The Gate Comes Down - Fire in the Valley (2014)

Fire in the Valley (2014)

Chapter 8
The Gate Comes Down

We got creamed.

Don Massaro, president of Xerox’s office-products division

In the years since they had left Albuquerque for their native Bellevue, Washington, Bill Gates and Paul Allen had established a successful software business specializing in programming languages for personal computers. The BASIC they had originally written for the MITS Altair was still their most popular product, a standard in an industry with few standards. In addition, Gates and Allen had introduced other programming languages, like mainframe-originated FORTRAN and COBOL, to personal computers. They even had a hardware product, a card for the Apple that would let it run Microsoft’s 8080 and Z80 software. Tim Paterson of Seattle Computer Products, located across Lake Washington, had been instrumental in developing that.

Gates, 24, and Allen, 27, were pleased with their accomplishments. Microsoft was racking up $8 million in annual sales and it employed 32 people, most of them programmers. But in July 1980 they became involved in a project that would jolt and transform their company and the entire personal-computer industry.

By 1980, dozens of personal-computer hardware and software companies were running businesses that were fundamentally sound, if not earth-shattering success stories. It was the success of Apple Computer that notified the world that personal computers were serious business. The growth of this garage operation into a large company, Apple’s enormous annual sales increases, and the proliferation of smaller companies writing software and making add-on hardware for the Apple II convinced skeptics that the personal computer was not another hula hoop.

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Figure 78. Bill Gates and David Bunnell Just a few years after working together at MITS, they meet here as the software entrepreneur demonstrates a program to the magazine entrepreneur.

(Courtesy of David Bunnell)

The biggest skeptics had been the large minicomputer and mainframe corporations. Some of them, like Digital Equipment Corporation and Hewlett-Packard, had even rejected employee proposals to build personal computers in the early 1970s.

There were many reasons why the established computer companies were slow to embrace this new market. Prior to Apple’s success, they could still question the very existence of a market for personal computers. Besides, for non-IBM companies, the established markets already offered sufficient risks. Launching an unproven product is perilous, and while a start-up company has relatively little to lose, an established firm can damage its reputation badly by plunging into untested waters. The expense was higher for the established companies, too. Their engineers’ salaries for assessing the feasibility of a personal computer alone could cost a big company more than MITS and Proc Tech ever spent on research and development. The company would also need prototypes and market research, which cost more money.

Finally, there was the seemingly intractable problem of the sales force. Engineers who understood their inner workings sold large computers one at a time. The transaction often involved several visits, long phone calls, and many hours of a highly trained professional’s time. In this system, the cost to a company of selling a mainframe would easily exceed the total price of a personal computer. This method was clearly inappropriate for personal computers, but no large computer company was eager to explore new approaches and perhaps alienate its own sales force in pursuit of a chimerical market.

But Apple proved that the “niche” personal-computer market was very real indeed. It no longer took much vision to see that a company with a well-designed machine, some marketing savvy, and the funds for promotion could reasonably expect to sell personal computers at a profit. It was inevitable that the big boys would jump in.

The Luggable Computer

Early personal computer companies were managed by amateurs who deluded themselves into believing that their transient success had something to do with good management or foresight.

–Adam Osborne, personal-computer pioneer

This situation was not lost on Adam Osborne. In 1980, Osborne, who had been involved with microcomputers from the start, from writing microprocessor manuals for Intel to launching a line of computer books and writing a popular industry-watching column in a computer magazine, decided to get much more deeply involved.

From the Fountainhead

As one of the most quotable figures in microcomputing, Osborne had a tongue as glib as his pen. His commanding, distinctive voice, highlighted by a precise British accent, seemed to find the right word at all times, and his delivery convinced his listeners that he had stated the matter in its finality. Osborne had gained a good deal of notoriety in the field from his writing—first books on microprocessors and then columns in Interface Age and InfoWorld.

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Figure 79. Adam Osborne Osborne wrote manuals for Intel, created a computer-book publishing company, wrote an influential column for computer magazines, and founded the first company to produce a portable personal computer. (Courtesy of David Carlick)

His column began with straightforward analyses of Silicon Valley chip technology. But Osborne quickly gravitated to other issues, and soon wrote muckraking indictments of computer companies. He was particularly critical of the common practice of preannouncing items and then bankrolling their development with money from the ensuing orders. Silicon Valley was the source of his information, and he called his column “From the Fountainhead.” Osborne had never been accused of toe-scraping humility, and many readers plausibly assumed he meant the title to refer to himself.

Osborne felt comfortable writing exposés about the industry because he was not directly involved in it. But the Berkeley-based computer-book publishing company he founded as an offshoot of his microprocessor consulting business attracted the attention of McGraw-Hill. After he sold the book company, now called Osborne/McGraw-Hill, he began looking for something else to do.

For a long time, Osborne believed that computers should be portable—a pipe dream in those days. Portability would be the next product innovation, he felt, a fact that companies did not yet understand. During visits to computer shows, Osborne met industry pioneers like Bill Gates and Seymour Rubinstein and sought their reaction to this idea. “At first he was saying, ‘Why doesn’t someone do this?’” recalled Gates. “And the next thing I knew it was, ‘It’ll be called the Osborne 1.’”

Lee Felsenstein’s Next Project

On a hot day in June 1979, Lee Felsenstein was on the auditorium floor of the National Computer Conference in New York City. No one had told him that Processor Technology, the company for which he was consulting, had folded. He waited, patient but sweating, with the prototype of his latest Proc Tech board in hand until it sank in that Bob Marsh and Gary Ingram were never going to show up.

Felsenstein returned to Berkeley, where he tried to drum up business to offset his lost Proc Tech royalties. He tried selling the design of the last Proc Tech board, an enhanced version of his VDM video board, to other companies, but had no luck. He undertook various freelance projects. The jobs offered him a bare subsistence—he was particular about the kinds of work he would accept. “I was running into the ground,” he said. “I was just waiting for the opportunity to do what I wanted to do and closing my eyes to the monetary considerations.”

Felsenstein recalled an evening later that year when he sat wire-wrapping video boards late into the night while listening to the Berkeley alternative radio station KPFA. The disc jockey played the romantic ballad “The Very Thought of You” six times in a row. As it ended the first time, Felsenstein continued his work and wondered what song would be next. Up it came again and again and again.

“That was the low point,” he says. “It was as if I was trapped; the sun was never going to rise; I was just going to have to keep going and going and going. The rest of the world didn’t exist, and all I would do was listen to this song and keep working.”

Things didn’t improve much for Felsenstein in 1980. In February, he moved into the Berkeley barn that housed the Community Memory project he had helped start before hooking up with Marsh. The “barn” was a big room with a black ceiling, white walls, and many sandblasted wood beams, evidence of the “earthquake proof” architecture of the early 1900s. As Community Memory’s founder, he expected that he wouldn’t have to pay rent. Unfortunately, Community Memory was teetering financially and Felsenstein found his living situation growing more and more precarious.

His luck finally took a turn for the better at the West Coast Computer Faire in March, when Adam Osborne approached him with a bold assertion: he was going to start a hardware company and he was “going to do it right.” Felsenstein told Osborne, “You took the words right out of my mouth.”

Osborne and Felsenstein knew each other through Osborne’s publishing company, for which Felsenstein reviewed books and consulted on technical projects. Felsenstein showed Osborne a batch of his unsold designs, including a controller that “would have been able to control a room full of joysticks and run a group space war game.”

Osborne summarily rejected those ideas. He knew what he wanted. He was going to sell a personal computer and offer bundled software—that is, application software included with the machine. Until then, hardware and software companies served the same consumers but did not work together on purchases. Osborne knew that novice computer buyers often were confused about what software they needed. By offering the most common applications—word-processing and spreadsheet programs—packaged with the computer, Osborne thought he could attract buyers.

Oh, yes. And the computer would be portable.

Assembling the Pieces

Osborne’s plan to produce a portable personal computer at this early stage was ambitious but he approached it pragmatically. He didn’t want state-of-the-art hardware for its own sake; he wanted only those innovations necessary to make the computer easy to carry. Thinking portable, he asked for a 40-column display. The Sol had 64. Felsenstein split the difference and gave him 52. Osborne wanted the computer to fit under an airplane seat. Felsenstein obliged by minimizing the number of lines of characters on the screen so that the screen would be tiny enough—only five inches—to leave room inside for cushioning the CRT. Because people would tote the machine around, they would inevitably drop it. Felsenstein designed it to survive a drop test, and that meant adding cushions.

He also came up with a display innovation that would be rediscovered decades later when designers tried to figure out how to display a web page on a smartphone screen. He stored a larger screen’s worth of information in memory and gave the user a way to scroll the information on that screen across the tiny display. The user saw what seemed to be a sheet of paper sliding behind the glass.

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Figure 80. Lee Felsenstein Here Felsenstein is surrounded by some of his inventions, including the Sol and Osborne computers. (Courtesy of Levi Thomas)

Serious microcomputers at that time had two disk drives, so Felsenstein put two in the Osborne 1 as well. Not confident that high-density drives could tolerate rough handling, he used relatively primitive drives that gave the machine adequate but unimpressive storage.

“Adequacy,” Osborne pronounced, “is sufficient.”

The machine had a Z80 microprocessor, 64K of memory, and standard interfaces to devices—typical fare for the time. But it was designed, from its overall dimensions down to the disk pockets Osborne insisted on, for portability. Compared to the thin notebook computers in years to come, “luggabality” might be a better term, but there was a handle and you could fit it under an airplane seat.

Osborne then set out to get the software that he would bundle with his computer. He needed some simple programs, tools that would facilitate software development. He called Richard “The Surfer” Frank, a sandy-haired Silicon Valley software developer. Frank made a variety of contributions to the company and even provided space to work early on.

For the operating system, Osborne turned to the industry leader: Gary Kildall’s CP/M. For the programming language, BASIC was the obvious choice. Osborne had two widely used versions to choose from. Because the two BASICs had complementary virtues, he decided to offer them both and made deals with Gordon Eubanks for CBASIC and Bill Gates for Microsoft BASIC. Osborne also needed a word processor.

In 1980, the man with the leading word processor was Seymour Rubinstein, president of MicroPro. Osborne gave Rubinstein a part of his company in exchange for WordStar at a bargain price. Osborne had also offered Gates, Kildall, and Eubanks stock in the company. Only Kildall refused, on principle, to avoid the appearance of favoring one customer over another. Gates turned down a position on Osborne Computer Corporation’s board of directors but accepted the stock in exchange for a special deal on Microsoft BASIC. Osborne offered Rubinstein more—the presidency of the new company. Rubinstein turned it down and instead took the position of board chair. He thought Osborne’s idea was so good, though, that he invested $20,000 of his own money in the company.

Unable to make an acceptable deal with Personal Software for the spreadsheet program he needed, Osborne turned to Richard Frank and his company Sorcim to develop a spreadsheet program, which Frank called SuperCalc. The per-copy market value of Osborne’s software now totaled almost $2,000, and he planned to include it all in the basic price of the machine.

Up to now, most of the design work was done in the Community Memory building, but in January 1981 Osborne Computer Corporation filed for incorporation and obtained office space in Hayward, California.

Skyrocket to Success

Osborne introduced his Osborne 1 at the West Coast Computer Faire in April, where it was the hit of the show. People jammed his booth. Osborne towered over the others and seemed to be gloating. The machine was no technological marvel, but it was a bold step forward. Not only would it prove to be the first commercially successful portable computer; it was the first personal computer to come with all the software an average buyer needed. This made the purchase a much easier decision, a fact that would help to open the market to more people. And then there was the price. At $1,795, it was said that Osborne was selling software and had thrown the computer in for free.

True, there were snide comments from those—including the irascible Bill Godbout—who remembered Osborne’s tirades against manufacturers who took customers’ money before making the products, and who now saw Osborne doing the same thing himself. But in September 1981, Osborne Computer Corporation (OCC) had its first million-dollar-sales month. New companies quickly sprang up trying to duplicate or improve on his design, and others seized on his ideas of portability and of including software in their system packages.

The $1,795 price became a target. The Kaypro portable contained software similar to that of the Osborne 1 and had the same look and the identical price. George Morrow’s Morrow Designs also brought out a machine for $1,795, and Harry Garland and Roger Melen of Cromemco introduced one for $5 less.

But whatever their merits, none of the portables, none of the machines with software included, and none of the other $1,795 wonders had the impact of Adam Osborne’s first venture into computer manufacturing. One of the industry’s early participants had further advanced the development of the personal computer, and the Osborne 1 quickly became one of the new industry’s top-selling personal computers, reaching a peak sales rate of about 10,000 a month.

Since Osborne’s initial business plan called for selling 10,000 total, OCC had certainly skyrocketed to success. Staying there was another matter.

The HP Way and the Xerox Worm

One of the things [Hewlett-Packard] learned is that closed architectures aren’t going to work, that you really have to depend on third-party suppliers.

–Nelson Mills, project manager, Hewlett-Packard

Osborne was among the last pioneers to open new territory before civilization arrived. After the Osborne 1 appeared in 1981, the big companies really did begin to enter and transform the market. Soon IBM, DEC, NEC, Xerox, AT&T, and even Exxon and Montgomery Ward were thinking about producing a personal computer. Some companies, like Hewlett-Packard, had started much earlier, though.

Project Capricorn

Hewlett-Packard hadn’t rejected Steve Wozniak’s Apple I design because it didn’t believe in the idea of a personal computer. It did. HP built large computers as well as calculators, so it understood how to sell relatively inexpensive, personal technology products. There are many reasons why HP may have turned Wozniak down. One is that his machine did not lend itself to mass production. As Jobs later acknowledged, “it was designed to be built in a garage.” It was also true that the Apple I was not a machine for the engineers and scientists who made up HP’s primary market. Woz was clearly told that the Apple I was more appropriate for a start-up company than for HP. He may also have even been turned down because he had no university degree, which would not have been surprising at any established computer company at that time. Those reasons aside, HP had another reason to reject a personal-computer design in 1976: it was already working on one of its own.

In early 1976, a crew of engineers at HP’s Cupertino, California, facility began to coalesce around a project with roots in its calculator technology. Chung Tung, the engineer in charge of Project Capricorn, brought in engineer Ernst Ernie along with Kent Stockwell to direct the hardware design and George Fichter to oversee software. There was no shortage of talent at HP, and Capricorn was a significant project.

Initially, Capricorn was intended to be a computerlike calculator but more elaborate than any of HP’s small machines. HP already made highly specialized calculators. The calculator-market war that had driven Ed Roberts to create the Altair had not hurt HP as much as it had other calculator manufacturers because HP had concentrated on scientific calculators that did more and sold for more than the less expensive commercial versions. Capricorn was at first intended to have a liquid crystal display, like a calculator, but with several lines instead of one. It would be a desktop BASIC-language calculator. By summer the project had redefined itself, and Capricorn was ornamented with a cathode-ray tube, a significant change both in terms of manufacturing costs and the potential market for the machine. Capricorn was gradually turning into a computer.

HP was perhaps better suited to develop a personal computer than any other established computer company—with the possible exception of Xerox. HP was headquartered in Silicon Valley, near most of the semiconductor companies and in the midst of the growing micro mania. Some of the Capricorn engineers were actually hobbyists like Woz, working on their own homebrewed systems. HP also had far more resources to devote to creating such computers than the garage start-ups. By the time they finally designed a machine, the Capricorn staff had grown to more than a dozen engineers and programmers.

This computer was becoming quite distinctive. It was to have a small built-in printer, a cassette-tape recorder for data storage, a keyboard, and a display, all in one desktop package that was smaller than the Sol (which had not appeared yet and would not include an integrated display or data storage—let alone a built-in printer—when it did). Its chip was also ahead of its time—but this was not necessarily an advantage. In 1976, the only microprocessor that looked feasible was the Intel 8080, the Altair’s chip, but the Capricorn team wanted one better adapted to its purposes, and turned the problem over to another HP division. Hence, Capricorn got its own HP-designed proprietary microprocessor. It was a decision some members of the team later regretted.

Another problem soon emerged. In the fall of 1976, in a corporate-level decision, the project was moved out of Silicon Valley to HP’s offices in sleepy Corvallis, Oregon, a shift that played havoc with the schedule and damaged morale. Woz, who more than anything else wanted to design computers at HP, seriously considered joining the Capricorn team and moving to Corvallis. He thought he would like living in Oregon, and he wanted to get in on the project. But HP turned him down.

Then in October, Mike Markkula made his first visit to Steve Jobs’s garage, and Woz began being pulled into Jobs’s plan to start a company. Unlike Woz, many other Capricorn engineers felt that Corvallis was exile, that they were being asked to leave the center of the universe and move into the void. Some elected not to move and dropped out of the project. When others did make the move, they found the plant wasn’t ready for them. At first, programmers had to commute 70 miles to do software development on the nearest mainframe computer.

Missing the Window

For all the delay, however, the Capricorn team was progressing. By November they had developed a prototype. It had no tape drive, printer, or display yet, and the CPU chip and certain other microprocessors the engineers wanted for controlling peripherals were still in the layout stage. In 1977 they solved the tricky problems of mixed technologies that were posed by building a printer into the computer. Finally, the chips began to appear. During a visit of the corporate brass, one executive vice president told the engineers that the machine needed more I/O ports on the back to connect it with other HP devices or to allow future capabilities to be added. It was a little late to suggest significant design modifications, but the changes were made. Together, the move and the modifications helped Capricorn slip a full year behind schedule.

When project became product in January 1980, it was an attractive, solidly engineered machine, but relatively expensive—even given its capabilities—at $3,250. It was called the HP-85 and had a 32-character display, almost as wide as the 40 characters on Wozniak’s Apple II.

Although the HP-85 sold well enough for HP’s purposes and led to a series of related machines, it did not set cash registers ringing as the Apple II did. Then again, it wasn’t designed to—HP sold it not as a business machine but as a scientific and professional one. Nevertheless, HP’s sluggish pace in completing and marketing the product unquestionably hurt sales. By the time this machine with its built-in cassette-tape drive came out, the field was moving toward using floppy disks, which were more reliable than tape cassettes and stored much more information. Moreover, the HP-85 cost more than some of these floppy disk–based systems.

In the long run, though, the HP-85’s greatest flaw may have been its closed system design that required HP software and HP peripherals. When the Apple II was released in 1977, the Capricorn team believed their machine would compete well with it. But by the time the HP-85 appeared three years later, some Capricorn programmers were privately conceding the general and business market to Apple. There was real irony here because the Apple II’s 40-column, lowercase display was clearly inappropriate for basic applications like word processing and report generation, and its 6502 processor was no number cruncher. Apple machines eventually got 80-column upper- and lowercase display capabilities, but only because Wozniak left the architecture open and others created the necessary boards and software. Third parties were continually improving the Apple II, whereas they were shut out of the HP-85. HP soon concluded that the closed architecture had been a mistake.

Still, HP had beaten the other established computer companies into the market by more than a year, and the HP-85 and its successors carved out a solid market niche for themselves. The next big manufacturer to introduce a personal computer fared less well.

The Alto

Xerox had made its name in photocopying machines, but the company had flirted with computers as well, and maintained close ties with Silicon Valley. After acquiring Scientific Data Systems, a computer company in El Segundo, California, and renaming it Xerox Data Systems (XDS), Xerox became one of the dwarfs—the seven mainframe computer companies living in IBM’s shadow. XDS, however, was a financial millstone, and Xerox finally sold it, although it retained the El Segundo facility itself for some integrated circuit and electronics design and systems programming.

Xerox purchased Shugart, the disk-drive manufacturer, in the winter of 1977—1978. Don Massaro, president of Shugart through the early 1970s, recalled that in the days before Apple soared to its zenith, young Steve Jobs was in his office nearly every week nagging him to devise a disk drive that personal-computer users could afford. Massaro and his colleague James Atkinson did just that, helping make Apple and Shugart leaders in their fields. When Xerox bought Shugart, it acquired that wedge in the personal-computer market, and it also got Massaro, who proved instrumental in Xerox’s foray into the market some years later.

At PARC, its research center in Palo Alto, Xerox had attracted some talented people. Hungarian-born Charles Simonyi, who had learned programming on a Russian vacuum-tube computer and had degrees from Berkeley and Stanford, worked there. Also working at PARC was John Shoch, who finished his PhD at Stanford while helping get PARC started, and the fiercely independent but farsighted Alan Kay, who adorned his desk with a cardboard model of his dream computer—a machine that Kay called Dynabook, powerful and yet small enough to fit in a book bag. Larry Tesler brought the newest programming techniques to his PARC software. Bob Metcalfe was involved in a technique for networking computers.

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Figure 81. Bob Metcalfe While working at Xerox PARC, Metcalfe cocreated Ethernet, which became the standard for networking computers.

(Courtesy of Richard Shoup)

Over several years these engineers and programmers, building in part on the revolutionary work of Douglas Engelbart, created an impressive workstation computer called the Alto. The Alto boasted an advanced language called Smalltalk, an input device borrowed from SRI called the mouse, and that networking technique of Bob Metcalfe’s called Ethernet for connecting individual Altos for communication and cumulation of effort, as if they were one big computer. Xerox referred to the whole arrangement as the “office of the future,” and it was both visionary and technically sound. Xerox marketed Altos to government agencies, placing them in the White House, the Executive Office Building, the National Bureau of Standards, the Senate, and the House of Representatives, where they were used to print the Congressional Record.

The Alto was 20 times more computer than the original Altair. Not only did it have impressive speed and display graphics, but the Smalltalk language was a generational leap beyond BASIC. Because work on it was completed in 1974, some people, particularly those at Xerox, claim it as the first personal computer ever. But the Alto was never a commercial product. No more than 2,000 were ever built, and its cost removed it from the category of a personal computer, even if it was a self-contained machine for one individual’s use. It was priced as a minicomputer.

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Figure 82. Charles Simonyi and Bill Gates Simonyi came from Xerox PARC to oversee development of Microsoft’s most profitable products. He became a billionaire and was the first space tourist. (Courtesy of Microsoft)

The Alto took two years to develop—from 1972 to 1974—and was used for three more years before Xerox decided to develop it further into a marketable product. In January 1977, David Liddle was put in charge of this task, and Charles Simonyi came to work for him. Liddle had joined PARC in 1972 after having worked on computer display systems in a project funded by the Defense Advanced Research Projects Agency. But the project proceeded slowly. Many researchers at PARC, attracted by the freedom to design technologically dazzling innovations, were growing frustrated that their creations remained sequestered in the lab. They could see things happening in quickstep around them, particularly at Apple, while Xerox dawdled. Before Xerox got a personal-computer product to market, several key people left, with others departing soon afterward. Tesler went to Apple, Kay to Atari, and Simonyi to Microsoft.

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Figure 83. David Liddle Liddle headed up the Star computer project at Xerox, which attempted to turn the revolutionary Alto into a marketable product. (Courtesy of Richard Shoup)

The Worm

Meanwhile, Xerox released its Ethernet network and began linking personal computers. In 1981, four years after it started, Xerox announced the 8010 Information System (nicknamed Star). It was an impressive machine, using much of the advanced Alto technology that Jobs had seen in 1979. But at $16,595 the Star was not really a personal computer either. Nor did Xerox try to convince people it was. For example, the company did not try to sell the machine in computer stores. If HP’s laggardly development of the HP-85 had caused it to miss its commercial window by offering a tape-based machine in a disk-based world, the Xerox Star missed the market altogether.

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Figure 84. Ethernet This is a printout of the first message, other than some within Xerox PARC, ever sent via Ethernet. (Courtesy of David Liddle)

A month later, though, Xerox introduced a true personal computer. The Xerox 820, announced in July 1981, was code-named The Worm during development, perhaps because Xerox had dreamed it would eat into Apple’s market. Like many existing personal computers, the Xerox 820 used the Z80 chip. Xerox also offered Kildall’s CP/M and the two BASIC languages, one written by Gates and Allen and one by Eubanks.

Don Massaro led the 820 project. The 820s would be inexpensive, individual workstations on Ethernet systems in Fortune 500 corporations, the same market the Star sought. Development took only four months, and the machine quickly went into manufacture. “All we wanted to do was reserve those desks for Stars later on,” Massaro said. Given that target market, Xerox’s next move didn’t make much sense.

“It was designed to go after the end-user market through our direct sales organization,” Massaro explained. “Xerox has always sold through its own sales organization. Xerox had 15,000 salespeople worldwide, and that was one of the real strengths of Xerox.” But ComputerLand waved huge purchase orders before Xerox corporate eyes, and “in a moment of weakness, we went to that channel.”

Mass marketing was a mistake. Xerox fared poorly in the developing shelf-space war in ComputerLand stores. Perhaps it was the paucity of technological innovation in the 820, or Xerox’s failure to learn from the lesson of open architecture. Or perhaps the competition was simply getting too heavy even for Xerox by that point. In Bill Gates’s view, the company misunderstood the market. “Xerox was aiming a little too high and trying to do something very difficult and didn’t see the opportunity,” said Gates. “When they did, they threw something together in a couple of months, and it was too little too late.”

“We got creamed,” Massaro admits. And it was IBM that did it.

IBM

IBM is a pretty big company.

–Bill Gates

Hewlett-Packard and Xerox had made less-than-impressive entries into the personal-computer market, and there was intense curiosity within that industry about how IBM would fare. The megafirm was considered successful in almost everything it had tried. Its reputation had held up at least since the mid-1960s, when IBM owned two-thirds of the computer market. And when IBM chief Thomas J. Watson, Jr., bet the company on a new semiconductor-based computer line that instantly made IBM’s most profitable machines obsolete—and the bet paid off—IBM only appeared all the more infallible.

In 1980 a new CEO, Frank Cary, proved willing to risk if not the company, at least some of its pristine reputation on a very un-IBM venture.

Taking a Meeting with IBM

In July of 1980, Bill Gates, busily developing a BASIC for Atari, received a phone call from a representative of IBM. He was surprised, but not greatly so. IBM had called once before about buying a Microsoft product, but the deal had fallen through. However, this communication was more tantalizing. IBM wanted to send some researchers from its Boca Raton, Florida, facility to chat with Gates about Microsoft. Gates agreed without hesitation. “How about next week?” he asked. “We’ll be on a plane in two hours,” said the IBM man.

Gates proceeded to cancel his next day’s appointment with Atari chairman Ray Kassar. “IBM is a pretty big company,” he explained sheepishly.

Because IBM was indeed a pretty big company, he decided to turn to Steve Ballmer, his advisor in business matters and a former assistant product manager at Procter & Gamble. Gates had known Ballmer when he attended Harvard in 1974. In 1979, when Gates decided that Microsoft was getting difficult to manage, he hired Ballmer. Ballmer was brash and ambitious. After Harvard, he had entered Stanford University’s MBA program but had dropped out to start making money sooner.

Ballmer had been glad to join Microsoft. He was enthusiastic about the little software company, and he liked Bill Gates. At Harvard, he had convinced Gates to join his men’s club. As an initiation rite, he dressed his friend in a tuxedo, blindfolded him, brought him to the student cafeteria, and made him talk to other students about computers. Gates’s dealings with IBM would remind him of this experience.

Gates liked Ballmer, too. Gates had played poker during the evenings in the Harvard dorms, and after being cleaned out, he often went to Ballmer to describe the game. As they started working together at Microsoft in 1980, Gates found he still enjoyed discussing things with his friend, who quickly became one of his closest business confidants, and he naturally turned to him after IBM’s call.

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Figure 85. Steve Ballmer and Bill Gates Gates’s ebullient college buddy would go on to replace him as Microsoft CEO. (Courtesy of Sarah Hinman, Microsoft Museum)

“Look, Steve,” Gates said, “IBM is coming tomorrow. We better show those guys a little depth. Why don’t we both sit in on the meeting?”

Neither of them could be sure that the call was anything special, but Gates couldn’t help getting worked up over it. “Bill was superexcited,” Allen later recalled. “He hoped they’d use our BASIC.” Thus, Ballmer said, he and Gates “did the thing up right,” meaning suit and tie, which was unusual attire at Microsoft.

Before the meeting began, IBM asked Gates and Ballmer to sign an agreement promising not to tell IBM anything confidential. Big Blue used this device to protect itself from future lawsuits. Hence, if Gates revealed a valuable idea to the company, he could not sue later on if IBM exploited the concept. IBM was familiar with lawsuits; adroit use of the legal system had played an important part in its long control of the mainframe-computer business. It all seemed rather pointless to Gates, but he agreed.

The meeting seemed to be little more than an introductory social session. Two of the IBM representatives asked Gates and Ballmer “a lot of crazy questions,” Gates recalls, about what Microsoft did and about what features mattered in a home computer. The next day Ballmer typed up a letter to the IBM visitors thanking them for the visit and had Gates sign it.

Nothing happened for a month. In late August, IBM phoned again to schedule a second meeting. “What you said was really interesting,” the IBM representative told Gates. This time IBM would send five people, including a lawyer. Not to be outdone, Gates and Ballmer decided to front five people themselves. They asked their own counsel—a Seattle attorney whose services Microsoft had used before—to attend the meeting, along with two other Microsoft employees. Allen, as usual, stayed in the background. “We got five people in the room,” said Ballmer. “That was a key thing.”

At the outset, IBM’s head of corporate relations explained why he had come along. It was because “this is the most unusual thing the corporation has ever done.” Gates thought it was about the weirdest thing Microsoft had ever been through, too. Once again, Gates, Ballmer, and the other Microsoft attendees had to sign a legal document, this time stipulating that they would protect in confidence anything they viewed at the meeting. Then they saw the plans for Project Chess. IBM was going to build a personal computer.

Gates looked at the design and questioned the IBM people across the table. It bothered him that the plans made no mention of using a 16-bit processor. He explained that a 16-bit design would enable him to give them superior software—assuming they wanted Microsoft’s. He was emphatic and enthusiastic and probably didn’t express himself with the reserve they were used to. But IBM listened.

IBM did want Microsoft’s languages. On that August day in 1980, Gates signed a consulting agreement with IBM to write a report explaining how Microsoft could work with IBM. The report was also to suggest hardware and Gates’s proposed use of it.

The IBM representatives added that they had heard about a popular operating system called CP/M. Could Gates sell that to them as well? Gates patiently explained that he didn’t own CP/M, but that he would be happy to phone Gary Kildall and help arrange a meeting. Gates later said that he called Kildall and told him that these were “important customers” and to “treat them right.” He handed the phone over to the IBM representative, who made an appointment to visit Digital Research that week.

When Gary Went Flying

What ensued has become the material of personal-computer legend. Instead of landing a contract with IBM, “Gary went flying,” Gates recounted, a story that became well known in the industry. Kildall disputed Gates’s recollection. He denied that he was out flying for fun while the IBM representatives cooled their heels. “I was out doing business. I used to fly a lot for pleasure, but after a while you get tired of boring holes in the sky.” He was back in time for his scheduled meeting with IBM.

That morning, however, while Kildall was airborne, IBM met with Kildall’s wife Dorothy McEwen. Dorothy handled Digital Research’s accounts with hardware distributors. The nondisclosure agreement that the IBM visitors asked her to sign troubled her. She felt that it jeopardized Digital Research’s control of its software. According to Gary, she stalled until she could get hold of Gerry Davis, the company’s lawyer. That afternoon Gary arrived on schedule, and along with Dorothy and Gerry Davis, he met with IBM’s representatives. Kildall signed the nondisclosure agreement and heard IBM’s plans. When it came to the operating system, though, they had an impasse. IBM wanted to buy CP/M outright for $250,000; Kildall was willing to license it to them at the usual $10 per-copy rate. IBM left with promises to talk further, but without having signed an agreement for CP/M.

They immediately turned to Microsoft. Gates required no prodding. Once IBM agreed to use a 16-bit processor, Gates realized that CP/M was not critical for their new machine because applications written for CP/M were not designed to take advantage of the power of 16 bits. Kildall had seen the new Intel processors, too, and was planning to enhance CP/M to do just that. But it made just as much sense, Gates told IBM, to use a different operating system instead.

Where that operating system would come from was a good question, until Paul Allen thought of Tim Paterson at Seattle Computer Products. Paterson’s company had already developed an operating system, 86-DOS, for the 8086, and Allen told him that Microsoft wanted it.

Three Months Behind Schedule Before We Started

At the end of September, Gates, Ballmer, and a colleague took a redeye flight to deliver a report. They assumed it would determine whether they got the IBM personal-computer project. They nervously finished collating, proofreading, and revising the document on the plane. Kay Nishi, a globetrotting Japanese entrepreneur and computer-magazine publisher who also worked for Microsoft, had written part of the report in “Nishi English,” which, according to Ballmer, “always needs editing.” The report proposed that Microsoft convert 86-DOS to run on IBM’s machine. After the sleepless flight, Gates and Ballmer were running on adrenaline and ambition alone. As they drove from the Miami airport to Boca Raton, Gates suddenly panicked. He had forgotten a tie. Already late, they swung their rental car into the parking lot of a department store and waited for it to open. Gates rushed in and bought a tie.

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Figure 86. Phil Estridge Estridge headed the IBM PC project in the 1980s. (Courtesy of IBM Archives)

When they finally met with the IBM representatives, they learned that IBM wanted to finish the personal-computer project in a hurry—within a year. It had created a team of 12 to avoid the kind of corporate bottlenecks that can drag a project on for years—three and one-half for the Xerox Star, four for the HP-85. IBM president Frank Cary dealt roughly with all internal politics that could cause delays. Throughout the morning, Gates answered dozens of queries from members of IBM’s project team. “They pelted us with questions,” said Ballmer. “Bill was on the firing line.”

By lunchtime, Gates was fairly confident Microsoft would get the contract. Philip Estridge, who was the project head, an IBM vice president, and an owner of an Apple II, told Gates that when John Opel, IBM’s new chairperson, heard that Microsoft might be involved in the effort he said, “Oh, is that Mary Gates’s boy’s company?” Opel had served with Gates’s mother on the board of directors of the United Way. Gates believed that connection helped him get the contract with IBM, which was finally signed in November 1980.

Microsoft first had to set up a workplace for the project, a more difficult task than might be imagined. IBM wasn’t just any company. It treasured secrecy and imposed the strictest security requirements. Gates and Ballmer decided on a small room in the middle of their offices in the old National Bank building in downtown Seattle. IBM sent its own file locks, and when Gates had trouble installing them, IBM sent its own locksmith. The room had no windows and no ventilation, and IBM required that the door be kept constantly closed. Sometimes the temperature inside exceeded 100 degrees. IBM conducted several security checks to make sure Microsoft followed orders. Once the IBM operative found the secret room wide open and a chassis from a prototype machine standing outside it. Microsoft wasn’t used to dealing with this kind of strictness.

But Microsoft learned. To speed communication between Microsoft and IBM, a sophisticated (for those times) electronic mail system was set up, which sent messages instantly back and forth between a computer in Boca Raton and one in Seattle. Gates also made frequent trips to Boca Raton.

The schedule was grueling. The software had to be completed by March 1981. IBM’s project managers showed Gates timetables and more timetables, all of which “basically proved we were three months behind schedule before we started,” Gates said.

The first order of business was the operating system. Paterson’s 86-DOS operating system was a close but crude imitation of CP/M. It needed a lot of work to make it fit the bill for the IBM job. Gates brought Paterson in to work on adapting his operating system. The operating-system APIs, in particular, had to be completed as soon as possible.

APIs are application programming interfaces. They specify how application programs, like word processors, interface with the operating system. Despite the generally tight security surrounding the PC, developers writing application programs for the IBM machine had to have the APIs to do their work. That provided a crack in the security through which Gary Kildall managed to see, before the machine was released, what Microsoft’s operating system was like.

When he saw the APIs, Kildall realized just how close to his CP/M the new IBM/Microsoft operating system was. He threatened to sue IBM. “I told them that they wouldn’t have proceeded down that path if they knew [the IBM operating system] was that closely patterned after mine. They didn’t realize that CP/M was something owned by people.” IBM met with him and agreed to offer the 16-bit version of CP/M as well as Microsoft’s operating system for their PC. Kildall, in return, agreed not to sue. IBM said that it couldn’t set a price, though, because that would be a violation of antitrust laws.

When Gates heard about IBM’s dealing with Digital Research, he complained, but IBM reassured him that Microsoft’s DOS was its “strategic operating system.” It would turn out that Gates had nothing to worry about. Kildall’s operating system would never be given a chance to compete with Microsoft’s.

Meanwhile Gates took charge of converting Microsoft BASIC, the warhorse originally written for the old Altair, to the IBM computer. He worked on it with Paul Allen and Neil Konzen, another Microsoft employee. Six years before, Allen, as MITS software director, had nagged Gates to do the Altair disk code and the teenaged Gates had procrastinated. Now Gates was doing the nagging and Allen did most of the work. Other Microsoft programmers labored on the various language-conversion projects.

Gates was feeling the pressure from IBM, and he passed it on to his employees. Some of them were used to spending winter weekends as ski instructors—but not that winter. “Nobody went skiing,” said Gates. When some of them wanted to fly to Florida to watch the launch of the space shuttle, Gates was unsympathetic. But when they insisted, he said that they could go if they completed a set amount of work beforehand. The programmers spent five days straight at Microsoft, even sleeping there, in order to meet his demands. Allen remembers programming until 4 A.M. when Charles Simonyi, formerly of Xerox PARC, walked in and declared that they were flying down to Florida for the launch that morning. Allen protested. He wanted to continue his work. Simonyi dissuaded the exhausted programmer, and they were on the plane a few hours later.

Open Architecture

Gates discussed the design of the new machine with IBM continually, usually with Estridge. He pointed out that the open architecture of the Apple computer had contributed immeasurably to its success. Gates had reason to appreciate openness because the SoftCard, Microsoft’s only hardware product, was a cornerstone of the corporation. Because Estridge owned an Apple II, he had leaned toward an open architecture at the outset. With Gates’s encouragement, IBM defied its tradition of secret design specifications and turned its first personal computer into an open system.

This was an extraordinary move for IBM, the most aloof and proprietary of all computer companies. It was deliberately inviting the “parasites” that Ed Roberts had condemned. IBM would use standard parts and design patterns created by kids in garages, and it would encourage more contributions from them. It was shrugging off the tailored tux to don the ready-to-wear clothes of the hobbyists and hackers.

Gates especially understood the open-system issue from MITS’s experience. Ed Roberts had accidentally created an open system in 1974 by making the Altair a bus-based machine. Other manufacturers could, and did, produce circuit boards for the Altair’s S-100 bus, and an entire S-100 industry developed, to Roberts’s dismay. When Roberts tried to hide the bus’s details, the industry effectively took the bus away from him, redefining it to standard specifications.

Gates was intent on making Microsoft’s operating system, now called MS-DOS (really PC-DOS for IBM but MS-DOS for every other customer), the industry’s standard operating system. He abandoned the symbiotic relationship he had once enjoyed with Digital Research whereby Digital Research was the operating system firm and Microsoft did languages. Gates made a strong and convincing case to IBM for an open operating system, too. The IBM people in charge of the PC were receptive, but openness was not an IBM hallmark. The benefits took some explaining. If people knew the details of the operating system, they could develop software for it more easily, and VisiCalc had shown that good third-party software can help sell a machine. He may have had more practical considerations in mind, however. Having broken into mainframe operating systems when he was 14, having seen his original Altair BASIC become an industry standard through theft, Gates may simply have found it wiser to give away what would otherwise be preempted.

The operating system was also open in another way. Gates managed to get IBM to agree to let Microsoft sell its operating system to other hardware manufacturers. IBM didn’t understand what a wealth-creation machine they were handing to Bill Gates.

Although pressure to finish the software was extreme, Gates was confident in his ability and the capability of his company, which was glittering with programming talent. But he had one fear that he could not overcome. It concerned him even more than the deadline, and it haunted him right up to the announcement of the IBM computer: would IBM cancel the project?

They were not really working with IBM, after all. They were working with a division of IBM, a maverick division on a short tether. There was no telling when IBM might pull in the rope. IBM was a Goliath with many, many projects. Only a small percentage of the research and development work done at IBM ever appeared as finished projects. What other secret IBM personal-computer projects might be proceeding in parallel with Chess he didn’t know and would probably never know. “They seriously talked about canceling the project up until the last minute,” said Gates, “and we had put so many of the company’s resources into the thing.”

Gates was under strain, and any talk of cancellation upset him. He worried about the speculative stories increasingly appearing in the press about an IBM personal computer. Some were quite precise. Would IBM question his company’s compliance with its security requirements? When an article in the June 8, 1981, issue of InfoWorld accurately described four months early the details of the IBM machine, including the decision to develop a new operating system, Gates panicked. He called the magazine’s editor to protest the publication of “rumors.”

When IBM came out with its personal computer, fortunes would be won and lost. Bill Gates wanted to be sure nothing prevented Microsoft from being among the winners.

The IBM Personal Computer

When, on August 12, 1981, IBM announced its first personal computer, it radically and irrevocably changed the world for microcomputer makers, software developers, retailers, and the rapidly growing market of microcomputer buyers.

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Figure 87. The original IBM PC In 1981 IBM’s entry into the field of personal computers legitimized the field and changed it fundamentally. (Courtesy of IBM Archives)

In the 1960s, there was a saying among mainframe-computer companies that IBM was not the competition; it was The Environment. Whole segments of the industry, known collectively as the plug-compatibles, grew up around IBM products, and their prosperity depended on IBM’s prosperity. To the plug-compatibles, the cryptic numbers by which IBM identified its products, like the 1401 or the legendary 360, were not the trademarks of a competitor, but familiar features of the terrain, like mountains and seas. When IBM brought out a personal computer, it too had one of those product numbers. But the IBM marketing people knew that they were dealing with a new kind of customer and that a number might not convey the right message. It isn’t hard to guess what IBM thought the right message was. By naming its machine the Personal Computer, it suggested this device was the only personal computer. The machine quickly became called the IBM PC, or simply the PC.

The IBM PC itself was almost conventional from the standpoint of the industry at the time. Sol and Osborne inventor Lee Felsenstein got his hands on one of the first delivered IBM PCs and opened it up at a Homebrew Computer Club meeting.

“I was surprised to find chips in there that I recognized,” he said. “There weren’t any chips that I didn’t recognize. My experience with IBM so far was that when you find IBM parts in a junk box, you forget about them because they’re all little custom jobs and you can’t find any data about them. IBM is off in a world of its own. But, in this case, they were building with parts that mortals could get.”

The machine used an 8088 processor, which, although it was not the premier chip then available, put the IBM PC a notch above any other machine then sold. The PC impressed Felsenstein—not technologically, but politically. He liked to see IBM admitting that it needed other people. The open bus structure and thorough, readable documentation said as much. “But the major surprise was that they were using chips from Earth and not from IBM. I thought, ‘They’re doing things our way.’”

In addition to operating systems and languages, IBM offered a number of applications for the PC that were sold separately. Surprisingly, IBM had developed none of them. Showing that it had learned from Apple, IBM offered the ubiquitous VisiCalc spreadsheet (Lotus 1-2-3 would come later and would become must-have software for business), the well-known series of business programs from Peachtree Software, and a word processor called EasyWriter from Information Unlimited Software (IUS).

WordStar, from Seymour Rubinstein’s MicroPro, was the leading word-processing program, and IBM had wanted it. But Rubinstein, like the Kildalls, balked at accepting IBM’s terms. They wanted MicroPro to convert WordStar to run on the IBM PC and then turn the product over to IBM, Rubinstein said. “They said I could build my own program after that, but I’d have to not do it the same way. They were setting themselves up to sue me later. They were going to grab control of my product. I had something to protect, so I didn’t do the deal. I tried to negotiate a different deal, but they wouldn’t.” IBM turned to IUS.

Captain Crunch and EasyWriter

The IUS deal may have been the ultimate culture shock for the IBM people. They had designed their machine with non-IBM components. They had released to the general public the sort of information they had always kept secret. They had bought an operating system instead of writing it; they had done and dealt with things that had always been utterly beyond IBM’s pale. But they hadn’t bargained for John Draper.

IUS was a small Marin County software firm with a word processor called EasyWriter. IBM had approached IUS about EasyWriter, and Larry Weiss of IUS contacted EasyWriter’s author, John Draper, alias the notorious phone phreak Captain Crunch, from whom Woz and Jobs had learned how to build blue boxes.

Draper recalled, “Eaglebeak [Weiss] comes to me and he says, ‘John, I got this deal that you’re not going to believe, but I can’t tell you anything about it.’ And then we had this meeting at IUS. There were these people in pinstripes and me looking like me. This was the time that I realized we were dealing with IBM. I had to sign these things saying that I wasn’t going to be discussing any technical information. I wasn’t even supposed to disclose that I was dealing with IBM. They were coming out with a home computer and Eaglebeak said something to me about putting EasyWriter on it.”

Draper had written EasyWriter years before out of frustration because the Apple had no satisfactory word processor and he couldn’t afford an S-100 system on which he could run Michael Shrayer’s Electric Pencil. Draper liked Electric Pencil, the only word processor he’d seen, so he fashioned his own after it. Demonstrating it at the fourth West Coast Computer Faire, he ran into Bill Baker, a transplanted Midwesterner who had started IUS, and Baker agreed to sell EasyWriter for him. All that had led to this: Captain Crunch sitting down with IBM.

IBM gave IUS and Draper six months to convert EasyWriter to run on the PC, and Draper went right to work. “In order to keep from slipping and talking about IBM, we called it Project Commodore,” Draper recalled. Soon, Baker was irritating Draper. “Baker comes down on me for not working 8 to 5, and that’s bullshit. Look, man, I don’t operate in that style. I operate in a creative environment. I don’t go by the clock. I go by the way my mind works.” Then IBM made changes in the hardware that Draper had to incorporate. The six months passed and the release program wasn’t done. Draper found himself pressured to say that an earlier but completed version was adequate and that it could be released with the machine. With grave reservations he finally did so, and IBM’s machine was sold with Captain Crunch’s word processor. The program did not receive rave reviews. IBM later offered free updates to the program.

A word processor was sober software, no matter who wrote it, but at the last minute IBM decided to add a computer game to its series of optional programs. Toward the end of the press release announcing the PC, the company declared, “Microsoft Adventure brings players into a fantasy world of caves and treasures.” Corporate data-processing managers around the country read the ad and thought, “This is IBM?”

Welcome, IBM

The PC’s unveiling received wide play in the national press. It was by far the least expensive machine IBM had ever sold. IBM realized that the personal computer was a retail item that consumers would buy in retail computer stores and could not, therefore, be marketed by its sales force. The company again departed from tradition and arranged to sell its PC through the largest and most popular computer retail chain at the time, the IMSAI spin-off ComputerLand. This was a much bigger departure for IBM than it had been for Xerox, but it was a no-brainer for ComputerLand. They knew the value of the IBM logo. IBM didn’t stop there; it also announced plans to sell the PC in department stores, just like any appliance.

Wherever it was sold, the purchaser had a choice of operating systems: PC-DOS for $40 or CP/M-86 for $240. If it was a joke, Gary Kildall wasn’t laughing.

Software companies quickly began writing programs for PC-DOS. Hardware firms also developed products for the PC. Because PC sales started fast and continued to increase, these companies were easily convinced that PC-based products would find a market. In turn, the add-on products themselves spurred PC sales because they increased the utility of the machine. IBM’s open-system decision was now paying dividends, for IBM and a new generation of plug-compatible companies.

Apple Computer was not surprised by the IBM announcement, as it had predicted an IBM microcomputer several years earlier. Steve Jobs claimed that Apple’s only worry was that IBM might offer a machine with highly advanced technology. Like Felsenstein, he was relieved that IBM was using a nonproprietary processor and an accessible architecture. Apple responded publicly to the PC announcement by asserting that this would actually help Apple because IBM publicity would cause more people to buy personal computers.

The world’s largest computer company had endorsed the personal computer as a viable commercial product. Although innovative hobbyists and small companies had founded the industry, only IBM could bring the product fully into the public eye. "Welcome, IBM. Seriously," Apple said in a full-page advertisement in The Wall Street Journal. “Welcome to the most exciting and important marketplace since the computer revolution began 35 years ago.… We look forward to responsible competition in the massive effort to distribute this American technology to the world.”

IBM’s endorsement certainly did increase demand for personal computers. Many businesses, small and large, balked at the idea of buying a personal computer. Many seriously wondered why IBM wasn’t working in that area. Now IBM had said it was all right. They could buy a personal computer. Between August and December 1981, IBM shipped 13,000 PCs. Over the next two years, it would sell 40 times that number.

The early microcomputers had been designed in the absence of software. When CP/M and its overlayer of application software became popular, hardware designers built machines that would run those programs. Similarly, the success of the IBM Personal Computer caused programmers to write an array of software for its PC-DOS operating system—which, when licensing it to companies other than IBM, Microsoft called MS-DOS. New hardware manufacturers sprang up to introduce computers that could run the same programs as the IBM PC: “clones.” Some offered different capabilities than those of the IBM machine, like portability, additional memory, or superior graphics, and many were less expensive than the PC. But all served to ratify the PC operating system. And MS-DOS quickly became the standard operating system for 16-bit machines.

Microsoft benefited more than any other player, including IBM. Gates had encouraged IBM to use an open design and had managed to get a nonexclusive license for the operating system. The former ensured that there would be clones if other companies could get their hands on the operating system. The latter ensured that they could, and that they would pay Microsoft for it. And IBM’s pricing strategy ensured that Microsoft’s operating system would be the only one that mattered.

Even DEC entered the fray a year later with a dual-processor computer called the Rainbow that could run both 8-bit software under CP/M and 16-bit software under CP/M-86 or MS-DOS.

All the companies in the industry had to cope with the imposing presence of IBM. ComputerLand was dropping the smaller manufacturers for IBM, and even Apple found that it had to respond to IBM’s incursion into the ComputerLand stores. Apple terminated its contract with ComputerLand’s central office where IBM was influential, and started dealing directly with the outlet franchise stores.

The Shakeout

It was the end of the beginning. A shakeout that had been only foreshadowed in the failures of MITS, IMSAI, and Processor Technology began to loom real in the eyes of the pioneering companies, and with more than 300 personal-computer companies in existence, many hobbyist-originated companies began to wonder if they would still be in business two years hence. IBM had forced even the big companies in the market to reappraise their situations.

Xerox, Don Massaro said, had carefully considered that IBM might produce a personal computer. “We did a worst-case scenario in getting approval for the [Xerox 820] program. We said, ‘What could IBM do? How could we not be successful in this marketplace?’ The scenario was that IBM would enter with a product that would make ours technically obsolete, they would sell it through dealers, and it would have an open operating system.” It seemed an unlikely prospect. “IBM had never done that, had never sold through dealers, and had certainly never had an open operating system. I thought IBM would have their own proprietary operating system for which they would write their own software, and that they would sell through their own stores.” Instead, Xerox’s worst fear came to life in painful detail, and “the whole world ran off in that direction. IBM just killed everybody.”

Not everybody. But the circle of attention had narrowed. There were now two personal-computer companies that everyone was watching: Apple and an IBM nobody knew; an IBM that had, in John Draper’s words, “discovered the Woz Principle” of the open system.

The presence of IBM and the other big companies shook the industry to its hobbyist roots. Tandy, with its own distribution channels, was only modestly affected. Commodore was doing all right concentrating on European sales and sales of low-cost home computers.

But the companies that had pioneered the personal computer began dropping out of the picture. The shakeout was in earnest. The resurrected IMSAI was one of the first companies to go. Todd Fischer and Nancy Freitas supplied the IMSAI computer that figured prominently in the popular movie War Games, and it was effectively the company’s last act. Shortly thereafter, Fischer and Freitas gave the pioneering microcomputer company a decent burial. (But not permanently: Fischer and Freitas would be selling IMSAI computers again in 1999, feeding a retrocomputing craze.)

By late 1983, even some of the most successful of the personal-computer and software companies to spring up out of the hobbyist movement were hurt. North Star, Vector Graphic, and Cromemco all felt the pinch. There were massive layoffs, and some companies turned to offshore manufacturing to stop leaking profits. Chuck Peddle, who had been responsible for the PET computer and had been active throughout the industry in semiconductor design at MOS Technologies and in computers at Commodore and briefly at Apple, was now running his own company, Victor, with a computer similar to IBM’s. In the face of the IBM challenge, Victor soon had to severely cut back its work force, hurt by softening sales. George Morrow’s company Microstuf considered a stock offering, but then withdrew the idea in response to IBM’s growing influence in the market.

On September 13, 1983, Osborne Computer Corporation declared bankruptcy amid a mountain of debt accumulated when it tried to catch up with Apple and IBM. Of all the company failures in the history of the personal-computer industry, none was more thoroughly analyzed. OCC had flown high and fast, and its fall was startling. At the height of their success, Osborne executives appeared on the television program 60 Minutes, predicting that they would soon be millionaires. They were on paper, but the company’s financial controls were so lax that the figures were meaningless. The media coverage of the company’s failure was intense, but the analyses were conflicting. Certainly there were problems with the hardware, but most companies have them and Osborne dealt with them. Osborne executives made serious mistakes in the timing of product announcements and the pricing of new products.

In May, Osborne had announced its Executive computer. Its improvements included a larger screen, but the company’s new “professional” management priced it at $2,495 and stopped selling the original product. Sales immediately declined. “If we had left the Osborne 1 on the market, management would have seen the mistake because it would have kept on selling,” said Michael McCarthy, a documentation writer at the firm. Instead, first-time buyers who liked the Osborne 1 for its packaging and price now looked elsewhere.

What seems clear is that Osborne grew so fast in its attempt to be one of the three major companies that Adam Osborne had predicted would dominate personal computing in a year or so, that its managers were unable to control it. As industry analyst John Dvorak put it, “The company grew from zilch to $100 million in less than two years. Who do you hire who has experience with growth like that? Nobody exists.” Osborne was just too successful for its own good.

The last chapter of the Osborne story had a bittersweet irony for the employees. Coming to work one day, they were instructed to leave the premises. Money owed them was not paid. Security guards were posted at the doors to ensure that they took no Osborne property with them. But someone had failed to inform the guards that the company made portable computers, and the employees walked out carrying Osborne’s inventory with them.

Others fell under IBM’s shadow. Small software companies like EduWare and Lightning Software allowed themselves to be bought by larger ones, and all software companies learned to think of first doing “the IBM version” of any new software product. Even major corporations adjusted their behavior. Atari and Texas Instruments swallowed millions in losses in their attempts to win their way into the personal-computer market through low-cost home machines. Atari suffered deep wounds. And although TI had more of its low-cost TI-99/4 computers in homes than almost any other computer, it announced in the fall of 1983 that it was cutting its losses and getting out of personal-computer manufacturing.

IBM’s entry also affected the magazines, shows, and stores. David Bunnell, who had left MITS to start Personal Computing magazine, responded to IBM’s arrival by coming out with PC Magazine, a thick publication directed at users of the IBM machine. Soon major publishers were fighting over Bunnell’s magazine. Wayne Green, having built Kilobaud into an empire of computer magazines by 1983, sold the lot to an East Coast conglomerate. Art Salsberg and Les Solomon rode out Popular Electronics’s transformation into Computers and Electronics. Jim Warren started an IBM PC Faire in late 1983 and then sold his show-sponsoring company, Computer Faire, to publishing house Prentice Hall, claiming that the business was too big for him to manage. ComputerLand and the independent computer stores found themselves competing with Sears and Macy’s as IBM opened new channels of distribution for personal computers.

Late in 1983, IBM announced its second personal computer. Dubbed the PCjr, the machine offered little technological innovation. Perhaps to prevent business users from buying the new and less expensive machine in place of the PC, IBM equipped the PCjr with a poor-quality “Chicklet” keyboard, a style of keyboard unsuited to serious, prolonged use. Despite the PCjr’s unimpressive technological design and chilly reception, by announcing a second personal computer, IBM demonstrated that it recognized a broad, largely untapped market for home computers. IBM intended to be a dominant force in that market, too.

Apple, in preparation for its inevitable toe-to-toe battle with IBM, made several significant moves. In 1983, the firm hired a new president, former Pepsi-Cola executive John Sculley, to manage its underdog campaign against IBM.

That Apple, no longer the dominant company in an industry still in its infancy, could attract the heir apparent to the presidency of huge PepsiCo was a tribute to the persuasive powers of its cofounder, Steve Jobs. “You can stay and sell sugar water,” he told a vacillating Sculley, “or you can come with me and change the world.” Sculley came.

Then, in January 1984, Apple introduced its Macintosh computer.

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Figure 88. The original Apple Macintosh It had 128K of memory. (Courtesy of Apple Computer Inc.)

IBM had chosen to emphasize its name—the best-known three letters in the computer industry. Apple decided to provide state-of-the-art technology. The Macintosh immediately received accolades for its impressive design, including highly developed software technology that used a mouse, an advanced graphical user interface, and a powerful 32-bit microprocessor in a lightweight package.

But while Apple delighted in portraying this situation as a confrontation between Big Brother and the unruly upstarts, Apple was no longer some hippie garage shop financed by pocket change and float. The computer industry was now big business, and Apple was a serious, well-funded company.

The money dealers had come to where the money was, and the financial success of the industry rooted in hobbydom severed the industry from its roots. But the computer-power-to-the-people spirit Lee Felsenstein and others had sought to foster had by no means disappeared. Even staunchly conservative IBM had bent to it in adopting an open architecture and an open operating system. IBM’s corporate policy in the 1950s and 1960s had often been to lease computers and to discourage sales. For the room-sized computers made then, this method was appropriate. With proprietary architectures and software, the power of the machines really belonged not to the people who used them, but to the companies that had built them.

But something had changed in this first personal-computer decade, and in 1984 it looked like the personal computer and all the growing power it harnessed belonged to the people.

Copyright © 2014, The Pragmatic Bookshelf.