Sunday, August 3, 2008

Remembering 1980

By Christopher Hancock

It’s 1980.

Reagan defeats Carter. Lennon falls to Chapman’s bullet. Mount St. Helens erupts, killing 57. CNN, the first all-news network, hits the airwaves. 3M introduces the Post-it note. The Cold War escalates. The U.S. boycotts the Moscow Olympics. Saddam attacks Iran. Japan surpasses the U.S. as the world’s largest automaker, while Americans sit transfixed to find out who shot J.R. But this was the year’s greatest story…

The 3 Principles of All Great Fortunes

Until 1980, IBM, the world’s top computer company, controlled the mainframe computer market.

The Fortune 500 were the only ones with pockets deep enough to afford them. So the idea of taking something that required a company’s war chest down to something accessible to John Q. Public seemed a bit absurd to most at Big Blue.

But eventually, the starched white shirts couldn’t help but notice the tremendous ripple effect startup companies with unconventional names like Apple were making. In fact, IBM’s own engineers began turning to first-generation PCs to do the work their own mainframe computers wouldn’t support. At that time, only a few personal computers were available to the public.

Mostly, hobbyists used them. Picture ham radio guys in basements — that pretty much summed up the general scene. For these market “insiders,” the long-term potential seemed self-evident. Computers were on the verge of taking off. Creating the PC for that generation would rival what Henry Ford did for his.

Big Blue began to grasp the potential. It wanted a piece of the action. But it had to act fast. The white shoes of the East Coast were out to court the flip-flops of the West.

So IBM decided to make a personal computer. This it could do… well, partly. The hardware seemed easy enough. But the software — the programs instructing the hardware exactly what to do — posed a whole different set of problems.

IBM had two choices. One was Gary Kildall, the 38-year-old computer science Ph.D. who invented the PC’s first operating system, CP/M. The other option: a 24-year-old Harvard dropout specializing in BASIC computer language.As one observer put it: “One would hit the jackpot; the other would be forgotten…A footnote in the history of the personal computer.”

As it turns out, IBM needed both an operating system like Kildall’s and the BASIC computer language software pioneered by Bill Gates.

Gates jumped at the chance. Kildall balked.

IBM, however, still needed an operating system similar to Kildall’s CP/M. Gates turned to a local programmer named Tim Paterson.

A few years earlier, Paterson had purchased a CP/M manual from a retail computer store for $5. He created an operating system quite similar to Kildall’s. In fact, the only discernable difference between the two may have been the name printed on top.

Gates quickly made Paterson an offer. $50,000 bought Microsoft the rights to Paterson’s system.

But the true stroke of genius — the vision that propelled Gates to among the likes of Vanderbilt, Hearst, Rockefeller and Morgan — came next.

For all intents and purposes, Gates gave his software to IBM. He encouraged its use. Gates instinctively knew the real cash flow would stem from selling the high-margin software, not the hardware. And that’s how Gates made his fortune. IBM would market Microsoft to the world. Microsoft would then license its technology to third-party clone makers like Dell and Gateway. And so the story goes.

The moral of our story goes something like this. All great fortunes require three main ingredients: vision, risk and a stroke of luck. Gates envisioned the impact software would play in every facet of modern society. He took a great risk to drop out of Harvard. And lest we forget, what a stroke of luck to stumble upon Tim Paterson’s clone.

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