IBM, every mention

Microsoft Volume I: The Complete History and Strategy of founding through Windows 95 (Audio) · Acquired Apr 22, 2024 · 100 mentions

• ▶ 1:31:05 David Rosenthal So, that company, the most valuable in the world, they're going to tiny little Microsoft that's just moved to Seattle for this partnership.
• ▶ 1:31:13 David Rosenthal So, when IBM decided, this is just so amazing, like, they deserve so much credit here.
• ▶ 1:31:21 David Rosenthal They got the Clay Christensen, disrupt yourself, disruptive technology thing intuitively decades before Clay writes any of this stuff.
• ▶ 1:31:30 David Rosenthal The way that they decide to compete is they're like, all the things that Clay wrote about are working against us here.
• ▶ 1:31:43 David Rosenthal We need to do something outside the company completely removed from the politics.
• ▶ 1:31:53 David Rosenthal They call it the entry level systems division.
• ▶ 1:31:55 David Rosenthal Actually, it may have existed before, but they repurpose it.
• ▶ 1:32:07 David Rosenthal And they create a secret project called Project Chess.
• ▶ 1:32:11 David Rosenthal Secret from the rest of the company, the whole world.
• ▶ 1:32:13 David Rosenthal And the goal is to develop the IBM microcomputer, or the personal computer, as people are starting to refer to microcomputers.
• ▶ 1:32:25 David Rosenthal They're gonna do it in secret with a small team with no other IBM resources, and so that means this small team, the only way they can do it is to use all off-the-shelf components from technology providers, basically play on the same level…
• ▶ 1:32:49 David Rosenthal IBM leadership tells this team in Boca
• ▶ 1:32:52 David Rosenthal They have to ship the PC to customers within one year.
• ▶ 1:33:01 David Rosenthal Don Estridge, who was one of the leaders of Project Chess, he would later say that the company realized that if you're gonna compete against people who started in a garage, obviously a reference to Apple here, you have to start in a garage…
• ▶ 1:33:15 David Rosenthal And then Lou Gerstner, who later would take over IBM, would describe this whole Boca project as, quote, the way you get an elephant to tap dance.
• ▶ 1:33:25 Ben Gilbert And the question is, are they playing from behind and thus have to adopt a flawed strategy, or is this strategy of assembling with all off-the-shelf components actually a good strategy if it works?
• ▶ 1:33:41 David Rosenthal Okay, so what do they do?
• ▶ 1:33:53 David Rosenthal Like, I think IBM can do a deal with Intel.
• ▶ 1:34:46 David Rosenthal The standardized software packaged application software doesn't happen until the 16 bit era and doesn't really, really happen until the 16 bit era and the IBM PC.
• ▶ 1:35:03 David Rosenthal IBM calls up Bill Gates, and by August, 1980, the two companies are in serious talks to partner and work together on the IBM PC.
• ▶ 1:35:03 David Rosenthal IBM calls up Bill Gates, and by August, 1980, the two companies are in serious talks to partner and work together on the IBM PC.
• ▶ 1:35:26 David Rosenthal The Microsoft team of 30, which the whole company of Microsoft pivots to, like, work on the IBM PC
• ▶ 1:36:49 David Rosenthal Now they're dealing with IBM.
• ▶ 1:36:54 David Rosenthal So back to the IBM negotiations.
• ▶ 1:36:59 David Rosenthal IBM is not just very interested in working with Microsoft.
• ▶ 1:37:17 David Rosenthal And there's some debate on whether it was the Microsoft side or the IBM side that really saw the vision of, hey,
• ▶ 1:39:37 David Rosenthal Okay, so the IBM-Microsoft discussions are going along, and IBM's like, oh, hey, yeah, we need an operating system.
• ▶ 1:40:14 David Rosenthal IBM, that team from Project Chess, flies down, I think directly from Seattle, and talking with Bill and Steve, to Monterey, California, where Digital Research is based at this point, to meet with Gary and his wife Dorothy, who run the…
• ▶ 1:40:42 David Rosenthal So the team comes down, obviously they show up, they're from IBM.
• ▶ 1:41:09 David Rosenthal Knew it was happening, but he had another important business meeting, and he didn't know that this was IBM that was coming.
• ▶ 1:41:15 David Rosenthal Regardless, it doesn't really matter, because IBM just wants the operating system.
• ▶ 1:41:30 David Rosenthal The punchline is that IBM sort of leaves this interaction
• ▶ 1:41:56 Ben Gilbert And in particular, they would have to do some customizing, but part of what IBM wants
• ▶ 1:42:02 Ben Gilbert Is a customized version of an operating system for the IBM PC.
• ▶ 1:42:10 Ben Gilbert And just to add one more stir the pot of history here, there is another version of this story where Gary does actually have a conversation with IBM, and it blows up over licensing terms.
• ▶ 1:42:27 Ben Gilbert Of every IBM PC sold and IBM walks over that.
• ▶ 1:42:27 Ben Gilbert Of every IBM PC sold and IBM walks over that.
• ▶ 1:42:30 Ben Gilbert So whether that happened or whether it's just an NDA issue, either way, I think we all know the IBM PC did not end up running the CPM operating system.
• ▶ 1:42:42 David Rosenthal We'll talk about that when we get to the business terms of the Microsoft IBM deal in a minute.
• ▶ 1:42:54 David Rosenthal So IBM goes back to Microsoft and they're like, hey, this guy you referred us to ain't gonna work.
• ▶ 1:42:59 David Rosenthal The way that I read some quotes from the IBM people here was like, we just threw the problem back in Microsoft's lap of you guys deal with this.
• ▶ 1:43:15 David Rosenthal In this case, you kind of did need to give them an opportunity twice because they almost flubbed it and sent IBM down to see Gary.
• ▶ 1:44:55 Ben Gilbert Something about dirty didn't have a ring to it when you're selling it to IBM.
• ▶ 1:45:45 David Rosenthal Later on, before this all gets announced and the PC ships, Microsoft would pay Seattle computer products another 50,000 dollars for full rights to own
• ▶ 1:47:18 David Rosenthal This is just a shortcut to get the deal done with IBM to make it happen.
• ▶ 1:47:58 David Rosenthal Okay, so now they've got the operating system, they've got QDOS, or DOS, in place to license to IBM.
• ▶ 1:48:05 David Rosenthal The only thing that is left to formalize the partnership is the business terms, and Ben, if what you said is right about the Gary Kildall IBM negotiations, this is just a masterstroke from
• ▶ 1:48:23 David Rosenthal Bill here in the licensing with IBM.
• ▶ 1:48:37 David Rosenthal So the one that it looks like he's giving on is he does another fixed cost OEM deal with IBM.
• ▶ 1:48:50 Ben Gilbert IBM paid Microsoft 75,000 dollars for testing and consultation.
• ▶ 1:49:04 Ben Gilbert So all told, bundled together, that is 430,000 dollars fixed that IBM paid Microsoft with no ongoing obligation.
• ▶ 1:49:18 David Rosenthal Every copy of DOS that IBM sells, either included as part of systems that they're selling, or they're free to charge independently for DOS, whatever amount they want, Microsoft gets zero dollars.
• ▶ 1:49:49 David Rosenthal You would think, like, man, IBM, like, this is the time.
• ▶ 1:49:51 David Rosenthal People aren't gonna pirate IBM software.
• ▶ 1:50:38 Ben Gilbert And now in the 16 bit generation, when there are people building programs for computers, not just developers, once those application developers who are writing programs are targeting an operating system, then that is the operating system…
• ▶ 1:51:07 Ben Gilbert Did IBM miss this fact, or did they know it?
• ▶ 1:51:12 Ben Gilbert Basically, what IBM did was they were the one place where every business needed to go for their computer needs, and what they did in this negotiation was they actually handed that over to Microsoft, and they said, we are going to become a…
• ▶ 1:51:51 David Rosenthal To hear them say it, they actually didn't want ownership of the software.
• ▶ 1:52:28 David Rosenthal So it didn't matter.
• ▶ 1:52:32 David Rosenthal Once IBM is selling PCs, who's gonna buy a PC from anybody else?
• ▶ 1:52:35 David Rosenthal IBM is going to win this market.
• ▶ 1:52:47 David Rosenthal That there would be a million hardware manufacturers flowers blooming here.
• ▶ 1:53:03 David Rosenthal And IBM either didn't see or didn't believe that that would
• ▶ 1:53:09 Ben Gilbert IBM failed to see the value of software, and they certainly failed to understand what a software platform business model would be.
• ▶ 1:54:08 Ben Gilbert Yeah, the deal that Bill Gates made with IBM for the IBM PC is the greatest deal in at least computer industry history, if not all business history, full stop.
• ▶ 1:54:08 Ben Gilbert Yeah, the deal that Bill Gates made with IBM for the IBM PC is the greatest deal in at least computer industry history, if not all business history, full stop.
• ▶ 1:54:24 David Rosenthal They're going to come out with the PC platform.
• ▶ 1:54:46 David Rosenthal The IBM PC ships in August, 1981.
• ▶ 1:55:05 Ben Gilbert IBM was right that it was by far and away the most successful personal computer on the market as soon as they released it.
• ▶ 1:55:11 David Rosenthal They sell 13,500 IBM PCs within the first couple months after they announce it.
• ▶ 1:55:28 David Rosenthal Everybody at IBM is celebrating.
• ▶ 1:55:36 David Rosenthal Now, before we talk about the clones, this is really just a footnote because, of course, all the incentives are aligned for IBM to push DOS as the operating system for the PC.
• ▶ 1:55:36 David Rosenthal Now, before we talk about the clones, this is really just a footnote because, of course, all the incentives are aligned for IBM to push DOS as the operating system for the PC.
• ▶ 1:55:47 David Rosenthal I mean, they've done this whole deal with Microsoft.
• ▶ 1:55:53 David Rosenthal When they launch the PC,
• ▶ 1:55:53 David Rosenthal When they launch the PC,
• ▶ 1:55:56 David Rosenthal Customers actually have a choice of which operating system they want on their IBM PC.
• ▶ 1:56:23 David Rosenthal And the price sheet for the operating system option is Pascal is an extra 450 dollars with your IBM PC.
• ▶ 1:56:32 David Rosenthal CPM is an extra 175 dollars with your IBM PC.
• ▶ 1:56:37 David Rosenthal And DOS, which was developed specifically for the PC, is the best way to run it, is only 60 dollars.
• ▶ 1:56:44 David Rosenthal So IBM is making 60 dollars a full 100% margin on top of
• ▶ 1:56:49 David Rosenthal Their hardware for the PC by selling DOS, because they don't have to pay Microsoft any of that, and they've set up the incentives that, like, obviously everybody's gonna choose DOS.
• ▶ 1:56:49 David Rosenthal Their hardware for the PC by selling DOS, because they don't have to pay Microsoft any of that, and they've set up the incentives that, like, obviously everybody's gonna choose DOS.
• ▶ 1:56:58 Ben Gilbert To give them a little bit more credit, too, they did try to enforce that there's some amount of lock-in to the IBM PC, and they did that in two ways.
• ▶ 1:56:58 Ben Gilbert To give them a little bit more credit, too, they did try to enforce that there's some amount of lock-in to the IBM PC, and they did that in two ways.
• ▶ 1:57:27 Ben Gilbert The second is, IBM did actually have proprietary BIOS.
• ▶ 1:57:27 Ben Gilbert The second is, IBM did actually have proprietary BIOS.
• ▶ 1:57:33 Ben Gilbert So that was another part where they kind of thought that that might provide them some protection where they could stay a linchpin in the ecosystem, and it wasn't just all off the shelf.
• ▶ 1:57:43 Ben Gilbert They actually did have something that was theirs that was proprietary.
• ▶ 1:57:46 David Rosenthal It just turned out that the effort required to reverse engineer the IBM BIOS was trivial, basically.
• ▶ 1:58:05 Ben Gilbert So, Compaq was formed basically to clone the IBM PC.
• ▶ 1:58:15 Ben Gilbert So let's go eat their margin is basically the plan.
• ▶ 1:58:18 Ben Gilbert However, the one thing that was not off the shelf is the BIOS, the basic input-output system, which is effectively the thing that decides to load the operating system when you turn the machine on.
• ▶ 1:58:35 Ben Gilbert So, Compaq reverse-engineered the BIOS, and the way that they did it
• ▶ 1:58:51 Ben Gilbert So, Compaq had two engineers, and one engineer went in and fully dissected the code for the IBM PC BIOS, and basically saw all the proprietary calls that it made, and documented each of those calls without
• ▶ 1:59:14 Ben Gilbert Then he handed, hey, here's what the BIOS needs to interface with over to the other engineer and the other engineer on their own just went through and thought of an implementation and they have no idea if it's the same implementation.
• ▶ 1:59:38 Ben Gilbert They basically figured out how to exactly clone the IBM PC and buy the very same operating system, and to go back to quoting Ben Thompson, because this is from his great piece again, the result was a company that came to dominate the…
• ▶ 2:00:28 David Rosenthal And then the IBM PC comes out at the end of 1981 and they're like,
• ▶ 2:00:40 David Rosenthal They start the company in 1982, and within the first year, they do a hundred and eleven million dollars of revenue of selling IBM PC clone hardware.
• ▶ 2:00:53 Ben Gilbert Like, basically, this is the IBM PC, but for less money?