Hard Drive: Bill Gates and the Making of the Microsoft Empire (37 page)

cost of similar IBM machines. IBM decided to go after the clone market with the PS/2. About half the technology in the PS/2 machines was developed by IBM, making it much harder to copy than the original PC. But of the four new PS/2 machines introduced by IBM, only one used the 386 chip. The others were based on the “brain dead” 286 microprocessor.

“The development of OS/2 will open up a whole new class of applications,” Microsoft’s Jon Shirley predicted confidently. The new operating system was designed to run on any IBM or IBM-compatible machine that used the 286 or 386 chip, including the PS/2 models. But OS/2 was not available to customers until late 1987. And Presentation Manager would not be shipped until nearly a year after that.

At the fall Comdex in 1987, IBM demonstrated OS/2 on its new line of computers. For most of the 90,000 people who jammed the show, this was what they most wanted to see—future industry trends. Although there was great enthusiasm for OS/2 among the crowd at Comdex, there were also skeptics. Pete Peterson, executive vice-president of WordPerfect Corporation, which made the best-selling word processing program of the same name, predicted that many computer users would not want to switch over to the new operating system. Why would they need to? DOS worked just fine. And he questioned Microsoft’s commitment to OS/2. He suggested Microsoft went along on OS/2 in order to get IBM to endorse Windows in the form of Presentation Manager.

“Microsoft has a religious approach to the graphical user interface,” Peterson told a reporter for the
San Jose Mercury News.
“If Microsoft could choose between improved earnings and growth and bringing the graphical user interface to the world, they’d pick the graphical user interface.”

Microsoft’s development of Presentation Manager and OS/2 with IBM had been making the folks at Apple Computer very nervous. Security analysts who followed Apple wondered how the company would respond to this new threat to the Macintosh. But Apple was planning its own surprise.

On March 17, 1988, Apple Computer, Microsoft’s longtime business ally and competitor, one of its industry brethren, filed an 11-page copyright suit in federal court in San Jose, accusing Microsoft of stealing visual display features of the Macintosh computer in the latest version of Windows.

Just the day before, Gates had met with Apple Chairman John Sculley on other business. Sculley had said nothing about a lawsuit or even hinted at any unhappiness with Microsoft. When Gates learned of the suit, he was dumbfounded as well as angry that Apple had provided copies of the suit to the press before telling Microsoft.

“He never mentioned it to me . . . not one word,” Gates told the
San Jose Mercury News
of his meeting with Sculley the day before Apple dropped its bombshell. “So I told people at first, when the rumors started, that it wasn’t true. Then we found out they’d called all these reporters and sent them all a copy of the lawsuit. This was a massive [public relations] attack. . .. We re confused. I’m not kidding. I’ve been involved in a lot of lawsuits and every lawsuit I’ve been in, I’ve thought, ‘I hope we re OK. But not this one. You have to wonder—if they’re rational people—what are they thinking. . . . Apple is using the press to send a message. The suit is supposed to strike fear into people s hearts and make them think that Apple invented this stuff and not Xerox.”

What Apple wanted, industry insiders agreed, was to torpedo the plans of archrival IBM to develop a personal computer with the same easy-to-use graphics of the Macintosh. The suit, they said, was aimed as much at Presentation Manager as Windows. “Apple is saying between the lines, ‘Watch out IBM, we’ll come and get you if you use Windows,’ ” Stewart Alsop was quoted as saying the day the suit was filed.

Not only Gates but the entire personal computer industry was caught off guard by the suit. It hit like an earthquake in the

Silicon Valley, sending tremors not only up the West Coast to the Silicon Forest outside Seattle but across the country. No one had expected Apple to counter the latest IBM threat with a lawsuit. Although opinion was mixed on how successful Apple might be in court, there was general agreement in the industry that the suit could have a chilling effect on software development for Windows. Microsoft had been pushing to establish Windows as an industry standard and to get software companies to write Windows applications. It was now pushing equally hard for Presentation Manager.

“Although Apple has a right to protect the results of its development and marketing efforts, it should not try to thwart the obvious direction of the industry,” said Lawrepce Magid, a Silicon Valley computer industry analyst. He and others pointed out, as Gates had before, that Apple, when it developed the Macintosh displays, used technology perfected at Xerox PARC. Critics of the suit said Apple apparently had lost the entrepreneurial spirit that transformed it from a garage operation into the world’s second biggest computer company.

“In general, it’s a horrible thing,” Andy Hertzfeld, the former Apple programmer who had worked on the Macintosh, said of the suit. “Apple could end up really hurting itself.”

Dan Bricklin, who developed VisiCalc, the first spreadsheet program, had a similar reaction: “If Apple is trying to push this as far as they appear to be trying to push it, this is a sad day for the software industry in America.” Writing software, Bricklin said, is not the same as writing a book. Software builds on what was there before.

In its suit, Apple said it had granted Microsoft in 1985 a limited license to use Macintosh-like features in Windows 1.0, but features in Windows 2.03 were not covered by the license. Apple said Windows 2.03 violated 13 different copyrights. Windows 2.03 was the basis for Presentation Manager, which had not been officially released at the time the suit was filed. In addition to Microsoft, the suit named Hewlett-Packard as a defendant and accused the Palo Alto company of copyright violations in New Wave, a Windows-based product for IBM compatible machines. Like Windows 2.03, New Wave had been announced but not yet shipped. Hewlett-Packard asked Apple if it could license Macintosh technology, but Apple refused, according to the suit. Since New Wave needed Windows 2.03 to operate, in essence the suit was really over Windows.

Apple argued in its suit that Windows 2.03 and New Wave had the distinctive “look and feel” of the visual displays of Macintosh. But there were differences between Macintosh displays and those in Windows. The Macintosh, for example, could display files as icons. In Windows, files were displayed only by a name. And the Macintosh erased a file by
dra
ggin
g
the icon or file name into a “trash can.” With Windows, a mouse was used to highlight a file name, and “erase” was selected from a menu.

This was not the first time Apple had accused a competitor of copying visual display features of the Macintosh. A few years earlier, Apple had threatened to haul Digital Research into court over its Macintosh-like product GEM. Digital changed GEM to Apple’s liking and avoided a court battle.

There was legal precedent for Apple’s suit. In 1987, a federal court in Atlanta had ruled that Softklone Corporation infringed on Digital Communications Associates’ copyright of the visual display of one of its programs.

Less than a month after the Apple filing, Microsoft counterattacked with a suit of its own, accusing Apple of breaking the 1985 licensing agreement and deliberating trying to damage Microsoft’s business with negative publicity. Microsoft said Windows 2.03 was “virtually identical” to Windows 1.0, which was covered in the license from Apple. According to Microsoft, Apple wrote the company in 1986, saying the 1985 agreement was limited to Windows 1.0. Apple gave no explanation for the letter, the Microsoft suit said. Microsoft said Windows 2.03 should be covered under that 1985 agreement. It also argued that the graphical interface used in the Macintosh was not original to Apple and thus should not be protected by copyright.

As Apple had done, Microsoft also took its case to the press, faxing copies of formerly confidential agreements with Apple to reporters, including the disputed 1985 licensing agreement.

' Apple subsequently filed additional court papers accusing Microsoft of using lies and threats to extract the 1985 licensing agreement. Apple said Microsoft threatened to stop work on vital applications for the Macintosh. Sculley, Apple’s leader, had said pretty much the same thing in his book
Odyssey,
which was published shortly before the Apple lawsuit.

Gates disputed Sculley’s version of events. He said Apple officials in 1985 had requested a meeting at Microsoft to talk about Windows 1.0 and brought along a “hot shot” lawyer who made threats about a lawsuit. Sculley was unaware, Gates said, of agreements Steve Jobs had made with Microsoft in 1982 to develop applications for the Macintosh.

“I informed Sculley about the agreements,” Gates said. “We said, ‘Come on, this isn’t productive for our two companies to be doing this.’ There was no threat from Microsoft. We never went to them and asked for a license. They’re the ones who started things off.”

After the suit was filed, there were several important pretrial rulings. Early on, a federal judge ruled that Microsoft had a legal license under the 1985 agreement for many of the displays used in Windows 2.03. Still at issue, however, even today, is whether Microsoft copied the concept of overlapping Windows used in the Macintosh. Having to change such a critical aspect of Microsoft’s Windows would be a costly setback. The judge also ruled that Microsoft could attempt to prove at trial that elements of the visual displays used in the Macintosh were copied from Xerox and thus should not be the basis for a copyright suit.

The various rulings in the Apple lawsuit have occasionally sent Microsoft’s stock tumbling or soaring, depending on how legal experts interpreted the overall outcome. In March of 1989, after the court ruled that the 1985 agreement between Microsoft and Apple “was not a complete defense” for Microsoft, its stock price dropped nearly twenty-seven percent.

Steve Ballmer decided to take advantage of the panic selling by Wall Street traders, telling colleagues at Microsoft he thought the stock had been unduly pummeled by the unfavorable court ruling. Ballmer went out and purchased 935,000 shares of Microsoft stock on the open market for $46.2 million—his first purchase since the company went public in 1986. Ballmer bought the stock at an average price of $48.91 a share. Within a month, the stock had climbed to $53.25 a share and was still going up.

“It’s nice to have that kind of money to put where your mouth is,” said one Wall Street analyst.

If the real target of Apple’s copyright lawsuit against Microsoft was actually OS/2 as many industry insiders suspected at the time, the Cupertino computer maker could have saved itself a lot of money in legal fees by doing nothing. As it turned out, its fears were unfounded. After all the media hype and industry anticipation, the much-ballyhooed operating system was a failure.

In early 1988, shortly after OS/2 was first shipped, IBM and Microsoft predicted sales would overtake DOS within two years. “During the next 10 years, millions of programmers and users will utilize this system,” wrote Bill Gates in the foreword to a 1988 technical book on OS/2 by Gordon Letwin, systems architect for Microsoft.

But once they got a look at OS/2, others in the industry soon had a different opinion. “The broad market will turn its back on OS/2,” predicted Jeffrey Tarter, publisher of the industry newsletter
Sofiletter,
in September of 1988. He was right. While technically impressive, OS/2 did not catch on for several reasons. At $325 a copy, it was more than twice as expensive as DOS. In order to use the new system, some PC owners had to spend $2,000 or more to update their existing hardware. For big corporate customers, this meant millions of dollars. Even if customers decided to switch over to the new operating system, there were few applications available to use with it. But the biggest obstacle OS/2 faced was from DOS. At the time OS/2 was introduced, DOS was used on more than 20 million personal computers. It accounted for thirty-eight percent of Microsoft’s sales and nearly half its profits during the year that ended in June 1987. Gates had established an entrenched industry standard with DOS, just as he had set out to do, and loyal customers would not give it up easily.

By 1989, Gates was a lonely voice in the crusade for OS/2. Wrote Sandra Reed in a
Personal Computing
column in July of that year: “Once gospel, Gates’ word now has to compete with disparate voices in a world that won’t give up the DOS standard easily.”

Gates professed not to be concerned about the miserable performance of OS/2 in the market place. “We are patient people,” he told a reporter for
Business Week.
“All the progress is in the right direction.”

He knew better, however. Within Microsoft, Gates had already started shifting programmers away from OS/2 to work on Windows. In 1988, Microsoft had introduced a second version of Windows designed for computers with the powerful 386 chip. Windows finally was starting to show promise. Sales were picking up. Gates had finally convinced software developers to write applications for Windows 2.0. Yet another, more advanced version, Windows 3.0, was already under development.

But Microsoft’s continued tinkering with Windows was straining its relationship with IBM, which supported Presentation Manager. There were industry rumors of a serious rift between the two companies over how Windows should be positioned in relation to OS/2. As it turned out, the rumors were true. The marriage between the two companies was having problems. Gates was no longer dealing with Bill Lowe at IBM. Lowe’s star had fallen, and he left for a job with Xerox. Replacing him as vice-president of IBM’s desktop computer division was Jim Cannavino, a veteran of the company’s mainframe division who was considered something of a hot shot. Although Cannavino had no experience with personal computers, he was smart and understood the technology much better than Lowe. But Cannavino didn’t trust Gates. He felt Gates had manipulated Lowe into making wrong decisions about OS/2 to the benefit of Microsoft. In fact, Lowe had
not
listened to Gates, which is what caused all the problems in the first place. But Cannavino knew none of the history of OS/2.