Introduction to How Microsoft Works
Microsoft is a software company. It makes money by selling its software for use on computers.
That’s an accurate summary, but it doesn’t tell anywhere near the whole story. It doesn’t tell you that Microsoft is a business empire without equal, that its products are used in nearly every computer on the planet, or that it has yet to reach the height of its power and influence. Microsoft has become a symbol of all that is great about the information age, as well as all that is less-than-great about it.
Although you may find yourself cursing the “evil empire” when your system crashes, or when you spend money on another upgrade, Microsoft is unsurpassed when it comes to powering information technology. Whether by cunning, innovation, determination, or a mix of these qualities, Bill Gates’ Microsoft has defined how we use computers since the first IBM PC rolled out in 1981 with Microsoft’s MS-DOS in its innards.
So Microsoft rules the world, but just what does it do, anyway? In this article, we’ll take a look at the history of Microsoft and find out how it competes in the market. We’ll also explore how Microsoft’s corporate culture factors into its success. Finally, we’ll look at Microsoft products to find out how they benefit from the company’s core advantages.
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The Rise of Microsoft
Image courtesy MSN
Bill Gates founded Microsoft in 1975.
Bill Gates and Paul Allen founded Microsoft in 1975 as the classic “garage start-up.” They were part of the first leap towards personal computing with a difference. While Apple founders Steve Jobs and Steve Wozniak built both a machine and software (the computer code that gives the computer the ability to do the things it does) in it, Microsoft only developed software.
Another key difference between Microsoft and other “garage start-up” computer companies was that neither Gates nor Allen held illusions about the business world. Many of their peers were hobbyists and acolytes of the “Home Brew Computer Club,” which resembled a 1960s era “rap session” instead of a business association. Gates and Allen (along with Steve Balmer) were running a commercial enterprise in a competitive market. If there was a competing product, then they had two choices: buy it or destroy it. Their first conquest was also their biggest: DOS (Disk Operating System).
To make a long and dramatic story short, IBM was building its first personal computer and needed an operating system to run it. The company approached Microsoft, thinking that it had one available. But Microsoft didn’t make operating systems — they just wrote computer languages. Bill Gates directed them to the makers of CPM, which was the reigning OS (Operating System) at the time. The culture clash between the IBM suits and the groovy style of the CPM manufacturers threatened to send the IBM PC into the dustbin of history…until Microsoft came to the rescue.
Today most laptop and desktop PCs come pre-loaded with Windows and other Microsoft software.
In what would become a typical move for the company, Gates and Balmer bought an OS for $50,000, which they in turn licensed to IBM for $80,000. Even in the early 1980s, $80,000 wasn’t very much money. So what was Gates thinking? It turns out that he was thinking far ahead. He said as much when interviewed for the PBS series “Triumph of the Nerds”: “the key to our…deal was that IBM had no control over…our licensing to other people.”
Microsoft realized that the IBM PC was going to create a mass market for personal computers. Gates gambled that the business cycle would follow the mainframe model and spawn clones. Out of necessity, these clones would be obliged to pay Microsoft any price to use DOS, which meant that the company was the gatekeeper that PC makers had to pay to compete in the personal computing world.
From that moment on, Microsoft would out-fox, bully, best and co-opt all comers. It was simply a matter of finding new ways to reproduce the business model and the revenue it generated. Microsoft’s shift from DOS to the Graphical User Interface (GUI)-based Windows operating system completed the cycle.
Next, we’ll discuss how Windows came about and why Microsoft broke with IBM.
A GUI Opportunity
Image courtesy MSN
Apple’s world-changing Macintosh hit the market in 1984 and was the first commercially successful PC to use a graphical user interface (GUI), making it user friendly. We use GUIs to interact with computers and networks today.
Bill Gates immediately saw the Mac as both a danger and an opportunity. The GUI could popularize computing on a level beyond the mass market created by the IBM PC and its clones, making it a threat to Microsoft’s franchise. It also presented an opportunity to help Microsoft finish off its current opponent, IBM, and ensure its supremacy for years to come.
IBM and Microsoft had been embroiled in a battle over the PC’s next operating system. IBM was collaborating with Microsoft on O/S2, a successor to DOS. IBM needed something other hardware makers couldn’t clone. Microsoft played along until it became clear that the companies were at cross-purposes: Microsoft was trying to exploit IBM’s market position and IBM was trying to put the DOS-genie back in the bottle. This precipitated a break, and Microsoft was on its own.
If Microsoft could create its own GUI to work on top of DOS, then Bill Gates was killing two birds with one OS. The impact of Windows from a business perspective was as strong as the Mac’s impact from a user’s perspective. Almost overnight, a boring, obsolete PC could become Mac-like at a tenth of the cost of buying a Mac.
Bill Gates had again adapted to re-define the computer market, and just in time. Just before Windows 95 launched, a company called Netscape went public. Microsoft also had to deal with another oncoming threat: the Internet. How would Microsoft deal with an open global network, seemingly powered by altruistic creators bent on giving their products away?
Easy, Microsoft said — we’ll give our stuff away too. The “browser wars” didn’t last long and were particularly one-sided, with Internet Explorer ultimately triumphing over Netscape.
In the next section, we’ll look at what gives Microsoft the decisive advantage in nearly every commerce endeavor that it undertakes.