Microsoft I (1975 - 1995)
The company that put a computer on every desk, invented the software business model, completely dominated every conceivable competitor and is still the second most valuable company in the world.
Kyle’s Rating: 9/10
This episode is a riveting deep dive into how two teenage programmers parlayed audacity, timing, and one of the greatest business deals ever negotiated into a company that redefined an entire industry. Ben and David do an exceptional job tracing the through-line from Bill Gates' first encounter with a teletype machine to the Windows 95 launch, making four-plus hours feel like a breeze.
After nearly a decade of Acquired episodes, Ben and David finally tackle the most valuable company ever created. The company that put a computer on every desk and in every home. The company that invented the software business model. The company that so thoroughly and completely dominated every conceivable competitor that the United States government intervened and kneecapped it… yet it’s STILL the most valuable company in the world today.
This episode tells the story of Microsoft in its heyday, the PC Era. It covers the rise from a teenage dream to the most powerful business and technology force in history — the 20-year period from 1975 to 1995 that took Bill and Paul from the Lakeside high school computer room to launching Windows 95 alongside Jay Leno and the Rolling Stones. From BASIC to DOS, Windows, Office, Intel, IBM, Xerox PARC, Apple, Steve Jobs, Steve Ballmer… it’s all here, and it’s all amazing.
Company Overview
Company: Microsoft Corporation
Founded: April 4, 1975
Headquarters: Redmond, Washington (originally Albuquerque, New Mexico)
Microsoft pioneered the software business model, becoming the company that put "a computer on every desk and in every home" running Microsoft software
The episode covers Microsoft's PC Era (1975-1995), from teenage founders to the Windows 95 launch alongside Jay Leno and the Rolling Stones
Narrative
Microsoft is the result of tremendous intelligence, brilliant strategy, fierce competition, and an unbelievable amount of luck. The company's founders were born at the perfect moment, gained access to computers when perhaps only dozens of Americans had similar opportunities, and possessed the insight to recognize computing's exponential trajectory.
The Microsoft story begins in 1955 with the birth of Bill Gates III in Seattle to a remarkable power couple. His father, Bill Gates Sr., was the first in his family to attend college and became a founding partner of Preston, Gates & Ellis (now K&L Gates). His mother, Mary Maxwell Gates, defied gender expectations of her era to become one of the Pacific Northwest's most influential business leaders, serving on numerous corporate boards including First Interstate Bank and Pacific Northwest Bell. Young Bill grew up in a household where CEOs, senators, and governors regularly joined for dinner, absorbing high-level business discussions from an early age.
At age 13, Bill enrolled at Lakeside School, where a fateful decision by the Mothers Club to purchase computer time on a teletype connected to a downtown mainframe would change history. In 1968, when computers meant either room-sized machines or human calculators, this exposure was extraordinarily rare. Bill quickly became one of the school's best programmers, forming the Lakeside Programmers Group with three others, including tenth-grader Paul Allen. The two bonded over their shared vision of computing's future.
When Paul Allen explained Moore's Law to Bill Gates in 1971, Bill's response revealed the audacity that would define Microsoft: "Oh, exponential phenomena are pretty rare, pretty dramatic. Are you serious about this?" When Paul confirmed it was true, Bill immediately grasped the implications - if computing power would grow exponentially while costs plummeted, they needed to act on this once-in-history opportunity. This realization led to their incredibly bold vision: a computer on every desk and in every home, running Microsoft software.
The duo's entrepreneurial journey began with Traf-O-Data, analyzing traffic patterns using Intel's new 8008 microprocessor. Though only modestly successful financially, the venture proved crucial for understanding microprocessors' potential.
When the Altair 8800 appeared on Popular Electronics' cover in January 1975, Paul and Bill saw their moment. Despite having no actual product, they called MITS claiming to have a BASIC interpreter ready. This audacious bluff led to a frantic few weeks of development, with Paul writing the bootloader on his flight to demonstrate their hastily completed interpreter in Albuquerque.
Microsoft's early years involved critical business model discoveries. Their initial exclusive deal with MITS taught them the importance of controlling distribution. After winning arbitration in 1977, they pivoted to licensing BASIC directly to all microcomputer manufacturers at deliberately low prices, prioritizing ubiquity over short-term profits. Bill's strategy was prescient: become the standard programming environment and create a self-reinforcing cycle of adoption. By 1979, with revenue reaching $2.4 million and international expansion through Japan, Microsoft relocated to Seattle to access better talent pools.
The company's trajectory changed dramatically with the IBM PC partnership in 1980. When IBM's Project Chess team needed an operating system and Digital Research fumbled the opportunity, Microsoft seized the moment. They acquired QDOS from Seattle Computer Products for $75,000, adapted it into MS-DOS, and negotiated a masterstroke deal: IBM paid a flat fee while Microsoft retained rights to license DOS to any other manufacturer. When PC clones emerged, Microsoft was perfectly positioned to become the essential software provider for the entire ecosystem, licensing MS-DOS on a per-processor basis to manufacturers worldwide.
The late 1980s and early 1990s marked Microsoft's evolution from a DOS company to a Windows company, though the path was far from straightforward. While officially committed to IBM's OS/2 initiative, Microsoft hedged with Windows development. When Windows 3.0 finally succeeded in 1990, it marked what PC Computing magazine called "the first day of the second era of IBM compatible PCs." The success led to Microsoft surpassing IBM's market cap in 1993, completing a stunning reversal of the technology industry's power structure. The era culminated with Windows 95's spectacular launch, featuring Jay Leno, the Rolling Stones' "Start Me Up," and a marketing campaign so successful that Coca-Cola sought Microsoft's advice on modern marketing techniques.
Timeline
1955: Bill Gates III (Trey) born in Seattle to Bill Gates Sr. and Mary Maxwell Gates
1968: Bill Gates enrolls at Lakeside School; encounters teletype computer access
1972: Bill and Paul Allen form Traf-O-Data
April 4, 1975: Microsoft founded as partnership between Bill Gates (60%) and Paul Allen (40%)
1975: MITS Altair 8800 announced; Microsoft creates BASIC interpreter
1977: Microsoft wins arbitration against MITS/Pertec, gains control of BASIC licensing
1978: Microsoft goes international with Japan distribution through Kay Nishi
1980: Microsoft moves to Seattle; signs IBM PC partnership deal
1981: Microsoft reorganizes as C-corporation; TVI invests $1 million for 5%
1981: IBM PC ships with MS-DOS
1982: Compaq and PC clone market emerges
1983: Windows announced
1984: Microsoft Excel debuts on Macintosh
1985: Windows 1.0 released
1986: Microsoft IPO at $750 million valuation
1990: Windows 3.0 achieves breakthrough success
1992: Microsoft passes $1 billion in revenue
1993: Microsoft surpasses IBM in market cap
1995: Windows 95 launches with massive marketing campaign
Notable Facts
Microsoft was the first software company to exceed $1 billion in revenue (1990) and $10 billion in revenue (1997)
The Windows 95 launch involved lighting up the CN Tower and Tower of London, with people lining up around blocks to buy an operating system
Bill Gates became the youngest billionaire at age 31 when there were only 50 billionaires globally
By going international in year 3 (1978), Microsoft derived roughly half its revenue from international markets throughout its history
Microsoft retained 49% founder ownership at IPO, with only 5% ever sold to outside investors
The company created over 10,000 millionaires in the Seattle area from a relatively small employee option pool
Financial Metrics
1975: $16,000 revenue (first year)
1977: $381,000 revenue (despite 11 months of disputed MITS contract)
1978: $1.3 million revenue
1979: $2.4 million revenue
1982: $25 million revenue
1984: $98 million revenue
1986: IPO at $750 million market cap on $200 million trailing revenue
1990: $1.2 billion revenue (first software company to break $1 billion)
1992: $2.8 billion revenue; Gates becomes wealthiest American
1995: $5.9 billion revenue (pre-Windows 95)
1996: $8.7 billion revenue
1997: $12 billion revenue
Employee growth: 5 employees (1977), 13 (1978), 30 (1980), 360 (Windows 95 team)
Windows installed base: 75 million users before Windows 95 launch
Success Reinforces Success
Bill Gates articulated Microsoft's core strategic principle as a "positive spiral" where success reinforces success. In his words: "Success reinforces success. In a growing market, one way of doing something gets a slight advantage over its competitors, this is most likely to happen with high technology products that can be made in great volume for a very little increase in cost." The plan was elegantly simple: achieve even a small technical or market advantage, then leverage software's economics to compound that lead exponentially.
This strategy manifested in Microsoft's BASIC pricing, where Bill deliberately underpriced competitors not to maximize immediate revenue but to ensure ubiquity. Once Microsoft BASIC became the standard, developers wrote programs for it, users expected it, and competitors withered. The same playbook repeated with DOS - get broad distribution through IBM, become the de facto standard, then leverage that position when clones emerged. Each success made the next victory more likely, creating an unstoppable momentum.
Ben warns this approach has specific requirements rarely found in modern startups: "The important thing here is (a) Most of the work was already done for the original BASIC. (b) Bill was doing it himself, Bill and Paul, so the importance of technical co-founders. Their overhead was crazy low." In today's environment, the minimum viable fixed cost for achieving that "slight advantage" often requires billions in investment, making Microsoft's bootstrap approach nearly impossible to replicate.
Xerox PARC's Untold Impact
While Silicon Valley lore celebrates Steve Jobs' famous raiding of Xerox PARC for ideas and talent, Ben and David reveal that Microsoft did the same. The Palo Alto Research Center invented virtually every element of modern computing: the graphical user interface, the desktop metaphor, the mouse, object-oriented programming, Ethernet, and laser printing. As David notes, "This is everything about modern computing, invented there."
The roster of PARC alumni reads like a technology hall of fame: Alan Kay, Bob Metcalfe (who invented Ethernet and founded 3Com), Larry Tesler (who joined Apple), John Warnock (who started Adobe), Eric Schmidt, and crucially for Microsoft, Charles Simonyi. When Microsoft hired Simonyi in 1980, they gained not just an engineer but a direct conduit to PARC's innovations. He would lead development of Microsoft Word and champion the graphical interface concepts that eventually became Windows.
The Alto computer PARC created in 1973 was essentially "the Mac with the monitor turned on its side" - eleven years before Apple's Macintosh. But David explains, it wasn't a microcomputer but rather a minicomputer costing tens of thousands of dollars. This explains why Xerox management, often derided for failing to commercialize these innovations, actually made rational decisions - the technology simply wasn't economically viable until the microprocessor era made personal computers affordable.
IBM & Microsoft
In 1980, IBM faced an existential challenge: the microcomputer revolution threatened their mainframe monopoly. Their response, Project Chess in Boca Raton, Florida, would inadvertently transfer technology industry leadership to Microsoft. As Don Estridge explained, to "compete against people who started in a garage, you have to start in a garage yourself." IBM gave a small team one year to ship a PC using only off-the-shelf components - a radical departure from their integrated approach.
The pivotal moment came when IBM needed an operating system. Bill Gates initially referred them to Digital Research's Gary Kildall, but that meeting infamously failed - whether due to Kildall flying his plane, his wife refusing to sign NDAs, or disputes over licensing terms remains disputed. IBM returned to Microsoft essentially saying, "you guys deal with this." Microsoft promptly acquired QDOS (Quick and Dirty Operating System) from Seattle Computer Products for $75,000, hired its creator Tim Patterson, and transformed it into MS-DOS.
The masterstroke wasn't acquiring DOS - it was the licensing terms. Microsoft negotiated a fixed fee of $430,000 from IBM ($75,000 for testing, $45,000 for DOS, $310,000 for languages) with zero ongoing royalties. This seemed like Microsoft was leaving money on the table, but they retained the right to license DOS to anyone else. As Ben Gilbert explains: "What IBM did was they were the one place where every business needed to go for their computer needs. What they did in this negotiation was they actually handed that over to Microsoft."
When Compaq reverse-engineered IBM's BIOS and created the first PC clone in 1982, they needed an operating system - and Microsoft was waiting. Every subsequent clone manufacturer faced the same need. Microsoft used IBM's distribution to create demand for DOS, then captured value from every other PC maker. The per-processor licensing deals that followed meant manufacturers paid Microsoft for every computer shipped, regardless of the operating system installed.
The partnership thrived initially, but fundamental conflicts emerged. IBM wanted to recentralize control through OS/2, a new operating system exclusive to IBM hardware. Microsoft publicly supported OS/2 while secretly developing Windows, recognizing that IBM's vision conflicted with the open PC ecosystem that enriched Microsoft. When Windows 3.0 succeeded in 1990, the marriage was over. By 1993, Microsoft's market cap exceeded IBM's, completing one of business history's greatest power transfers. This single deal created not just Microsoft's $3 trillion value but enabled trillions more in ecosystem value - "the single best business deal negotiation of all time."
Powers
Using Hamilton Helmer's Seven Powers framework, Ben and David identify that Microsoft exhibited all seven powers during the PC Era:
Counter-positioning: Microsoft embraced the microcomputer revolution while IBM tried to slow it down and maintain mainframe dominance. As Ben notes, Microsoft had "no baggage" and could become "the whole point of integration for the entire ecosystem just by shipping bits." They enabled other companies' success - Compaq, Lotus, Intuit - while IBM's model required controlling everything.
Scale Economies: The hosts emphasize this throughout - with software's zero marginal cost, Microsoft could amortize fixed development costs across millions of users. When competitors added features, Microsoft could implement them and "reap tons and tons and tons of value" across their massive installed base that smaller companies couldn't match.
Switching Costs: As David notes, "Good luck getting other applications that you know and love to run on" another operating system. Users faced prohibitive costs to switch - relearning interfaces, replacing applications, converting file formats. The ecosystem lock-in made alternatives virtually impossible.
Network Economies: More Windows users attracted more developers, creating more applications, driving more users. File format compatibility created additional network effects - as David observes, law firms needed clients to open Word docs, creating inter-organizational network effects even before networked computers.
Process Power: Ben acknowledges this as "the weakest" but cites Microsoft's ability to ship Office on a three-year schedule with 6,000 people involved, hitting RTM (release to manufacturing) dates planned years in advance. The complex interdependencies of device drivers, middleware, and APIs created institutional knowledge competitors couldn't replicate.
Branding: "You don't get fired for buying Microsoft" became the enterprise mantra. Windows 95 created unprecedented consumer brand awareness for an operating system, with people lining up around blocks. Microsoft built both enterprise trust and consumer desire - a dual branding achievement unmatched in software.
Cornered Resource: DOS became Microsoft's ultimate cornered resource. Once IBM began shipping it, as Ben emphasizes, "it was over." IBM's distribution created demand for DOS, then Microsoft captured value from every PC manufacturer who needed it. The $75,000 acquisition of QDOS generated billions in revenue.
Playbook
Hedging Bets in an Uncertain Technology Future: As David emphasizes, "whichever way the apple fell from the tree, Microsoft was going to be positioned to catch it." They had conviction that software would be big but "very little conviction" on the exact path. This manifested in developing Windows while publicly committed to OS/2, creating Mac applications while building DOS, and maintaining multiple strategic options simultaneously.
Capital Efficiency: Bill Gates retained 49% ownership at IPO, having raised only $1 million from VCs who got 5% of the company. This extraordinary capital efficiency allowed founder control and long-term strategic thinking impossible in today's venture environment. Microsoft generated more cash than they could spend, making the IPO purely about liquidity, not capital needs.
New Generations of Technologies Create Market Dislocation: As Ben notes, "Unless you are in a transformational moment... it's pretty hard to go challenge an incumbent." The microprocessor enabled Microsoft to challenge IBM, just as GUI enabled them to leap past Lotus 1-2-3. These technology shifts are the moments when new entrants can dethrone seemingly invincible incumbents.
Be THE Talent Magnet: Microsoft became where every ambitious young person wanted to work - technical, sales, or marketing. Brad Silverberg revealed their management philosophy: "We laid out principles for product and then pushed responsibility down." The result? "Everyone felt personally responsible for the product." This created a culture where employees worked themselves "half to death" but considered it "the good old days."
Scaling with OEMs: Ben draws the Visa/Amex analogy - Microsoft is Visa to Apple's AmEx. By distributing through OEMs, Microsoft could scale without doing the work themselves. Their Windows OEM team was just 20 people managing relationships with HP, Compaq, Dell, and Gateway, making their go-to-market incredibly efficient compared to direct sales.
International Early: Going global in year three meant "every time they shipped software, they had to make it globally ready." This created network effects and scale economies competitors couldn't match. They invested in quality localization and country-specific subsidiaries, treating international markets as strategic pillars rather than afterthoughts.
No Shame in Copying: Microsoft famously wasn't first to market with any major application. As Ben notes, this "leads to better risk-adjusted returns - you already know what's going to work." They incorporated good ideas wherever found, even keeping Lotus 1-2-3 keyboard shortcuts in Excel for easy switching. Steve Jobs' critique that "Microsoft has no taste" was another way of describing this strategy.
Software is Never Done: Microsoft understood before anyone else that "shipping software is the beginning." While competitors thought of software as products to be completed, Microsoft created a culture of continuous improvement. This philosophy persists today in cloud-based continuous deployment, contrasting sharply with Apple's annual release cycles.
Quintessence
Ben: The IBM deal remains his mental splinter - "I can't unsee it. Microsoft figured out a way to take someone else's dominance and wholesale transfer that into their dominance for the next generation." IBM thought they were playing chess (even naming it Project Chess), but "Bill Gates was playing chess and they played checkers." More profoundly, this deal illuminated how "a new technology generation... enables a shift in the point of integration in a value chain."
David: The sheer audacity of these kids in the 70s who changed the world captivates him. "These kids changed the world. That's so trite to say... but these kids in the 70s did it." There was a pivotal moment when Microsoft "started to believe in themselves that they don't need IBM" - transforming from ambitious youngsters to world-changers who truly believed they would revolutionize computing. "The level of ambition and audacity of these people is staggering."
Carveouts
David's carveouts:
LGR (Lazy Game Reviews) YouTube channel - Clint's channel dedicated to preserving and celebrating computer history from the PC Era, featuring unboxings and restorations of vintage computers
André 3000's new flute album and GQ interview - The rapper's unexpected pivot to woodwind instruments after 20 years, choosing authenticity over expectations
Ben's carveouts:
Meta Ray-Bans - Smart glasses that excel at phone calls and hands-free photo/video capture, representing "low key, more subtle, augmented reality"
Julia Rundberg - Visual designer recommended for branding, visual identity, and design work
Summer Health - On-demand pediatrician texting service for new parents, providing 24/7 medical guidance
Additional Notes
Episode metadata:
Episode: Microsoft Volume I
Series: Season 14, Episode 4
Release date: April 21, 2024
Duration: 4 hours, 22 minutes, 49 seconds
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