IBM and Microsoft Will Develop Jointly Certain Software for Desktop Computers

By John Marcom Jr., Staff Reporter
Wall Street Journal

New York -- August 22, 1985 -- Microsoft Corp. and International Business Machines Corp. said they signed a joint development agreement, signaling IBM's apparent commitment to maintaining present standards for its Personal Computer software.

The agreement, which calls for the two companies to work together for "long-term" development of certain software for IBM desktop computers, converts a loose alliance into a formal partnership. It is the latest in a string of partnerships, some of which involve joint ventures or minority investments, allowing IBM to take advantage of other companies' expertise in advanced areas of the computer business.

IBM isn't investing in Microsoft, which also sells software to almost all of IBM's competitors. The two companies declined to be specific about products or projected revenue.

The agreement could allay computer industry worries that IBM, because of the PC's growing strategic importance, will someday turn to in-house proprietary software, as is the case with its larger computers. IBM insists that it plans to stick to the present open design, which relies on Microsoft software.

"We are committed to the open architecture concept and we recognize the importance of an open architecture to our customers," William C. Lowe, president of IBM's Entry Systems Division, said.

Industry executives said the agreement adds credibility to IBM's commitment. "The way I read it, IBM plans to continue to support (the Microsoft system) and its ongoing evolution on a very significant basis," said Paul Ely, president and chief executive officer of Convergent Technologies Inc., San Jose, Calif., which supplies IBM-compatible computers to a number of other computer companies.

Microsoft, a closely held Bellevue, Wash.-based company, makes the disk operating system that guides the basic functions of IBM PCs as well as programming languages. The system is known as MS/DOS for non-IBM machines and PC/DOS for IBM products. IBM's choice of Microsoft, then a tiny, obscure company, was one of several unconventional steps that the computer giant took in its entry into the personal-computer business in 1980.

Microsoft's system has since become the standard for desktop computers and more than 100,000 word-processing, filing, analysis and other applications programs have been written to work with Microsoft's software.

IBM's major rivals, with the notable exception of Apple Computer Inc., now tailor their products to Microsoft's system. So-called system software accounted for slightly less than half of Microsoft's $140 million of revenue for the year ended June 30, with the balance coming from applications programs, according to Microsoft. IBM purchases accounted for 10% of total revenue. Microsoft is the second-largest personal-computer software company; the largest, Lotus Development Corp., relies overwhelmingly on sales of one analysis program, 1-2-3.

William Gates, Microsoft's chairman and co-founder, said the company will double its system-software staff to speed development of new software that will exploit more fully powerful computers such as IBM's PC AT and ease networking of PCs with other IBM products.

Without the agreement, Microsoft and IBM couldn't share information as freely, Mr. Gates said. "Up to now, IBM has been buying standard products," he said. "Now we've put together a unique agreement that allows IBM to come to us at a very early stage, helping influence what the design is."

Mr. Gates said the IBM agreement wouldn't affect other customers because resulting products will be licensed on a non-exclusive basis. Convergent's Mr. Ely said he expects it to work like the relationship between IBM and Intel Corp., the semiconductor company that makes the microprocessors for IBM PCs and many other companies. IBM holds a 20% stake in Intel, but "we feel quite comfortable dealing with Intel," Mr. Ely said.

In composite trading yesterday on the New York Stock Exchange, IBM closed at $128.375 a share, up 87.5 cents.