1 Microsoft Way
To enable people and businesses throughout the world to realize their full potential.
With annual revenues of more than $32 billion, Microsoft Corporation is more than the largest software company in the world: it is a cultural phenomenon. The company's core business is based on developing, manufacturing, and licensing software products, including operating systems, server applications, business and consumer applications, and software development tools, as well as Internet software, technologies, and services. Led by Bill Gates, the world's wealthiest individual and most famous businessman, Microsoft has succeeded in placing at least one of its products on virtually every personal computer in the world, setting industry standards and defining markets in the process.
Origins of an Empire
Bill Gates was born in Seattle in 1955, the second of three children in a well-to-do family. His father, William H. Gates II, was a lawyer, while his mother, Mary Gates, was a teacher, a regent of the University of Washington, and member of several corporate boards. Gates was first exposed to computers at school in the late 1960s with his friend Paul Allen, the son of two Seattle librarians. By the time Gates was 14, the two friends were writing and testing computer programs for fun and profit.
In 1972 they established their first company, Traf-O-Data, which sold a rudimentary computer that recorded and analyzed traffic data. Allen went on to study computer science at the University of Washington and then dropped out to work at Honeywell, while Gates enrolled at Harvard. Inspired in 1975 by an issue of Popular Electronics that showed the new Altair microcomputer kit just released by MITS Computer, Gates and Allen wrote a version of BASIC for the machine. Later that year Gates left college to work full time developing programming languages for the Altair, and he and Allen relocated to Albuquerque, New Mexico, to be near MITS Computer, where Allen took a position as director of software development. Gates and Allen named their partnership Micro-soft. Their revenues for 1975 totaled $16,000.
A year later, Gates published "An Open Letter to Hobbyists" in the Altair newsletter, in which he enjoined users to avoid illegally copied software. Arguing that software piracy prevented "good software from being written," Gates wrote prophetically, "Nothing would please me more than being able to hire ten programmers and deluge the hobby market with good software." In November 1976 Allen left MITS to devote his full attention to Microsoft, and the company's tradename was registered. In 1977 Apple and Radio Shack licensed Microsoft BASIC for their Apple II and Tandy computers, with the Apple license going for a flat fee of $21,000. As Apple sold a million machines complete with BASIC, Microsoft's unit revenues dropped to two cents a copy.
That same year Microsoft released its second programming language, Microsoft FORTRAN, which was followed in 1978 by a version of COBOL. Both were written for the CP/M operating system, one of many available in the rapidly expanding but still unstandardized microcomputer market. As CP/M was adopted by computer manufacturers including Sirius, Zenith, and Sharp, Microsoft became the leading distributor for microcomputer languages. By the end of 1978 Microsoft had 13 employees, a sales subsidiary in Japan, and $1 million in revenues. The following year Gates and Allen moved the company to Bellevue, Washington.
The Early 1980s: Associations with IBM and Apple
Microsoft's big break came in 1980 as IBM began developing its Personal Computer, or PC. While IBM contracted Microsoft to develop languages for the PC, IBM's first choice to provide an operating system was the leader in the field, Digital Research; however, IBM and Digital Research were unable to agree on terms, so the contract for the operating system was awarded to Microsoft. As Microsoft was under a tight deadline and did not have an operating system of its own, the company purchased the rights to one from Seattle Computer Products for $75,000. Originally dubbed Q-DOS (for "Quick and Dirty Operating System"), the product was renamed MS-DOS (for "Microsoft Disk Operating System") and modified for IBM's purposes. Under the terms of the agreement, Microsoft retained the right to sell the operating system to other companies and to consumers, while IBM could not. Neither company could have foreseen the value of this arrangement: as other manufacturers developed hardware compatible with the IBM PC, and as personal computing became a multibillion-dollar business, the fast and powerful MS-DOS became the industry's leading operating system, and Microsoft's revenues skyrocketed.
The year 1980 also saw the arrival of Steve Ballmer, a close friend of Gates from Harvard, who was hired to organize the non-technical side of the business. Ballmer later recalled the company's stormy beginnings under Gates's leadership: "Our first major row came when I insisted it was time to hire 17 people. He claimed I was trying to bankrupt him." Conservative in his spending, Gates dictated that the company must always have enough money in the bank to operate for a year with no revenues. Nearly 20 years later that policy still stood--in 1999 Microsoft had cash reserves of more than $13 billion and no long-term debt--while Ballmer, who had by then become Microsoft president, remained Gates's closest friend and adviser.
In 1981 the company was incorporated as Microsoft, Inc., with Gates as president and chairman and Allen as executive vice-president. The company closed the year with 128 employees and revenues of $16 million. Two years later Allen left Microsoft after being diagnosed with Hodgkin's disease. He remained on the board of directors and continued to hold more than 10 percent of the company's stock. Also in 1983 Microsoft launched a word processing program, Word 1.0, in an effort to supplant the category leader, WordStar. Simpler to use and less expensive than WordStar, Word used a mouse to move the cursor and was able to display bold and italic type on the screen. Nevertheless, some users felt that the product was too complex--designed for software engineers rather than business users--and it was quickly surpassed in the market by WordPerfect, released by the WordPerfect Corporation. Word did not become a success until its greatly improved version 3.0 was released in 1986, whereupon the application became Microsoft's best-selling product.
Throughout its history, Microsoft has been known for releasing products that were initially unsuccessful but eventually grew to dominate their categories. Many reviewers have been harsh in their criticism: David Kirkpatrick, writing in Fortune, described the first release of one product as a "typically unreliable, bug-ridden Microsoft mess," while Brent Schlender noted in the same magazine that "from its beginnings, Microsoft has been notorious for producing inelegant products that are frequently inferior and bringing them to the market way behind schedule." These critics note that the success of Microsoft has been based not only--or even principally--on the company's technological prowess, but also on Bill Gates's business acumen, which combined dogged perseverance, strategic marketing, powerful alliances, and, increasingly as the years went on, highly aggressive competitive tactics.
Microsoft worked closely with Apple during the development of Apple's Macintosh computer, which was introduced in 1984. Revolutionary in its design, the Mac featured a graphical user interface based on icons rather than the typed commands used by the IBM PC, making its programs simple to use and easy to learn, even by computer novices. Microsoft introduced Mac versions of BASIC, Word, and the spreadsheet program Multiplan, and quickly became the leading supplier of applications for the Mac. Revenues jumped from $50 million in 1983 to nearly $100 million in 1984.
Convinced that the Mac's graphical user interface represented the future of end-user applications, Gates sought to develop an interface manager to work on top of MS-DOS that would convert the operating system to a graphical model that would be user-friendly and provide a single method for interacting with the many non-standardized programs designed to run on the system. Because other companies, including IBM, were working to develop similar interface managers for MS-DOS, Gates solicited support from hardware manufacturers and software publishers who were concerned about IBM's continued dominance of the PC market. Compaq, Hewlett-Packard, Texas Instruments, Digital Equipment Corporation, and others announced their support for the project, called Microsoft Windows, while IBM, in the face of this opposition, threw its weight behind VisiOn, a similar product already being marketed by VisiCalc, while working to develop its own program, called TopView. Plagued by delays in development, the release of Windows was repeatedly rescheduled throughout 1984 and 1985, causing tensions at Microsoft and with other software publishers who were forced to delay releases of the applications they were designing for the system. Finally released in November 1985, after some 110,000 hours of frantic work by programmers, Windows faced a disappointing reception. The system was slow, few applications were available to run on it, and customers delayed purchase decisions while waiting for the introduction of TopView.
In 1985 Microsoft also introduced Excel 1.0, a Mac spreadsheet product. Based on the earlier and less successful Multiplan, Excel gradually took hold against its principal competitor, Lotus 1-2-3, and eventually came to account for more than $1 billion of Microsoft's annual revenues. That same year Microsoft began collaborating with IBM on a next-generation operating system, called OS/2.
The Late 1980s: Emergence of a Corporate Culture
In early 1986 Microsoft moved to a new 40-acre corporate campus in Redmond, Washington, near Seattle. Designed to provide a refuge free of distractions for those whose job was, in Gates's words, to "sit and think," the campus was nestled in a quiet woodland setting and reflected huge expenditures for tools, space, and comfort. Buildings were designed in the shape of an X to maximize light, with each programmer given a private office rather than a cubicle. The buildings featured many small, subsidized cafeterias, as well as refrigerators stocked with juice and caffeinated beverages. The self-contained, collegiate surroundings were carefully designed to promote the company's distinctive culture, which one commentator described as a close approximation of "math camp." Like most software companies, Microsoft had no dress code (although company lore recounts that in 1988 senior management did express a preference that employees not go barefoot indoors). Employees were hired on the basis of sheer intelligence, with the company selecting only a small fraction of applicants from the more than 100,000 resumes it received each year, and were expected to work brutal schedules to bring products to market as quickly as possible. Microsoft paid salaries that were distinctly lower than elsewhere in the industry, even to their senior executives, but compensated with generous stock options that made thousands of Microsoft employees millionaires. At the same time, the company tried to maintain a small company mentality, in which executives traveled coach class, the necessity of additional staff positions was closely scrutinized, and other unnecessary expenditures were vigilantly avoided.
In March 1986 Microsoft held an initial public offering (IPO) of 2.5 million shares which raised $61 million. Within a year the stock had risen from $25 to $85, making Bill Gates a billionaire at the age of 31. The following year Microsoft released its first CD-ROM product, Microsoft Bookshelf, a collection of ten reference works, as well as Excel for Windows, its first application for the new operating system. Microsoft also purchased Forethought, Inc., for $12 million, thereby acquiring that company's PowerPoint presentation graphics program, and released OS/2 in collaboration with IBM. In November 1987 Microsoft introduced Windows 2.0, a greatly improved version of the operating system, and by the end of the year Windows had sold more than one million copies. As Windows began to take hold, more software companies were convinced to develop applications for the operating system, which brought it increased usefulness and further sales momentum. In 1988 Microsoft surpassed Lotus Development Corporation as the leading software vendor, with more than $500 million in sales. The company was accused of copyright infringement by Apple, which alleged that Microsoft had copied the "look and feel" of the Macintosh, in a lawsuit that was finally dismissed after five years of litigation. In 1989 the company introduced Microsoft Office, a "suite" of programs that eventually came to dominate the market and become Microsoft's best-selling application product. While the initial release of Office was a discount package, later versions incorporated standard, shared features and included Word, Excel, PowerPoint, and the e-mail program Mail, with the Access database management program included in the Office Professional version.
Before 1990 Microsoft was primarily a supplier to hardware manufacturers, but after 1990 the bulk of the company's revenues came from sales to consumers. That year Microsoft became the first software company to reach $1 billion in revenues, closing the year with 5,600 employees.
Product Development in the 1990s
In 1993 Microsoft introduced Encarta, the first multimedia encyclopedia on CD-ROM, as well as the first version of Windows NT, an operating system for users on corporate networks. While the initial acceptance of Windows NT was disappointing, an upgrade shipped in September of the following year as NT 3.5 was a dramatic success: winning the PC Magazine award for technical excellence in system software and named the best operating system product of 1994, the upgrade boosted sales of NT to more than one million copies by the end of the year. Microsoft announced an agreement to purchase Intuit, the producer of the leading package of personal financial software, called Quicken; however, after the U.S. Department of Justice filed suit to prevent the takeover on the basis of antitrust concerns, Microsoft withdrew its offer. Revenues for 1994 exceeded $4 billion.
In August 1995 Microsoft launched its next version of Windows, called Windows 95, which sold more than one million copies in the first four days after its release. For the rest of the decade Microsoft expanded aggressively into new businesses associated with its core franchise. Its projects included two joint ventures with the National Broadcasting Company under the name MSNBC: an interactive online news service and a cable channel broadcasting news and information 24 hours a day. The company's web-based services included the Microsoft Network online service, a travel agency, local events listings, car buying information, a personal financial management site, and a joint venture with First Data that allowed consumers to pay their bills online. Microsoft purchased 11 percent of the cable television company Comcast for $1 billion and cut a licensing deal with the largest U.S. cable operator, TCI Communications, to put Windows into at least five million set-top boxes. The company also purchased WebTV, whose core technology allowed users to surf the Internet without a PC. Microsoft's latest generation of Windows, Windows CE, was designed to expand the franchise into computer-like devices including mobile phones, point-of-sale terminals, pocket organizers, digital televisions, digital cameras, handheld computers, automobile multimedia systems, and pagers. By early 1999 the company had secured more than 100 licensing agreements with manufacturers of these "intelligent appliances."
Legal Challenges and Competition in the Future
Microsoft's many critics believed that the company's goal in this widespread expansion was to control every delivery channel of information, thereby providing the means to control the content. According to Scott McNealy of rival company Sun Microsystems, "By owning the entry points to the Internet and electronic marketplace, Microsoft has the power to exercise predatory and exclusionary control over the very means for people to access the Internet and all it represents."
The U.S. government apparently agreed. After an intensive investigation of Microsoft's competitive practices that had gone on for much of the decade, in 1998 the U.S. Department of Justice and a group of 20 state attorneys general filed two antitrust cases against Microsoft alleging violations of the Sherman Act. The government sought to prove a broad pattern of anticompetitive behavior on Microsoft's part by demonstrating an array of claims, including the following: that Microsoft had a monopoly on the market for operating systems; that the company used that monopoly as a means of preventing other companies from selling its competitors' products (most notably Netscape's Internet browser); that it was illegal for Microsoft to bundle its own browser into the operating system Windows 98 as a means of precluding customers from purchasing Netscape's product; that the company sought to divide markets with competitors; that Microsoft sought to subvert the Java programming language, developed by Sun Microsystems, which it viewed as a threat to Windows; and, finally, that Microsoft's business practices were detrimental to consumers. The case was conducted under a flurry of media attention, with all parties agreeing that the stakes were extremely high: should Microsoft win, its brand of extremely aggressive capitalism would secure a legal blessing; should the company lose, the company could be forced to license the source code for Windows to competitors, thus destroying its monopoly, or could be broken up into smaller components, crippling its hold over the marketplace.
The fear and resentment that Microsoft and its founder Gates engendered were testament to the company's mythic status and Gates's role as the embodiment of the digital era. Gates's extreme wealth (in early 1999 he was worth $50 billion) made him the subject of constant scrutiny, while the Internet was rife with Bill Gates "hate pages," named, for example, "The Society for the Prevention of Bill Gates Getting Everything." Resentment and legal action notwithstanding, with more than $14 billion in sales in 1998, Microsoft showed no signs of slowing down.
Microsoft continued to grow rapidly, increasing its net revenue by 29 percent, to $19.7 billion, in 1999. Additionally, net income rose to $7.79 billion, a dramatic 73 percent increase over 1998. While the antitrust suit against Microsoft showed threats of a forced breakup of Microsoft, innovations in the company continued. Encarta Africana, the first complete encyclopedia of black history and culture, was launched, as well as Shop, Microsoft's first online store.
Unprecedented Growth in 2000 and Beyond
In 2000 Microsoft acquired Visio Corporation, the top supplier of business diagramming and technical drawing software. The transaction, at approximately $1.3 billion, became the largest acquisition in Microsoft history. Also in 2000, Microsoft invested $135 million in the software publisher Corel. Apparently, Corel negotiated the investment, offering to drop "certain legal actions" it had against the company, even as it had no legal claims filed against Microsoft. Another transaction--in Microsoft's desire to expand into the television market--involved a $56 million investment in Intertainer Inc, a provider of video-on-demand service. In the same year, Microsoft increased its employee base by nearly 9,000, from 39,170 to 48,030. The total expenditures took a temporary toll on Microsoft's net income, which dropped 22 percent, to $7.35 billion, in 2001. At the same time, net revenue continued to increase, up 10 percent from 2000.
The release of Windows 2000, while causing a stir, was overshadowed by the highly anticipated debut and worldwide release of Microsoft Windows XP. So confident was Microsoft in the product, and in its ability to boost worldwide sales of computers (which had declined 11.3 percent since the September 11 attacks just a month before), they launched a $250 million ad campaign for the product. The software did not represent a brand new development, as much of the technology came from that of its predecessor, Windows 2000. But as Paul Thurrott, writer for Network Windows magazine, wrote, "There's no doubt that we'll eventually look back on Windows XP as one of the key OS releases of all time."
Meanwhile, the Department of Justice ruled that they would not enforce a breakup of Microsoft. By the end of 2002, the U.S. District Court approved the settlement Microsoft reached with the Justice Department. The settlement included preventing Microsoft from benefiting from exclusive deals that could hinder competition; uniform contract terms for computer manufacturers; the required ability of customers to remove icons from certain Microsoft features; and a requirement that Microsoft release specific innovational technical information to its rivals, in order to enforce competition.
Microsoft's net revenue increased to $28.37 billion in 2002, while net income rebounded, gaining 6 percent from the previous year. In 2003, Microsoft saw an impressive 28 percent jump in net income, to reach just below $10 billion. The launching of Windows Server 2003, the largest software development project in the company's history to date, contributed to the growth. According to Microsoft, Windows Server 2003 would be a more reliable, more manageable, and more collaborative piece of software. Security would also be tighter, especially due to a newly built IIS (Internet Information Server) Web Server.
By 2004, with more than 56,000 employees and anticipated year-end revenues of up to $38 billion, Microsoft continued to hold a strong lead in the computer software industry. With an emphasis on continuous innovation--including such business products as the BizTalk Server 2004--further success seemed ensured. Still, resentment toward Microsoft was omnipresent. In April 2004, the company was fined by the European Union for abusing its monopoly on computer operating systems. The fine, at EUR 497 million ($596 million), was not likely to be the last for Microsoft.
Principal Subsidiaries: Microsoft Asia, Ltd. (Nevada); Microsoft Business Solutions Aps (Denmark); Microsoft Capital Group, L.P.; Microsoft E-Holdings, Inc.; Microsoft Finance Company Ltd. (Ireland); Microsoft Ireland Capital Ltd.; Microsoft Ireland Operations Ltd.; Microsoft Licensing, Inc.; Microsoft Manufacturing BV (Netherlands); Microsoft T-Holdings, Inc.; MSLI, GP; Round Island, LLC; Round Island One Ltd.
Principal Divisions: Client; Server & Tools; Information Worker; Business Solutions; MSN; Mobile and Embedded Devices; Home and Entertainment; Other.
Principal Competitors: Apple Computer, Inc.; Hewlett-Packard Company; International Business Machines Corporation; Logitech International SA; Novell, Inc.; Sony Corporation; Sun Microsystems, Inc.; Time Warner Inc.; Yahoo! Inc.