Business Skill+ 5
BUSINESS AS SPORT RANKING30
Bill Gates – Built one of the world’s biggest companies, but his ill-gotten operating system monopoly may well have slowed the pace of personal computer innovation throughout the world. Gates is also a philanthropist on a massive scale, but at this point it is difficult to assess the impact of his philanthropy.
Gary Kildall – A brilliant computer innovator who created some of the first operating systems, and much else, although he never got credit, or paid, for much of his work
Small businesses can create big impacts by introducing new products or processes to the marketplace. Despite frequent efforts to be more entrepreneurial, large businesses are not so good at innovation, but they are amazing marketing, distribution, and implementation machines. It is this marketing power that allows them to impact entire industries. Large businesses tend to grow through acquisition, rather than organically; they grow not through passion for any particular product, but by focusing on financial results. Microsoft is the perfect example. Co-founded by America’s richest man, Bill Gates, Microsoft came to dominate the computer software business. Author and business historian Harold Evans says Gates “has never invented any important, original software; and Microsoft has never been first to market with any major innovation.” Then Evans goes on to document this claim by showing that Microsoft tended to react to the innovations of others, rather than leading innovation:
“The BASIC programming language Gates and Bill Allen first adopted for the personal computer in 1974 was invented ten years before by two Dartmouth professors. Microsoft developed Microsoft Word to compete with WordPerfect; Microsoft Excel to compete with Lotus; Windows to compete with the Macintosh graphical user interface; DOS 6.0 to compete with Star Electronics disk compression software; Microsoft Net and LAN–man to compete with Novell’s networking software; WinCE to compete with PalmPilot; Internet Explorer to compete with Netscape; MSN to compete with AOL, and the Xbox to compete with Sony and Sega’s home game systems.”
In other words, Gates does not create new ideas or markets; he copies what others have created, sometimes successfully, sometimes not. He does not invent; he reacts. As Evans points out, Gates likes to think of himself as an inventor, like Thomas Edison, but he is really much more of an aggregator, and the more correct historical analogy is to John D. Rockefeller, also the richest man of his time.
Even when Microsoft creates a product to compete with an innovation developed by others, the Microsoft version is not really developed within Microsoft, despite the fact that the company employs thousands of software engineers. Microsoft typically buys products created by small entrepreneurs, then integrates the marketing of those products within the vast Microsoft suite. In early 1996, Charles H. Ferguson and Randy Forgaard sold Vermeer to Microsoft for $133 million, which integrated FrontPage into Microsoft Office. Hotmail is owned by Microsoft and bundled with the Internet Explorer browser, but was created by Sabeer Bhatia and Jack Smith and sold to Microsoft, reportedly for more than $400 million, in 1997. The list of companies purchased by Microsoft is truly staggering, and, just in 1999, includes: Access Software (PC golf games), Compare Net (database products and shopping comparison guides), Fasa Interactive, (another game developer), Jump Networks, (web based email and calendar service) OmniBrowse Inc. (wireless data services for hand held computers), Sendit (Cell phone to Internet communications software developer), ShadowFactor (Gaming software technology) – and that’s just a very select list of companies that Microsoft purchased outright.
During 1999 they also made equity investments, licensing, or development agreements with scores of other companies. By one count, Microsoft purchased, made a major investment in, formed a joint venture with, or otherwise made some major deal with 155 different companies just through the end of 1999. That pace has continued into the 21st century, with Microsoft president Steve Ballmer announcing in 2007 that the company planed to purchase as many as 20 companies a year for the next five years, and to spend up to $1 billion on each acquisition. In most of these cases, the purpose of the purchase or investment is to obtain some technology or innovation, making it clear that Microsoft’s role is as an aggregator and marketer of technology, not as a product innovator. Microsoft has been in a financial position to make these purchases and investments due to one fact: they control the operating system, which they also did not develop.
Even with all the products and services they have purchased from others, the real core of Microsoft, the foundation of its fortunes, is the fact that it sells the operating system (OS) software for 90% of personal computers. The operating system is the foundation on which all other programs run, in the same way that a foundation supports a house. Microsoft’s operating systems, like Microsoft Windows or Windows Vista, is designed to be incompatible, and thus a self-perpetuating monopoly, with the operating systems and other products from competing companies. And, once again, the genius of Gates and Microsoft lie not in creativity but in business savvy and, some would say, skullduggery. Under the critical initial contract between Microsoft and IBM, Big Blue agreed to fund most of the development costs of MS-DOS, Microsoft’s base operating system, but only Microsoft was allowed to license the software to third parties. IBM needed an operating system so it could sell functional computers, but they made no money unless someone bought an IBM PC.
On the other hand, working with IBM’s money, and the foundation created by others, Microsoft ended up with the right to sell, or rather license, MS-DOS to anyone, regardless of what kind of PC was running the software. Thanks to the work of Gary Kildall, operating systems were developed that could run on any PC. To Gate’s credit, he saw the future much more clearly than IBM and others; he saw that it was software, and specifically operating systems, not hardware, that could become near monopolies. Microsoft’s strategy, enabling it to sell the software to anyone, including future IBM competitors, has been widely heralded as a great business decision. In fact, when author Stuart Crainer canvassed business historians and others for his history of great business decisions, Gates’ acceptance of very low royalties from IBM in return for the right to license MS-DOS is the decision/strategy most often sited as a great business decision. There is no question that Gates is a great business tactician, like Rockefeller, but he is no innovator, and many say that the kernel of MS-DOS was indirectly stolen from another entrepreneur.
Gary Kildall was the classic entrepreneur; he loved what he did. This is how he described writing code: “It’s fun to sit at a computer and let the code flow. It sounds strange, but it just comes out of my brain; once I’m started, I don’t have to think about it.” Athletes in the heat of play would describe their actions in the same way; so well honed and intuitive that no thought is required, even for the most complex plays or routines. According to biographer Evans, Kildall would call colleagues in the middle of the night to tell them that he had successfully completed a program, shouting “What a Rush!” into the phone. Another writer, Robert Cringely, has said that Kildall wrote code as Mozart wrote music. Kildall was just as passionate in his play: he piloted his own aircraft, rode motorcycles and Jet Skis, raced his many sports cars, and generally lived with great passion. For Kildall, like for almost all great innovators, and athletes, the work came first, and the business second. Once the financial results assume primary importance, you can almost be sure that the results will be mediocre at best, whether the product is a sports team or a business.
Kildall’s outlook on life was one of openness; he wanted to share his work, and his passion with others. He devoted a lot of energy to a product called Dr. Logo, which was designed to teach kids to program and to use computers as learning tools. He “epitomized the openness of the early days of Silicon Valley” and believed that “mankind advances less by the protection of knowledge than by its diffusion.” Ultimately, this sort of attitude would be taken advantage of by Gates. IBM ended up partnering with Gates rather than Kildall, to a great cost, according to Evans:
“Had IBM backed Kildall’s system, the majority of computer users would have had multitasking and windows a decade earlier. By adopting MS-DOS, which was based on QDOS, a slapdash clone of Kildall’s system, IBM and Microsoft forced users to endure more than a decade of crashes with incalculable economic cost in lost data and lost opportunities.” (On the lighter side, this is reflected in the old joke, “If Bill Gates had a nickel for every time Windows crashed… Oh wait, he does.)
But he wasn’t just a brilliant programmer; Kildall was also a visionary who could see the future of computers. As Evans says, “entirely out of his own head, without the backing of a research lab or anyone, he wrote the first language for a microcomputer operating system and the first floppy disk operating system. Kildall was involved in many innovations: multi-tasking, window capabilities, menu driven PC interfaces, PC networking, computer interfaces for videodiscs to allow search capability. According to Evans, he built the first consumer CD –ROM filing system and data structures for a PC.
Like many very bright kids, Kildall was a poor student in high school, spending his time rebuilding old cars and boats and on pranks, such as rewiring the neighborhood phone lines to listen to his sister’s conversations with her boyfriend. In fact, he had to repeat a year of high school. Despite his lack of academic success, he followed family tradition and became a teacher, joining his father and grandfather as teachers at Kildall Nautical School for 3 years, where he taught navigation and trigonometry. At age 21 he applied, and was barely accepted, to the University of Washington. He developed his programming skills by playing with a university computer that he had been hired to maintain. After finishing his masters in computer science, with top grades, and being drafted, he was given a choice: he could become an officer on a destroyer facing battle in the Vietnam War, or he could become an instructor in mathematics and computer science at the Naval Postgraduate School in beautiful, and very peaceful, Monterrey California. It was not a hard decision to make.
While working at the Navy school, on his own initiative he developed many of the very basic innovations, like disk operating systems, that led to the development of the personal computer. The first application of these innovations was a program to produce predictions based on astrology. “Put in a quarter, dial your birth date, and out comes your future.” No one was interested in the astrology machines, but the primitive operating systems had other uses, and Kildall and his wife started selling them out of their bedroom. “There was no long term plan. We put no money into the operation. We didn’t have much savings. We lived off Visa and MasterCard.”
In 1975 Kildall and his partner, John Torode, an electrical engineer with whom had had developed the first operating system, had their first big sale when they sold, for $25,000, a word processing system to Omron, which made cathode ray tubes for newspaper editing. Kildall’s next major innovation was to make software independent of hardware. In the early days of computing, each software program had to be customized for each different type of hardware, but Kildall figured out a way to translate programs so that each could run on a different machine; he did all this was still working full time as a Naval instructor, which he loved. Evans describes this development as a “phenomenal advance. It liberated software from hardware. Any application could thereafter run on any computer.” Before this innovation, it was like having a car industry in which each different model of car required a different type of gasoline. Or like the situation in 2007 whereby Apple’s innovative iPhone would only run on the ATT phone network, much to the frustration of iPhone users.
Kildall had been a consultant to Intel, and was helping them to develop operating systems. In fact, he offered to sell them his system for some trivial amount, but they decided they wanted to develop their own operating system. In 1976 Kildall decided to quit teaching for the Navy, and Intel terminated his consulting contract. With his wife Dorothy he formed a mail order business, Digital Research. At the time, Intel sold the 8080 microprocessor with paper tape and floppy disk drive for $12,000; Kildall sold his much superior system for $70; it was small, fast, and would run on all Intel computers as well as competitors. Even at a give away price, he was making $100,000 a month by 1978, and his operating system was used the vast majority of the PCs in place at the time; in terms of having control over the operating system, he was the Bill Gates of his time, but without any measures to retard competition.
Bill Gates was several years younger than Kildall, but in the small world of computing of that time they were bound to know each other, and they did. Not long after Gates and Bill Allen had formed Microsoft in 1975, Gates and Kildall met and discussed merging their respective companies. Gates even stayed overnight with Kildall and his wife, and his wife, Dorothy, “fixed a nice roast chicken dinner” for Gates. But even at the time, he didn’t trust Gates: “For some reason, I have always felt uneasy around Bill. I always kept my hand on my wallet, and the other on my program listings. I found his manner too abrasive and deterministic, although he mostly carried a smile through a discussion of any sort. Gates is more an opportunist than a technical type.” At the time, Gates and Allen were focused on computer languages, such as Basic, not operating systems. In 1978 Bill Allen designed a Microsoft Softcard that combined Microsoft’s version of the Basic language and Kildall’s operating system for the Apple computer.
Kildall sold Gates the license for 10,000 copies for a total of $25,000; not a lot of money, but more than he was getting from many others who copied his operating system and resold it without paying Kildall anything. Still, at $2.50 copy, it was much less than the standard $10 per copy that Kildall was licensing to hardware manufacturers at the time. Because Gates had combined his programming language with Kildall’s operating system, when IBM was first developing their version of the PC, and looking for a software partner, it assumed that Gates owned the operating system. Gates informed IBM that Microsoft did not own the operating system, and directed them to Kildall, who met with the IBM people, but could not agree as to a royalty rate. IBM went back to Gates, but Kildall wasn’t worried, he said “Bill’s a friend of mine. He wouldn’t cut my throat.” In a literal sense that is probably true, as I doubt that Gates has much taste for physical violence. But in every other sense it was untrue, as Gates figured out a way to get Kildall’s operating system without paying for it. He simply paid $75,000 to buy the operating system from Tim Paterson, who had copied Kildall’s system. Both Paterson and Gates made some changes in the program, but it was, at root, the system designed by Kildall.
Kildall threatened to sue, but IBM placated him by saying it would sell both his system and the Microsoft one side by side, and Kildall was willing to let the marketplace decide which was better; the clone or the real thing. But IBM torpedoed him by selling his system for $240, and Microsoft’s for only $40, essentially making sure that their original partner, Bill Gates, would triumph. For uninformed consumers, it was a simple choice. Anyone buying IBM’s PC was told that they needed to buy software to run the PC; either software would work, but one cost $240 and one cost $40. It’s important to remember at this point that IBM had a vested interest in partnering with Gates rather than Kildall.
From a corporate culture point of view, Gates was a good match for IBM; he understood and was comfortable with big corporations, he even wore a tie to meetings with IBM. Kildall was much more the iconoclast. The chief executive of IBM, John Opel, even knew Gates’ mother, and referred to Microsoft as “Mary Gates’s boy’s company”. From a business perspective, Microsoft was charging IBM a very low royalty in return for the exclusive right to license the software to others, as we discuss above. Kildall could also have sued Microsoft, but, foolishly, chose not to, partly because it was just such a novel idea; at the time, no one had ever field suit over the infringement of computer software, and partly because it was just not his nature to be adversarial: “It’s not nice to sue people and we’re going to succeed anyway” he said at the time. Even as they contemplated filing suit, Steve Ballmer of Microsoft, was calling Kildall’s employees trying to figure out the engineering of the operating system they had stolen. Also, Kildall believed that the IBM hardware, the new IBM PC, was so bad it would never be successful, even using his operating system.
Despite all the problems with IBM and Microsoft, Kildall’s company, DRI, became very successful, with over 500 employees by the end of 1982, operations in Europe and Asia, and revenues over $44 million by 1983. DRI and Kildall moved on, focusing on, among other things, the potential of CD-ROMs to hold vast amounts of information. Kildall started a new company, Knowledge Set, to put encyclopedias on CD-ROMs. Gates, not realizing who was behind this new company, wrote a letter expressing interest in buying Knowledge Set. Despite his previous experience, Kildall met with Gates and talked in great length about the potential for CD-ROMs, which at the time were not yet a standard part of PCs. Kildall even, at Gates invitation, became the (unpaid) keynote speaker at a conference on CD-ROMs for which Microsoft was charging $1,000 per head, but which Gates had initiated only after Kildall told him that he was going to be holding a similar conference at a later date. Kildall gave the devil his due: “It was clever. It was divisive. It was manipulative. It is Bill Gates nature. I must give him credit for being a very opportunistic person.”
A superior product is no guarantee of business success, and the combined marketing clout of Microsoft and IBM was defeating DRI’s superior products. Trying to salvage as much value as possible for his shareholders, Kildall offered to sell DRI to Gates for $26M; Gates offered $10 million. A few years later, in mid 1991, Novell acquired DRI for $120M, and then proceeded to file an anti-trust suit against Microsoft, alleging, among other things, that Microsoft had a policy of falsely announcing new software that didn’t exist to prevent sales by potential competitors, created false warning messages about competitors’ programs incompatibility with Windows, and threatened retaliation against IBM should it choose Novell’s products. 3 and half years later, in early 2000, the case was settled in secret, with estimates of Microsoft’s settlement at $150-$275 million, or higher.
Despite his various travails, Kildall had been very successful financially, and had a luxurious lifestyle filled with many adult toys. His personal life was not such a success; he divorced his first wife, and remarried, but that marriage was not happy. He continued to innovate, and did some not for profit work, but was tortured by the public perception that Bill Gates was the creator of the PC, and Godhead of the personal computer revolution. Gates shadow, and self created myth, were seemingly everywhere: when Kildall was invited to attend his 25th college reunion at the University of Washington, he was distressed to learn that Gates had been invited as the featured speaker. When Kildall called to complain about this, the chairman of the computer science department hung up on him, as if Kildall was just some crank. In fact, Kildall was the University’s most distinguished graduate, but Gates, a Harvard drop out, was a major donor.
Like many men tortured in spirit, Kildall’s health began to deteriorate, and his doctor banned him from flying, one of his favorite hobbies. On July 8, 1994, he stumbled and hit his head at a restaurant in Monterey. Three days later he died of a blood clot. He was 52. 300 people attended the memorial service, but Bill Gates was not one of them. Microsoft issued a statement saying Kildall’s death was “a loss to the industry.” Kildall’s ashes were buried in Seattle, not far from Gates’ $60 million house.