John D. Rockefeller. Henry Ford. Andrew Carnegie. Bill Gates.
Few today would dispute that Gates is on a par with the great business figures of history. His genius melds deep technical knowledge, strategic business thinking and the force of personality that only a few figures have ever commanded–and to which none of his peers has come close.
Gates remains chairman of Microsoft, but on June 27 he steps down from day-to-day activities at the company–a software empire, really, with an estimated 84,000 employees and $68 billion in annual revenue. Moving forward, Gates will spend the bulk of his time on the Bill & Melinda Gates Foundation.
Starting from programming a time-shared minicomputer via teletype nearly four decades ago, Gates changed computing, changed business and changed our lives. Along the way, he amassed America’s greatest current fortune–much of which he is, like the business giants of yesteryear, devoting to charity.
While many of Gates’ computer industry contemporaries have been technologically brilliant, few of those bright minds have had excellent, or even good, business sense.
Conversely, there have been many stellar business executives in the technology industry, but few, if any, industry stars with the same hard-wired passion for technology as Gates.
But, despite Gates’ love of programming, which took hold when he was a teenager, the balance he struck between business and technology always tilted toward business–and, above all, profit.
“Gates had technical and business knowledge that no one else really had,” said Erik Brynjolfsson, the Schussel Family Professor at the MIT Sloan School of Management and director of the Center for Digital Business at MIT. “His technical knowledge was great, but the success of Microsoft was due to his business knowledge and skill, even more than technical knowledge. He was absolutely brilliant, going beyond cutting-edge economic theory. He pioneered new practices and ran circles around his competitors.”
The result: a software mega-vendor with a vast array of products–ranging from consumer games to systems management solutions–anchored by a Windows installed base of about 1 billion users and aggressively seeking to maintain its dominance in a Web 2.0 world.
The bespectacled Gates achieved billionaire status in 1986, only 11 years after he and friend Paul Allen founded Microsoft as an informal partnership and set up shop in Albuquerque, N.M., when Gates was 20.
The products developed under his watch-Windows, particularly–were often lackluster at first, achieving market acceptance only after several versions and market dominance only after several more. It wasn’t until 1988 that Microsoft surpassed Lotus to become the world’s largest software company.
“Windows 1.0 didn’t work,” said John Dodge, who in 1983 was one of the founding editors of PC Week, now eWEEK. “It promised more than the hardware could deliver–more processing speed and memory. Windows 3.0 was the first really useful version.”
Windows 1.0 was announced in 1983 and released in 1985; Windows 3.0 debuted in 1990 at a splashy rollout in New York with Gates presiding. Even then, most experts agree, Windows significantly trailed the Apple Macintosh OS, introduced in 1984, as a graphical operating system for personal computers.
This lateness to market was often a reason for rivals to underestimate Microsoft’s technology and Gates’ business skills. But time and time again, Gates waited for a market to develop, moving in only once he fully understood it. In the process, he often drove out pioneers and took over markets, sometimes by way of business practices that fueled bitterness among competitors and eventually stirred the dogs of antitrust.
Key to Microsoft’s success was a relationship with IBM that started as a close partnership and ended in a bitter schism.
It began this way: When Digital Research’s Gary Kildall was slow in striking a licensing deal with IBM for his CP/M operating system, Gates told Big Blue he could provide the technology. He then purchased QDOS (“Quick and Dirty Operating System,” a close cousin of CP/M written by Tim Paterson) from Seattle Computer Products and licensed the software to IBM as MS-DOS. Critically, Gates retained the right to license the operating system to other hardware vendors such as Compaq, which would in a few years leapfrog IBM’s hardware. The maneuver required a lot of nerve. It required Gates.
Recognizing the value of IBM as a partner, Gates cultivated a close relationship with the industry giant through several versions of DOS, culminating in an agreement to create a successor operating system, OS/2, in 1985.
Version 1.1 of the ill-starred OS was released in 1988. While IBM sought to herd its vast installed base of corporate PCs toward this expensive, proprietary hardware hog of an operating system, Gates maintained a separate development team focused on Windows, which was practically as good as OS/2, was less expensive, required less hardware and was available on a vast array of compatible PC vendors’ gear.
Gates’ move cast him in the eyes of many as David versus IBM’s Goliath. His gamble was bold, risky and–we all know now–a sure thing. What others would have shrunk from, Gates did. IBM, by far the dominant player in the IT industry, would pour untold millions into OS/2 before throwing in the towel and, eventually, abandoning the PC business altogether.
The New Economics of Information
With Windows, Gates would promote Microsoft Office, a bundle of Microsoft applications including Word, Excel and PowerPoint. It was a strategy that, MIT’s Brynjolfsson said, would guarantee success in the new information economy.
That’s because creating the first copy of software is expensive due to all the programming work involved, but additional copies are very cheap to produce. A vendor can further increase its profit margin by bundling a lot of products together. The strategy works particularly well when no single product is best-in-class, which has often been the case with Microsoft applications.
“Selling average products separately would not yield a large market share, but bundling them together makes it more attractive for the buyer,” said Brynjolfsson. “It gave [Gates] a big advantage. Even if a new product is better, most people will prefer to stick with the bundle, as they did with Microsoft Office.”
This model leads to higher market share and much higher profits. “It’s a bit like the McDonald’s meal bundles,” Brynjolfsson explained.
The result: “Microsoft products were consistently priced much lower than competitors’ products when you adjusted for their capabilities and features,” he said. “I think Bill Gates’ biggest contribution was in understanding the new economics of information. Most of his competitors didn’t get it.”
Internet Tidal Wave
The high-volume, high-profit model gave Microsoft a financial foundation that was far larger and more stable than any competitor could cobble together. It would have been easy to be lulled into a false sense of security and go soft. Gates fought that tendency ferociously over the years, repeating the mantra that any company is only two years from going out of business.
Gates was nonetheless blindsided by the Internet, which emerged in the early 1990s to transform business as no force had since the computer itself.
Initially seeing the Internet as subordinate to desktop and server systems, as networks of all kinds had theretofore been, Gates had a revelatory series of insights that culminated in his famous “Internet Tidal Wave” memo of 1995, in which he declared the Internet to be the highest priority and that it must permeate everything the company did.
It was a turn in the road that Gates and Microsoft almost missed. Doing so would have been a crippling, if not fatal, error. Once again, Gates would enter a market pioneered by others, only to gain a major and in some ways dominant position.
Meanwhile, Gates grasped what Brynjolfsson calls the new economics of information so well that Windows’ commanding market share attained monopoly status, arousing scrutiny of Microsoft’s business practices.
Not only would Microsoft sell multiple products in one package, the company would also bundle–or integrate–applications and utilities into Windows.
This practice led to an antitrust trial, when the company combined its Internet Explorer browser with Windows in the mid-1990s. Including Internet Explorer for “free” with Windows was an attempt to catch up with the pioneering Netscape Navigator. The strategy worked, sending Navigator into a tailspin from which it never fully recovered.
The antitrust trial recalled an earlier day, when John D. Rockefeller’s Standard Oil was the target. Like Gates, Rockefeller was the richest man of his day, and some of his business practices challenged a fundamental sense of fairness in the minds of many citizens.
Indeed, the Microsoft antitrust trial focused animosity that had been simmering in the industry for years.
Gates had quickly gone from being David to IBM’s Goliath to being Goliath himself, creating a long list of bitter rivals, including IBM, Lotus, Novell and Sun. The CEOs of those companies found Gates’ practices infuriating. So did the judge in the antitrust case, Thomas Penfield Jackson, who stepped over the line of judicial propriety when he expressed scorn for Gates and his company’s tactics in press interviews, a blunder that led to the overturning of Jackson’s breakup order on appeal.
Force of Personality
Although he was a thorn in the side of competitors, Gates could not have reached the heights he did without something more: a force of personality that has attracted many of the best minds in the industry to Microsoft.
Tim Paterson, the creator of QDOS, came to work for Microsoft; Dave Cutler came over from Digital Equipment Corp. to lead the development of Windows NT; Jim Allchin, a visionary software architect who created the Banyan VINES operating system, came to Microsoft to head development; and when Gates sought a successor as chief software architect, he persuaded Ray Ozzie, the brains behind Lotus Notes, to take up the mantle.
And while Microsoft had plenty of enemies, a critical key to the company’s success has been the vast number of friendly developers the company has courted and encouraged over the years. The seemingly limitless installed base of Windows has guaranteed that even small application developers will have a large, and therefore profitable, market into which to sell. The company has attracted some 640,000 solution partners, while 4.3 million people have gained certification in Microsoft technologies.
The Road Ahead
In the midst of that enviable ecosystem is the company from which Gates is now stepping away: an unparalleled combination of technology talent and market dominance.
But it’s a company that must find new ways to grow, despite its large size. Its most recent attempt to challenge technology leaders such as Google in the world of Web 2.0–the acquisition of Yahoo–has been unsuccessful so far. The company also faces the challenge of maintaining its operating system platform hegemony through the so-far lackluster advent of Windows Vista, even as it looks ahead to what is now being called Windows 7.
But if Gates’ friend and successor, Microsoft CEO Steve Ballmer, has learned anything from long association with his mentor, it is to take risks and persevere, whatever the odds.
Stan Gibson is a Boston technology writer and principal of Stan Gibson Communications. He can be reached at [email protected].