meet with Digital Research. Gates is quoted in Fire in the Valley as saying "Gary was out flying" that day, but Kildall always denied the implication, telling the authors of Hard Drive that he had flown on a business trip to the Bay Area.

IBM and its lawyers met with Kildall's wife, Dorothy McEwen, and presented Digital Research with a one-sided non-disclosure agreement, which the company refused to sign. Later, Sams would tell the authors of Hard Drive that IBM just couldn't get Kildall to agree to spend the money to develop a 16-bit version of CP/M in the tight schedule IBM required. But whatever the reason, it's clear that IBM left Digital Research without an agreement on an operating system.

IBM communicated its problem to Microsoft later that month, and Microsoft's Gates, Paul Allen, and Kay Nishi apparently debated what to do about the program. Allen knew of an alternative: Tim Paterson of Seattle Computer Products (SCP) had earlier built an 8086-based prototype computer and while he was waiting for CP/M to be ported to the 8086, he created a rough 16-bit operating system for it. Paterson called it QDOS for Quick and Dirty Operating System, and according to Allen, it all fit within 6K. (It would later be renamed 86-DOS, and sometimes referred to as SCP-DOS.)

By most accounts, Nishi was the one most strongly in favor of Microsoft getting into the operating system world, and Allen says in his autobiography that Gates was less enthusiastic.  In any case, Allen called Seattle Computer Products owner Rod Brock, and licensed QDOS for $10,000 plus a royalty of $15,000 for every company that licensed the software.

In Big Blues, Sams is quoted as saying Gates told him about QDOS and offered it to IBM. "The question was: Do you want to buy it or do you want me to buy it?" Sams says. But since IBM had already had decided to go with an open architecture, it wanted Microsoft to purchase it. Besides, Sams says, "If we'd bought the software, we'd have just screwed it up."

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.

Indeed, Microsoft would soon realize that under the name MS-DOS, the new operating system would be crucial to the success of Microsoft. In May, 1981, Paterson left SCP and joined Microsoft and on July 27, 1981, Allen and Brock signed a contract selling DOS to Microsoft for $50,000 plus favorable terms on upgrades of the languages.

According to Big Blues, Don Estridge, who headed the IBM PC project, said one reason the company went to Microsoft in the first place was because Microsoft BASIC had hundreds of thousands of users, while IBM's BASIC, while excellent, had few users. According to Fire in the Valley, he also reportedly told Gates that when IBM CEO John Opel heard Microsoft would get the contract, he said "Oh is that Mary Gates' boy's company?" since Opel and Bill Gates' mother served together on the national board of the United Way.

Still, the controversy over DOS and CP/M continued. For years, Kildall and Digital Research would claim that Paterson's QDOS just copied CP/M. (Recall in that time, software could not be patented, though it could be copyrighted.)

In Big Blues, Kildall was adamant that a lot of QDOS was stolen: "Ask Bill [Gates] why function code 6 [in QDOS and later in MS-DOS] ends in a dollar sign. No one in the world knows that but me."

But Paterson always denies it, telling the authors of Hard Drive, "At the time, I told him [Kildall] I didn't copy anything. I just took his printed documentation and did something that did the same thing. That's not by any stretch violating any kind of intellectual property laws. Making the recipe in the book does not violate the copyright on the recipe."

Paterson said his goal was to make it as easy as possible for software developers to port their 8080 programs to the new OS, so he used Intel's manual for translating 8080 instruction into 8086 ones, then got Digital's CP/M manual and for each function, he wrote a corresponding 8086 function.

"Once you translated these programs, my operating system would take the CP/M function after translation and it would respond in the same way," said Paterson. "To do this did not require ever having CP/M. It only required taking Digital's manual and writing my operating system. And that's exactly what I did. I never looked at Kildall's code, just his manual."

Big Blues says Kildall considered suing IBM and Microsoft over DOS, but IBM mollified the company by offering to make the 16-bit version of CP/M also available on the PC. Indeed, when it actually came out the IBM PC would run three operating systems -- DOS, CP/M and the UCSD p-system. But CP/M was priced at $240 vs. $40 for DOS (likely because of the non-royalty terms of the Microsoft contract), and it was clear that IBM was intent on pushing DOS.

Thanks to the non-exclusive agreement, Microsoft then had the rights to sell DOS for other machines, and that in turn set the stage for Microsoft to dominate the PC operating system industry for years.