The reason Microsoft became so big comes down to the best deal ever made in the history of computing, between the fledgling software company co-founded by Bill Gates and the behemoth hardware giant IBM.
Perhaps the most controversial aspect of the original IBM PC is how Microsoft ended up with the contract for the operating system. This would eventually make Microsofts MS-DOS the standard and set the stage for Microsoft to become the worlds leading PC software company.
As usual, there are lots of conflicting reports about the details that made this happen. But it mostly seems to be a case of Bill Gates and his company seeing the right opportunity at the right time and then executing well on the concept.
In the early PC market, Microsoft had established itself as the largest producer of computer programming languages, notably with an interpreted version of the BASIC language that had become the default standard on just about every major PC to date. Meanwhile, Digital Research Inc. (DRI) had become the leading operating system vendor with its CP/M (Control Program for Microcomputers) operating system. It was designed for the Intel 8080 processor (and later used on the Zilog Z80) and used on machines such as the Osborne 1, Kaypro II, and even the Apple II, using a Z80 “Softcard” from Microsoft.
In July 1980, before the IBM PC business unit known as “Project Chess” was formally approved, IBM sent a team led by Jack Sams, who would become the director of software development, to meet with Microsoft to discuss the PC market. The talks seem to have been in general terms, with IBM not disclosing many details of the actual PC.
After the project was approved on Aug. 21, 1980, Sams and his colleagues went back to Microsoft and discussed licensing Microsofts languages for the IBM PC, including BASIC but also COBOL, FORTRAN, and Pascal. Microsoft had already been working on 8086-based languages for other companies, so it seemed a logical fit.
In just about every account of the meeting, IBM asked Microsoft about operating systems, and Bill Gates referred IBM to Digital Research, even getting DRI founder Gary Kildall on the phone to arrange a meeting for the following day.
There are many somewhat conflicting stories about what happened when IBM went to meet with DRI. Gates is quoted in Fire in the Valley: The Making of The Personal Computer by Paul Freiberger and Michael Swain as saying “Gary was out flying” that day, but Kildall always denied the implication, telling the authors of Hard Drive: Bill Gates and the Making of the Microsoft Empire that he had flown on a business trip to the Bay Area.
IBM and its lawyers met with Kildalls wife, Dorothy McEwen, and presented DRI with a one-sided non-disclosure agreement, which the company refused to sign. Later, Sams would say in Hard Drive that IBM couldnt get Kildall to agree to spend the money to develop a 16-bit version of CP/M in the tight schedule IBM required. Whatever the reason, its clear that IBM left Digital Research without coming to an agreement on an operating system.
IBM communicated its problem to Microsoft later that month, and Microsofts Gates, Paul Allen, and Kay Nishi apparently debated what to do about the program. Allen knew of an alternative: Tim Paterson of Seattle Computer Products (SCP) had earlier built an 8086-based prototype computer, and while he was waiting for CP/M to be ported to the 8086, he created a rough 16-bit operating system for it. Paterson called it QDOS for Quick and Dirty Operating System, and according to Allen, it all fit within 6K. (It would later be renamed 86-DOS, and sometimes referred to as SCP-DOS.)
In Big Blues: The Unmaking of IBM, Sams is quoted as saying Gates told him about QDOS and offered it to IBM. “The question was: Do you want to buy it or do you want me to buy it?” Sams said. Since IBM had already had decided to go with an open architecture, the company wanted Microsoft to purchase QDOS. Besides, Sams said, “If wed bought the software, wed have just screwed it up.”
The first Quora link appears to be unavailable (“Something went wrong”) but I have information from the other two sources that provide details about this historic technology deal.
When we talk about the most influential business deals in technology history, Microsoft’s acquisition of DOS ranks near the very top This relatively small transaction fundamentally altered the course of computing and created the foundation for one of the world’s largest companies But exactly how much did Bill Gates pay for the operating system that would help make him one of the wealthiest people on earth?
The Origins of DOS and Microsoft’s Opportunity
In 1980, IBM was developing its first personal computer (the IBM PC) and needed an operating system. The computer giant approached Microsoft, which was then a small company primarily focused on programming languages like BASIC. Microsoft didn’t actually have an operating system to offer IBM at this time.
IBM initially wanted to license CP/M (Control Program for Microcomputers) from Digital Research Inc. (DRI), which was then the leading operating system for microcomputers. According to various accounts, Bill Gates actually referred IBM to Digital Research’s founder Gary Kildall.
What happened next has become one of tech history’s most debated stories. When IBM representatives went to meet with DRI, they were unable to secure a deal. Some reports claim Kildall was “flying his plane” that day (though Kildall denied this implication), while others suggest DRI was unwilling to sign IBM’s strict non-disclosure agreement or couldn’t commit to developing a 16-bit version on IBM’s tight schedule.
The QDOS Acquisition
Seeing an opportunity, Microsoft’s team, including Bill Gates, Paul Allen, and Kay Nishi, debated what to do. Paul Allen knew that Tim Paterson of Seattle Computer Products (SCP) had created a “Quick and Dirty Operating System” (QDOS, later renamed 86-DOS) for SCP’s 8086-based prototype computer while waiting for CP/M to be ported to the 8086.
In 1980, Microsoft initially licensed QDOS from Seattle Computer Products for approximately $10,000 plus a royalty of $15,000 for every company that licensed the software.
Later, as the IBM deal progressed, Microsoft realized they needed full ownership of the operating system. On July 27, 1981, Microsoft purchased all rights to DOS from Seattle Computer Products.
So How Much Did Gates Actually Pay?
According to most accounts, Microsoft paid between $25,000 and $50,000 for DOS, with $50,000 being the most commonly cited figure. This relatively small investment would turn out to be perhaps the most lucrative software acquisition in history.
Some accounts suggest Microsoft paid $25,000 initially for non-exclusive rights to QDOS and then later paid an additional $50,000 for exclusive lifetime rights, but the total investment remained remarkably small considering its eventual impact.
To put this in perspective, Microsoft’s contract with IBM for the operating system (which would become PC-DOS for IBM and MS-DOS for other manufacturers) was worth around $430,000 total, including:
- $45,000 for DOS
- $310,000 for various 16-bit programming languages
- $75,000 for “adaptions, testing and consultation”
The Masterful Business Move
What made this deal truly brilliant wasn’t just the low purchase price but the terms of Microsoft’s agreement with IBM. Rather than asking for a large upfront payment or per-copy royalty, Microsoft negotiated to retain the rights to sell DOS to other companies.
This decision proved to be the most crucial business move in Microsoft’s history. As IBM PC clones flooded the market in subsequent years, Microsoft was able to license MS-DOS to all of them, creating a standard operating system across the PC industry and generating massive recurring revenue.
The Controversy
This deal wasn’t without controversy. Gary Kildall and Digital Research claimed for years that Paterson’s QDOS was basically a copy of CP/M. Kildall reportedly said, “Ask Bill [Gates] why function code 6 [in QDOS and later in MS-DOS] ends in a dollar sign. No one in the world knows that but me.”
Paterson strongly denied these allegations, stating: “I didn’t copy anything. I just took his printed documentation and did something that did the same thing. That’s not by any stretch violating any kind of intellectual property laws. Making the recipe in the book does not violate the copyright on the recipe.”
IBM eventually offered to make CP/M available for the IBM PC as well, but priced it at $240 versus $40 for DOS, essentially ensuring DOS would become the dominant operating system.
Lessons from the Deal
The Microsoft-DOS acquisition offers several business lessons:
- Recognize pivotal opportunities: Gates and Microsoft saw the potential of the IBM relationship and moved quickly to position themselves.
- Think long-term: Rather than maximizing short-term profits, Microsoft prioritized retaining rights that would be valuable in the future.
- Execute effectively: Beyond just acquiring DOS, Microsoft successfully modified it to meet IBM’s needs on a tight schedule.
- Understand the market: Microsoft correctly anticipated the growth of PC clones and positioned itself to benefit from the entire ecosystem.
Why This Deal Mattered So Much
The $50,000 acquisition fundamentally changed the computer industry in several ways:
- It established Microsoft as the primary OS provider for IBM PCs and later for the entire PC industry
- It cemented the x86 architecture as the standard for personal computing
- It generated immense wealth for Microsoft, funding future developments like Windows
- It shifted power in the computer industry from hardware to software companies
Did Bill Gates Actually Create DOS?
A common misconception is that Bill Gates or Microsoft created DOS. In reality, Microsoft purchased the operating system rather than developing it from scratch. Tim Paterson at Seattle Computer Products was the original developer of QDOS/86-DOS.
After acquiring DOS, Microsoft did make modifications to it before delivering it to IBM as PC-DOS and to other manufacturers as MS-DOS. In May 1981, Tim Paterson left SCP and joined Microsoft to continue working on the operating system.
The Final Impact
The DOS acquisition allowed Microsoft to dominate the personal computer operating system market for decades. Windows, which initially ran on top of DOS, eventually became the world’s most widely used operating system.
This $50,000 investment ultimately helped create a company that at various points has been valued at over a trillion dollars and made Bill Gates one of the richest people in the world.
For a relatively tiny sum – less than the price of a modest home in 1981 – Microsoft secured the foundation for its software empire. In the history of business deals, few can claim such an extraordinary return on investment.
A Lesson for Today’s Entrepreneurs
The DOS acquisition shows that sometimes the most important business deals aren’t about the immediate price tag but about positioning for future opportunities. By focusing on the strategic value of controlling an operating system standard rather than maximizing short-term profits, Microsoft created the conditions for decades of dominance.
I’ve always been fascinated by how these pivotal moments in tech history could have gone differently. If Digital Research had secured the IBM deal, or if Seattle Computer Products had understood the value of what they’d created, the entire landscape of personal computing might look very different today.
For just $50,000, Bill Gates secured the future of Microsoft – proving sometimes the best investments aren’t the biggest ones, but the most strategically important ones.
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But Tim Paterson always denies it. He told the authors of Hard Drive, “At the time, I told [Kildall] I didnt copy anything. I just took his printed documentation and did something that did the same thing. Thats not by any stretch violating any kind of intellectual property laws. Making the recipe in the book does not violate the copyright on the recipe.”
Paterson said his goal was to make it as easy as possible for software developers to port their 8080 programs to the new OS, so he used Intels manual for translating 8080 instructions into 8086 ones. He then got Digitals CP/M manual, and for each function, he wrote a corresponding 8086 function.
“Once you translated these programs, my operating system would take the CP/M function after translation and it would respond in the same way,” said Paterson. “To do this did not require ever having CP/M. It only required taking Digitals manual and writing my operating system. Thats exactly what I did. I never looked at Kildalls code, just his manual.”
Big Blues said Kildall considered suing IBM and Microsoft over DOS, but IBM mollified the company by offering to make the 16-bit version of CP/M also available on the PC. Indeed, when it came out, the IBM PC could run three operating systems: DOS, CP/M, and the UCSD P-system. But CP/M was priced at $240 versus $40 for DOS (likely because of the non-royalty terms of the Microsoft contract), and it was clear that IBM was intent on pushing DOS.
Thanks to the non-exclusive agreement, Microsoft then had the rights to sell DOS for other machines—and that, in turn, set the stage for Microsoft to dominate the PC operating system industry for decades.
For more, check out PCMags full coverage of the 40th anniversary of the IBM PC:
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Gates, Steve Ballmer, and Microsofts Bob ORear met with IBM in Boca Raton and agreed that Microsoft would coordinate the software development process for the PC. According to Allen, under the contract signed that November, IBM agreed to pay Microsoft a total of $430,000, including $45,000 for what would end up being called DOS, $310,000 for the various 16-bit languages, and $75,000 for “adaptions, testing and consultation.”
Whats notable about this is that IBM apparently was expecting Microsoft to ask for more money upfront or at least for a per-copy royalty. Instead, Microsoft wanted the ability to sell DOS to other companies. Indeed, they would soon realize that under the name MS-DOS, the new operating system would be crucial to the success of Microsoft. In May 1981, Paterson left SCP and joined Microsoft. On July 27, 1981, Allen and Brock signed a contract selling DOS to Microsoft for $50,000 plus favorable terms on upgrades of the languages.
According to Big Blues, Don Estridge, who headed the IBM PC project, said one reason the company went to Microsoft in the first place was that Microsofts BASIC had hundreds of thousands of users, while IBMs BASIC, while excellent, had few users. According to Fire in the Valley, he also reportedly told Gates that when IBM CEO John Opel heard Microsoft would get the contract, he said “Oh, is that Mary Gates boys company?” Opel and Bill Gates mother served together on the national board of the United Way.
Gary Kildall in 1977 (Photo by Tom Munnecke/Getty s)
Still, the controversy over DOS and CP/M continued. For years, Kildall and DRI would claim that Patersons QDOS just copied CP/M. (Back then, software could not be patented, though it could be copyrighted.) In Big Blues, Kildall was adamant that a lot of QDOS was stolen: “Ask Bill [Gates] why function code 6 [in QDOS and later in MS-DOS] ends in a dollar sign. No one in the world knows that but me.”
Did Bill Gates Invent DOS?
FAQ
How much did Bill Gates pay for Doss?
Microsoft purchased 86-DOS, allegedly for $50,000. This became Microsoft Disk Operating System, MS-DOS, introduced in 1981. “Microsoft also licensed their system to multiple computer companies, who supplied MS-DOS for their own hardware, sometimes under their own names.
Who did Bill Gates purchase DOS from?
In order to meet a tight deadline, Microsoft purchased Q-DOS (Quick and Dirty Operating System) from Seattle Computer Products and revised it, transforming it …
How much did IBM pay for DOS?
Gates agreed to sell Operating System to IBM for much lower 50,000 US$ but it was non-exclusive royalty deal.Sep 6, 2023
How did Microsoft get the DOS operating system?
The most widely recognized version of DOS is MS-DOS, developed by Microsoft. This operating system emerged in the early 1980s when IBM sought to license an OS for its new PC, leading to a partnership with Microsoft and the eventual creation of MS-DOS based on the Quick and Dirty Operating System (QDOS).
