As kids, Bill Gates and Paul Allen dreamed of having their own Fortune 500 company.[1] The two became friends (and sometimes adversaries) when both attended the prestigious Lakeside School in Seattle in the early 1970s. But their friendship was mediated by a third entity, a Teletype ASR-33 connected remotely to a computer. As video terminals were rare and expensive, this popular teleprinter was often recruited to provide an interface to computers. Lakeside used the ASR-33 to connect to a timeshare service offered by General Electric (GE) in the Seattle area.

However, based on sharing the resources of a PDP-10, the service soon proved to be expensive. Despite an infusion of $3,000 into the Lakeside computer account by the Lakeside Mothers Club, the boys (Lakeside was an all-male school) soon ran out of computer time. But luckily, one of the mothers of a Lakeside student was a co-founder of a new company called the Computer Center Corporation that offered students computer time on their PDP-10 in exchange for helping them debug their software.

Allen and Gates became quite proficient with the machine, and even after the project ended, they continued to “hack” into the machine. Although they were eventually caught, they nevertheless gained a notorious but beneficial reputation for their hacking. But rather than continuing with hacking, they instead went into business, forming the Lakeside Programmer’s Group with a few other students.[2]

The Lakeside Programmers Group primarily provided computer services in exchange for coding time but provided the foundation for their next enterprise, Traf-O-Data. This new company was formed in 1972 to sell computer traffic-analysis systems to municipalities. They planned to string rubber cables across roads and highways and use a microprocessor to develop statistics on traffic flow.

Their technology was based on an Intel 8008 chip that had enamored Allen and who subsequently seduced Gates into helping him develop a BASIC interpreter for it. By this time, Allen was enrolled at Washington State University, and his dorm became their headquarters. The 8008 was the first 8-bit microprocessor but working with it was a bit awkward. They used an IBM System 360 on campus to simulate the 8008.

At the same time both were hired by defense contractor TRW to develop a simulator for the 8008 chip.[3] The two labored and eventually came up with a workable system for the car counter but it had difficulties with its paper-based printer. Traf-O-Data was not very profitable as it soon found itself competing against free services from the State of Washington. Their final Traf-O-Data product was not really a computer but it provided valuable experience for the two young programmers.[4]

After Gates’ graduation, the two were in Boston, where they took a bold move towards their vision of creating a major computer company. In the winter of 1975, Paul Allen, who was now working for Honeywell picked up the January issue of Popular Electronics at Cambridge’s Harvard Square. Excitedly, he took it to his friend Bill Gates’ dorm room, who was enrolled nearby at Harvard University.

The magazine issue sparked their quest to enter and impact the new computer era. They saw their opportunity to leverage their experience with BASIC and gain a foothold in the emerging microcomputer industry. The magazine showed a low-cost microcomputer built around the Intel 8080 chip and was in desperate need of a programming language. The Altair, as it was called, was actually a kit that had to be assembled by the purchaser. It was marketed by a company called MITS (Micro Instrumentation Telemetry Systems).

Gates and Allen had been following the development of the 8080 chip. Using Traf-O-Data stationary as their institutional identity, they contacted the developer of the MITS machine to offer their services. The two had some experience with Intel chips from their Traf-O-Data days, so they designed a simulation of the Altair’s 8080 chip on a Harvard PDP-10 to build a version of BASIC that would run on the Altair. The key was their questions about how to use a Teletype machine to read and input data. This call convinced the MITS people that they were serious. Just a few months later, Allen flew to New Mexico to present their software. The memory in the Altair was so small that they were unsure their version of BASIC would work. But after a day’s delay and some last-minute software adjustments by Allen, the software worked, and the demonstration was a success. It even allowed them to play a game of Lunar Lander on the Teletype printer.

Allen was offered a job on the spot and became Vice-President of Software at MITS. Gates flew down in the summer and helped out while they worked on their new company at night. On July 23, 1975, the two companies signed a contract giving MITS exclusive rights to their BASIC with royalties going to their new company Micro-Soft. The relationship between MITS and Micro-Soft soon soured. Microsoft was not making much money from the deal. MITS sold BASIC for $75 with the kit while charging $500 for it separately. It became extremely attractive for Altair users to trade bootleg copies of BASIC rather than buying it from MITS. Although the Altair depended on BASIC to do anything useful, MITS saw its business as selling the hardware, not the software. Consequently, marketing the software was not a priority.

On February 3, 1976, Gates sent his infamous letter accusing most Altair owners of stealing the BASIC software by duplicating the paper tape. He claimed that only 10% of them had bought BASIC. Soon Gates got his father, a successful lawyer in Seattle, involved in a lawsuit to get BASIC back from Pertec, the company that had bought MITS in the meantime.

The year 1977 was a decent year for Micro-Soft, with $381,715 in revenues.[5] They got BASIC back and in August began negotiations with Apple to license its programming language for $21,000. Micro-Soft produced versions of BASIC for new processors as they came out, including the 6502 that Wozniak was using for their Apple IIs and the TRS-80 by Radio Shack. The latter’s marketing capabilities made an extraordinary impact on the popularity of the microcomputer, and Micro-Soft’s BASIC was on most of them. When the Commodore PET was designed, Micro-Soft also got the call to provide their BASIC.

Allen, Gates, and crew worked on the project despite the agreement that royalties would not be forthcoming until it shipped the next year. Ironically it was support from Apple that provided a basic level of financial backing for Microsoft. Although Wozniak had designed a BASIC early on for the Apple II, it was not the “floating point” version that many users were requesting. Micro-Soft soon developed a version of BASIC for the Apple II and received a check for $10,500 as an initial part of its 10-year license fee. It was one of the rare times that Gates allowed software to be licensed on a flat-fee basis, rather than requiring a royalty payment on every copy sold.[6] The new version, called AppleSoft BASIC was released in November 1977 and improved and rereleased the following year.

Micro-Soft was very important to Apple in its early days. The Apple II’s bus architecture made expansion possible, and Micro-Soft came up with Softcard to allow the Apple computer to run CP/M. But it was BASIC that was crucial to the success of the Apple II, and Steve Jobs later encouraged Microsoft to create a version for the Macintosh. Unfortunately, this project was a disaster, so Gates strong-armed Jobs to accept it or lose their license for the Apple II’s BASIC. Since Apple Computers was still highly dependent on the sales of the Apple II and BASIC was a strong complementary component of the microcomputer, Jobs killed their in-house MacBasic project to use the Microsoft version. At least until the Apple II computer was discontinued. [7]

In 1978 Gates agreed to move the company back to their hometown Seattle and change the name to Microsoft. Allen, in particular, had grown tired of the desert and convinced Gates to move the company. The three years they were in Albuquerque years were very challenging as the small company (16 employees in 1978) worked day and night keeping up with the new computers and chips coming on to the market. CP/M was becoming the most popular cross-platform operating system due to Kildall’s BIOS that allowed the OS to be quickly adapted for new machines.

In December of 1979, they moved to Bellevue, Seattle, and started focusing on Intel-based 8086 16-bit machines. By March 1979, the newly named Microsoft had 48 OEM (Original Equipment Manufacturer) customers for its 8080 BASIC programming language, 29 for FORTRAN, and 12 for COBOL. During that summer, they developed PASCAL and APL languages as well. The Intel-based microcomputer industry was starting to take off, and Gates and Allen had positioned themselves in the center of it.

Notes

[1] Fortune 500 dream story told by Paul Allen in an interview on Robert X. Cringely’s Triumph of the Nerds.
[2] This information on Allen and Gates’ early years were from Laura Rich’s The Accidental Zillionaire. John Wiley & Sons, Inc.
[3] Allen and Gates became an employee of TRW during his senior year earning a salary of some $30,000.
[4] Traf-O-Data and TRW employment information from Fire in the Valley, pp. 30-32.
[5] Micro-Soft’s 1977 revenues from Laura Rich’s The Accidental Zillionaire.
[6] Licensing of Microsoft’s BASIC to Apple from apple2history.com. Accessed September 19, 2003. .
[7] Microsoft’s early reliance on Apple from Paul E. Ceruzzi’s A History of Modern Computing. Second Edition. Cambridge, MA: MIT Press. p. 265.

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Anthony J. Pennings, PhD is the Professor of Global Media at Hannam University in South Korea. Previously, he taught at St. Edwards University in Austin, Texas and was on the faculty of New York University from 2002-2012. He also taught at Victoria University in Wellington, New Zealand and was a Fellow at the East-West Center in Hawaii in the 1990s.