Microsoft and I.B.M. Join Forces

By Andrew Pollack
Special to the New York Times

San Francisco -- August 21, 1985 -- The International Business Machines Corporation has agreed with the Microsoft Corporation, a key software supplier, to develop fundamental software for personal computers, the companies said today.

But Microsoft will be able to sell the jointly developed operating systems to other computer manufacturers, which should allay industry fears that I.B.M. would one day migrate to its own, proprietary operating system. That could have locked others in the industry out of the market and made it impossible for existing software to run on future I.B.M. computers.

The agreement states that I.B.M. and Microsoft will work together on personal computer operating systems, the software that directs the computer in performance of basic operations such as retrieving information from data storage disks. Microsoft already supplies the MS-DOS operating system used in I.B.M. computers and other computers compatible with the I.B.M. machines.

Competitors' Fears

As to the industry fears that I.B.M. will lock out its competitors, ''If anything will eliminate it, this will eliminate it,'' said William H. Gates, the chairman and chief executive of Microsoft. ''It's very clear that this is a reaffirmation of the importance of DOS.''

''I think it's good for us from an outside perception viewpoint,'' said Ben Rosen, the chairman of the Compaq Computer Corporation, the leading supplier of I.B.M.-compatible personal computers. He said the agreement would help assure customers of what Compaq has always believed -that I.B.M. will not desert the open MS-DOS operating system.

I.B.M., in a statement attributed to William C. Lowe, president of its Entry Systems division, also emphasized that aspect of the agreement. ''We are committed to the open architecture concept and we recognize the importance of an open architecture to our customers,'' the statement said.

The agreement calls for the two companies to cooperate on the development of operating systems and other systems software products. While future versions of MS-DOS are included, the companies did not specify what else might be included. But it is likely the agreement calls for them to work on computer programming language, networks for connecting computers together and ''windowing environments'' that allow several tasks to appear on the screen at the same time, each in its own little ''window.'' Payments by I.B.M. The agreement provides for steady payments by I.B.M. to Microsoft as well as royalties from products. The size of the contract is confidential but it certainly will be worth tens of millions of dollars to Microsoft. ''It's by far the biggest contract we've ever signed,'' Mr. Gates said. He said there was no discussion about I.B.M. buying a stake of Microsoft, which remains closely held.

Microsoft is already working on future versions of its operating systems, known as versions 4.0 and 5.0, that will take advantage of more powerful computers now being built.

The new versions are expected to allow several tasks to be performed at once on the computer, whereas the existing MS-DOS can only handle one application at a time. The new versions will also be able to handle more computer memory. The current versions can only handle up to 640,000 characters of memory, whereas it is not uncommon now for computers to have one million characters of storage or more. It is also expected that MS-DOS will be upgraded to allow computers using it to better communicate with other computers as well as with new types of accessory devices such as laser printers and optical disks.

One potential conflict caused by the agreement is between Microsoft's Windows and I.B.M.'s Topview products, both of which are window environments. The agreement between the two companies seems to suggest that in the future the products will converge into a common one. But an I.B.M. spokesman said today that will not happen and that the two products will continue to compete.

Big Lift for Microsoft

For Microsoft, the agreement elevates it from a mere supplier to I.B.M., with the risk that it could one day be cut off, into more of a partner.

Microsoft, based in Bellevue, Wash., was catapulted to the lead in the software business when I.B.M. chose its operating system five years ago. Since then it has grown to $140 million in revenues and diversified. MS-DOS sales now represent about 20 percent of its revenues. Its sales to I.B.M. account for less than 10 percent, Mr. Gates said.

The agreement will also make it easier for the two companies to cooperate on future developments. Before, as merely a supplier, Microsoft was not privy to all of I.B.M.'s plans. ''It didn't allow us to have full information about what they were thinking,'' Mr. Gates said.

For I.B.M., the agreement means that future operating system development ''will respond to I.B.M. goals rather than Microsoft goals,'' said Brian Jeffery, director of research for the International Technology Group, a Palo Alto, Calif., consulting concern.

One priority I.B.M. has, he said, is to build into personal computers the ability to communicate with larger I.B.M. computers. He said I.B.M. had also discussed plans with consultants for a future operating system that will run both MS-DOS and Unix, a more sophisticated operating system that allows several people to use a single computer at once. Mr. Jeffery also said the move indicated that I.B.M. had realized it needed outside help in operating system development.