History of Microsoft Corporation

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.