The Billion-Dollar Whiz Kid

The Billion-Dollar Whiz Kid

At 31, Bill Gates Has Built Microsoft into a Software Powerhouse

By Richard Brandt in Redmond, Wash.
Business Week

April 13, 1987

On a spring day nearly a year ago, after an all-night flight from Seattle, Bill Gates arrived for a meeting at IBM's suburban New York offices. He hardly expected the bad news that awaited him. Four years earlier, the boyish chairman of Microsoft Corp. had dreamed up a piece of software, called Windows, that he hoped would push his company to the top of the personal-computer software industry. Gates was betting that International Business Machines Corp., already his prime customer, would eventually use the product in its personal computers, guaranteeing that the program would sell millions of copies. He was so sure of it that he had built much of Microsoft's long-term growth strategy around that one product. Now IBM was saying no -- it would design its own program.

For a moment, Gates seemed destined to join the dozens of entrepreneurs who over the years had hitched their starts to IBM, then faltered when the No. 1 computer maker switched gears. But he hadn't built 12-year-old Microsoft from a startup to the No. 2 personal-computer software company by being meek. Nose-to-nose with William C. Lowe, the executive in charge of IBM's personal-computer business, Gates argued Microsoft's case.

Windows had a two-year headstart over IBM's product, Gates insists. Lowe countered that Gates didn't understand complicated communications between computers. Gates rebutted that he understood personal computer customers better than IBM. In two hours Gates had won a reprieve. He would work with IBM's engineers to modify Windows to their liking. And IBM would see if it could do business that way. It could.

A VISION

On Apr. 2, IBM chose Windows officially as a key piece of software for the new generation of machines it's counting on to regain dominance in the personal-computer business (page 71). Windows will be built into a new operating system -- the software that controls a computer's basic functions and runs applications software such as spreadsheets -- that has been developed jointly by IBM and Microsoft. It will be sold with every new IBM personal computer except the most basic model -- practically guaranteeing Microsoft's role as the key player in personal-computer software. "All the work I've been doing is finally seeing the light of day," says Gates.

More than just the story of a product, the IBM-Windows deal reveals the essence of William H. Gates III. At 31, the co-founder of Microsoft is typical in many ways of the young entrepreneurs who created the personal-computer industry in the 1970s. Competitors call him a technical genius. Gates still talks zealously about his "vision" of bringing computing power to "the masses." He even acts embarrassed when visitors note that since Microsoft went public a year ago, its stock has more than quadrupled, to about 90, making his 45% of the company worth roughly $1 billion.

But Gates's most notable characteristic is the one that makes him atypical: He has staying power. Over the past five years, while co-founder Steven P. Jobs was being forced out of Apple Computer Inc. and founder Mitchell D. Kapor was opting out at Lotus Development Corp., Gates was staying in control at Microsoft and turning it into a highflier. Whether by good planning or fast footwork, the intense bachelor who likes to drive his Jaguar a little too fast has become that rarest of entrepreneurs: one with the right blend of youthful energy, technical acrumen, intellectual breadth, and business savvy to adjust as his company matures.

"Bill is very good at evaluating situations as they change," says Vern L. Raburn, a former Microsoft executive who is now chairman of software producer Symantee Corp. As Microsoft grew, for instance, Gates brought in professional managers to help run it. Adds Raburn: "He learned at a young age that you've got to give up power to get power."

AT THE CENTER

The results speak for themselves. Only a dozen years after his passion for computers led him to drop out of Harvard University, Gates has created a key company in the $35 billion personal-computer industry. Aside from the microprocessor, software is the most crucial part of a computer and is fast becoming the most profitable. And Microsoft is at the center of the personal-computer software business.

Windows, which uses graphics similar to those of Apple's Macintosh, will make IBM PCs much easier to use by simplifying the commands needed to operate them. It should boost the royalties Gates already gets from IBM. And it will be a lot more. Other software companies, which tend to create new products only for the best-selling computers, will write programs to run in concert with Windows. The resulting flood of software will make Windows de rigueur for the makers of IBM clones, who will have no choice but to offer it on their machines. Gates will be there to sell them the new operating system with Windows. The result: As early as next year, analysts say, Microsoft could displace Lotus as No. 1 in personal-computer software.

Of course, Gates has been a central figure in the microcomputer industry for years. The program that put Microsoft on the map and that still accounts for about 50% of its revenues is MS-DOS, the operating system for IBM's original PC. Once IBM chose it, MS-DOS became an industry standard -- just as Gates expects that Windows will. Compaq, Tandy, and all the clone makers followed IBM, and by last year MS-DOS was used on about 58% of the 7.1 million personal computers sold in the U.S.

Now Microsoft plans to make itself even more indispensable. It's writing a new operating system, called OS/2, for the three-year-old IBM PC/AT, plus another for the extremely powerful generation of new 32-bit personal computers, based on Intel Corp.'s new 80386 microchip, that IBM and others are just introducing. Both machines have lacked sophisticated enough software to take full advantage of the power of their chips -- or to deliver the productivity that computer makers have promised. With the new operating systems, the machines will be able to perform several tasks at once -- and handle the voluminous software instructions and graphics needed to make PCs nearly as easy to use as typewriters. The system for the PC/AT should be ready within nine months, the one for the 32-bit machine a year after that.

AVID READER

Despite its own huge software development budget, IBM wound up relying on Gates because he has what Intel Vice-President David L. House calls "an IQ that would peg the IQ meter." Gates's high school English teacher, Anne S. Stephens, recalls him memorizing a three-page soliloquy for a school play in one reading. He devours biographies of great scientists, businessmen, and politicians -- to understand, he says, how they thought. At Microsoft, he focuses on technology, leaving management to President Jon A. Shirley, 48, hired from Tandy Corp. in 1983. Even so, he's become an expert on legal issues, tax law, marketing and distribution, and accounting. He has also kept his ego in check, winning his employees' respect. "There are a lot of geniuses who can't affect the direction of the world," says House. "Bill can, because he's a shrewd businessman."

Gates developed a talent for business early. From a close-knit and prominent Seattle family, he grew up stimulated by bright people. His father, the first in his family to graduate from college, is a partner in Shidler McBroom Gates & Lucas, now Microsoft's law firm. His mother, a former schoolteacher, is a director of First Interstate Bank, chairwoman of United Way International, and a member of the University of Washington Board of Regents. Gates recalls that at the dinner table, he and his sisters, Kristianne and Libby, heard lively discussions of his parents' work. "It was a rich environment in which to learn," he says. He still visits his parents' house, less than a mile from his own, for dinner a couple of Sundays, a month.

HOOKED

Gates's parents enrolled him at Lakeside School, a private middle and high school known for being academically rigorous. There, at 14, he found his calling. Lakeside's Mothers Club put its rummage-sale proceeds for 1969 into a terminal linked by phone to a computer at a local computer company. Young "Trey," as his family called him, reflecting the "III" after his name, "became hooked on it," says his father, Bill Gates Jr. "Completely engrossed."

With three friends, Gates started the Lakeside Programming Group, and soon he and another member, Paul G. Allen, were sneaking back to the computer center in the middle of the night. During the day, they'd often skip gym class. Allen, who co-founded Microsoft and now runs a new software startup, still describes their experiences in metaphysical terms. "There's a certain clarity to [computing], a beauty to it. It's an art form," he says. "There was a period," conceded Gates, "when people thought we had gone overboard."

It was at Lakeside, where Gates once matter-of-factly told a teacher he's be a millionaire someday, that his flair for business took root. While his contemporaries were fascinated by computer technology, Gates also was fascinated by its practical uses. In his eighth-grade year, the Lakeside programmers started two commercial projects, whose profits paid for computing time. One developed a computerized payroll system for the school. The other used a computer to count the holes punched in cards by machines that monitor highway traffic.

Gates was temporarily kicked out of the group because he was two years younger than the others. But his friends soon found they couldn't do without him. When he came back it was on his terms: He headed the projects, and when the group created a company two years later to sell the traffic-counting system to municipalities, he was named president. The choice was obvious by then: He was the one group member who read business magazines.

Gates and Allen left Lakeside full of ambition. In 1973, when Gates enrolled at Harvard, Allen left the University of Washington and moved to Boston, too. There, the pair tried to think up new businesses involving computers. Opportunity knocked in the form of a cover story in Popular Electronics on a company called MITS, an Albuquerque-based maker of rockets and electronic kits. MITS sold a computer kit that used a new microprocessor from Intel and needed a computer language that hobbyists could use to program the machine. Gates and Allen thought they could write a condensed version of the language BASIC, used on large computers, that would fit the new machine's limited memory.

They beat a bunch of competitors to the task, partly because they had learned to write compact programs to hold down computing costs in high school. In June, 1975, they moved to Albuquerque and set up a partnership called Microsoft to produce the program for MITS. MITS ran into financial trouble and eventually folded. But Microsoft had found other customers in the fledgling computer industry. And in January, 1979, Gates and Allen moved their company to the Seattle area.

Enter IBM. It had begun to notice the mass-market potential of personal computers. Lacking its own machine and wanting to move quickly, it decided to buy most of the pieces from outside companies and approached Microsoft for an operating system. Gates didn't have one and suggested a competitor. But when IBM asked again, Gates saw dollar signs. He bought the rights to what he would turn into MS-DOS from a company called Seattle Computer Products Inc. and flew to IBM's personal-computer headquarters in Boca Raton, Fla. There he bought a tie and negotiated a deal.

That contract catapulted Microsoft into the big leagues. From 1980 to 1981, its staff grew from 80 to 125 and its revenues doubled to $16 million. More important, Gates learned from IBM. For example, the bigger company seemed especially good at keeping development projects on schedule, something most startups can't do. It held regular meetings of new-product teams and set strict deadlines. Gates calls Microsoft's current development process about "one-third IBM's and two-thirds Microsoft's."

PEPSI GENERATION

In most other ways, though, Microsoft is a 1,500-employee extension of Gates himself. Its median age is 31. Many employees share Gates's young-techie vocabulary. "Randomness" applies to any confused or haphazard situation. "Bandwidth" means the amount of information one can absorb. Things that go right are "radical," "cool," or, Gates's favorite, "super." Even Chief Financial Officer Francis J. Gaudette, at 51 Microsoft's oldest employee, is affected by the spirit. "I think young," he says. "I drink a lot of Pepsi."

The advantages of a youthful company are measurable. Microsoft people work long hours, and Gates sets the standard. He is chief strategist, oversees extensive product-development efforts, and meets regularly with his top executives, often on weekends. On weekdays he's at work from about 9:30 a.m. to midnight, though that time includes restaurant meals, often a hamburger, or talking with associates, which is "pretty relaxing stuff." Ann L. Winblad, a computer consultant and close friend, insists that after years of workaholism, Gates has learned to relax a little, even taking an occasional vacation. But, she adds, "there are parts of him that never leave the company behind." He still puts in "four or five hours on Sunday," testing new products, studying technical literature, and reading or writing memos.

The environment at Microsoft is equal parts family and West Coast informality. There are frequent picnics and parties, and every employee gets a free membership at a nearby health club. Except for scheduled meetings, programmers set their own hours. Even executives dress casually, some in jeans. Gates and Steven A. Ballmer, the vice-president for systems development who acts as liaison with IBM, don ties when visiting customers, but not when they are the hosts. Ballmer recalls one IBMer who couldn't remember a programmer's name and referred to him as "the guy without shoes." Informality works. Many Microsoft programmers earn less than they could elsewhere, though they do get stock options. Yet the company's annual turnover is less than 10%.

OBVIOUS

Microsoft also reflects Gates's perfectionism. His science teacher at Lakeside, William S. Dougall, says that "if a teacher was slow, he always seemed on the verge of saying, 'But that's obvious.'" At Microsoft, Gates willingly delegates authority, but he's fussy about how it's used. Vern Raburn resigned in 1982 as president of Microsoft's Consumer Products Group after Gates decided "he was not doing his best work." James C. Towne, now president of Photon Kinetics Inc., a Beaverton (Ore.) maker of fiber-optic equipment, was president of Microsoft for only a year before Gates fired him in 1983. Towne was a respected manager from Tektronix Inc., but he wasn't the technology enthusiast Gates wanted.

Still, Gates's down-to-earth manner keeps him on good terms with these people. He was best man at Raburn's wedding last May. And Towne says Gates handled his parting amicably, adding: "You can't help but respect him." The one big exception seems to be Kazuhiko Nishi, who handled Microsoft's sales in Japan until last year. The two haven't made up since they broke off their seven-year business relationship (page 76). "He's very stubborn," grouses Nishi.

Indeed, one side of Gates is abrupt and argumentative. He relies on what his father calls "hard-nosed conversational engagement" to make decisions. "It's a real part of the way he makes up his mind." When Gates starts work on a new product, he picks a team of about 10 people from engineering and marketing. It sets goals, divides up the work, then meets every couple of weeks to solve problems. And that's when Gates can be intimidating.

In one recent meeting, he swore at Charles Simonyi, Microsoft's top developer, and called his comments on a particular software feature "an extreme joke." He even offhandedly threatened to replace him. But ultimately, the decision went in favor of Simonyi. Says Jeffrey Harbors, who is in charge of developing applications software for Microsoft: "Bill has toughened us up. He used to just beat us up, and we went away feeling bad. You have to be able to take this abuse and fight back. If you back down, he loses respect. It's part of the game."

Although this approach sounds disruptive, it's hard to argue with results. With IBM's business firmly in hand, Microsoft's revenues are expected to soar 52%, to more than $300 million, in the fiscal year ending June 30, while net profits should increase by 80%, to $70 million. That would put it in a dead heat with Lotus as the largest microcomputer software company. At 41%, its pretax margins far exceed Lotus' 26% and the 27% of Ashton-Tate Co., the No. 3 producer of personal-computer software.

TOO TECHNICAL?

The impending success of Windows also gives Microsoft a chance to increase its sales of applications software, the crucial market for long-term growth. It's first applications programs, a spreadsheet and word processor released in 1982 and 1983, were criticized as too technical. Gates added a marketing team to the development process, and by 1985 turned the emphasis from IBM PC programs, where Ashton-Tate and Lotus already dominated, to the popular Macintosh. The changes helped. Microsoft now sells about half of all Macintosh programs, according to market researcher Info-Corp. Excel, its spreadsheet program for the Macintosh, is considered by many to outperform even Lotus' 1-2-3.

The Windows deal means that Microsoft can concentrate again on selling applications software for IBM PCs. It is working on word processing software for these machines plus a data-base program, which manages records. Moreover, it is designing a version of Excel for the PC. "Excel is the first legitimate competitor to 1-2-3," concedes Edward Belove, Lotus' vice-president for R&D.

Ironically, Microsoft will get plenty of competition in this effort from IBM. The bigger company plans to be far more active in developing and selling highly profitable applications packages and is already offering volume discounts and a year's guarantee against defects in its programs. Matching those features will cost Microsoft and its rivals a bundle.

At least for now, Gates's victory with Windows seems to vindicate his product strategy: Decide where the future lies and bet everything on getting there first. Still, he has critics. Some claim that his vision is murky because he lacks a degree in computer science. "There are large gaps in his knowledge," says an executive at one rival. Gates, who reads avidly on computer subjects, laughs off such criticism as "pretty random."

Robert Frankston, Lotus' chief scientist also argues that Gates sometimes is "fixated on the neat technology of the week." Two years ago, Gates bet on Nishi's idea for a set of specifications that home computers makers would adopt to create a new mass market. It flopped.

NOT SCARED

Now Gates is toying with CD ROM technology, a technique for storing huge amounts of information on compact laser disks. Many software companies doubt that there's much of a market for this. But Microsoft is mounting a large research effort on it. In early March, it introduced its first product, a $300 program that combines word processing software with a dictionary, a thesaurus, a Zip Code directory, and Bartlett's Familiar Quotations. Gates thinks such products will reinvigorate the moribund home-computer market.

Perhaps the most intriguing question, asked by rivals and analysts alike, is whether Gates is taking on too much. So far, he has pulled it off. But as new technologies appear, notes Edward M. Esber, chairman of Ashton-Tate, "the paths keep multiplying."

Observers also question what will happen if Gates ever stumbled badly. He is extremely competitive and unaccustomed to losing. Last September, his PR firm staged a contest with editors of technical publications to prove that Microsoft's programming languages are the best in the business. Gates, who planned to compete, grew increasingly irascible the week before. Finally he told the agency to play down the contest -- just in case he lost. The night before, he left a party early with a manual tucked under his arm and stayed up late to bone up on programming. The next day his mood was better: He'd won.

When pressed, Gates says he's looking forward to Microsoft's first major failure as a new, exciting challenge. "It doesn't scare me," he says. Of course, with IBM's endorsement of Windows secure, there's not much to be scared of for the foreseeable future.