Hard Drive - Bill Gates and the making of the Microsoft Empire 5

In my reading of the Hard Drive: Bill Gates and the Making of the Microsoft Empire by James Wallace and Jim Erickson, the authors accounted Bill Gates tussle with MITS and Ed Roberts to reclaim licencing rights of BASIC. Ed Roberts was the founder of MITS (Micro Instrumentation and Telemetry Systems) and the designer of the world’s first personal computer, the Altair. He had leveraged on being the first manufacturer of the personal computer to ink the deal with Microsoft to supply his company with the computer language of BASIC for the Altair which Bill Gates and Paul Allen had developed. When other personal computer manufacturers came along, he tried to bank on the company’s exclusive ownership of the BASIC language to gain an edge over the personal computer market. This involved preventing Microsoft via the licensing agreement from liaising with other computer hardware companies to supply them with BASIC, at the detriment to Microsoft’s interest to market its software to other computer hardware manufacturers.

Microsoft was bound by a licencing agreement with MITs that restricted it from marketing its BASIC language to other hardware operators in the market. At page 111 – 112 - “The licensing agreement with MITs prevented Microsoft from selling 8080 BASIC to companies without the approval of MITS. Roberts had said he would not block a sale unless it was to a competitor. This was not a problem at first because the Altair had no rivals. But within two years of the Popular Electronics article, dozens of computer hardware companies had joined the revolution. In early 1977, Commodore hit the market with its PET computer, named after the trendy and popular pet rocks of the day. And down in Texas, the huge Tandy corporation was running tests on a microcomputer called the Radio Shack TRS-80, which was expected on the market soon. Out in the Silicon Valley of California, a new company that had been started in a garage was about to offer the fruit of its labors – the Apple II. The industry was growing up fast, and a language company like Microsoft that allowed computer users to utilize their machines more effectively stood to reap a financial harvest.”

Bill Gates held the higher ground in the bargaining game with MITS. At page 112 – “While Gates looked at these new computer hardware companies and saw new markets for Microsoft’s products, Roberts saw them as a threat. Inevitably, he and Gates were headed for a collision. Although the two had argued, yelled, and screamed at each other almost since the day they met two years earlier, Roberts realized he was dependent on Gates. Had the young software creator left MITS and taken Allen with him, MITS would have been in serious trouble, particularly if Microsoft forged an alliance with a new hardware company. So there were limits on how far Roberts could go in arguing with Gates. On the other hand, Gates knew Roberts was not his equal when it came to understanding computer software. Arguably, no one was. Part of the problem for Roberts in dealing with Gates was that Gates knew he was good, and at times he could be obnoxious. He did not hesitate to call someone “stupid,” or an “idiot,” including Roberts.”

The terms of the licencing agreement also prevented Microsoft from making more money because it provided for a $180,000 royalty cap. Microsoft could not make more money from BASIC unless they could break away from MITS. On April 20, 1977, after consulting with Gates’ father who was a lawyer in Seattle, and hiring an attorney in Albuquerque, Gates and Allen notified Robert by letter that they were terminating the licencing agreement for BASIC, effective in ten days. They cited several reasons: MITS had failed to account for thousands of dollars in royalty payments, failed to make its “best efforts” to promote and commercialize BASIC, and failed to secure secrecy agreements when BASIC was licensed to certain third parties, mostly hobbyists.

Roberts filed for a restraining order in court when he found out Microsoft was negotiating to license BASIC to Texas Instruments, which was about to come out with a microcomputer of its own. During the time which Microsoft could not licence its 8080 BASIC until the licencing dispute was resolved, which lasted several months, Microsoft faced money problems from the lack of revenues.

On May 22,1977, Roberts sold MITs to Pertec for several million dollars worth of Pertec stock. The chief counsel for Pertec came to Albuquerque to assess the issue regarding the licensing agreement and talk with Gates. At page 115 – “He took one look at the long-haired, scraggly, 21-year-old and decided the legal battle against Microsoft was going to be easy. Roberts had warned Pertec that it would have its corporate hands full with Gates, but no one listened to him. “Pertec kept telling me I was being unreasonable and they could deal with this guy,” Roberts said. “It was a little like Roosevelt telling Churchill that he could deal with Stalin.”

The talk failed and the dispute finally went to arbitration. In this case, there was a voidance of the licensing agreement on grounds that there were breaches by Pertec of agreements to the terms of the licencing agreement. At page 115 – “In addition to underestimating Gates, Pertec made another mistake. The company wrote a very explicit letter to Microsoft, saying it would no longer market BASIC or allow it to be licensed because it considered all other hardware companies competitors. The letter turned out to be the key piece of evidence in the arbitration hearing, in that it went completely counter to the “best efforts” provision in the licensing agreement. “It weakened their case,” said Wood. “They came in very arrogant, essentially saying, ‘We are this huge multimillion dollar company and you are just a handful of kids and we are not going to take you seriously.’ And that was a big mistake.”

At page 116 – “It was a complex and highly technical case. If the arbitrator had had to decide the dispute based on his understanding of the technology, Microsoft might still be waiting for a ruling. “I don’t think he had a clue to what anybody was talking about,” said Curry. Instead the arbitrator ruled  on the legal merits. Microsoft, he decided, owned the rights to BASIC and could market the product as it saw fit.”

Is it possible for industrial technicalities to become so complex and obscure that it becomes impossible for arbitrators or judges to adjudicate on the matter? The legal concept might be simple to understand, but is difficult to apply to the facts of the matter because the conclusion to be drawn depends on the nature of the technology and whether its uses by the various parties constitute breaches in any regard. In my law studies, it seems that judges would relegate certain aspects of adjudication of the matter to experts in the field. In one case I read featuring the tort of negligence in a medical issue, the issue of whether the doctor was indeed negligent was dependent on whether other medical professionals concur that his practice constitutes an accepted procedure in the medical discipline.

After the Pertec decision came down and the log jam of customers waiting for BASIC broke loose, Microsoft never had to worry about money again.

Ed Roberts eventually moved out of the computer business to become a small-town doctor. At page 116 – “Ed Roberts stayed on with Pertec for a couple years, then returned to his mother’s birthplace in the quiet heart of Georgia, where he used some of his new wealth to buy a farm. A few years later, he sold the farm and entered medical school – he had always wanted to be a doctor. Today, he’s a family physician in Chochran, a town of about 5,000 south of Macon. Few of the townspeople know that Roberts once built a tiny computer called the Altair, which shone like a Christmas star in the night sky during the early days of the personal computer revolution. A dozen years after the light went out and Roberts left Albuquerque, he is still bitter when he talks about Gates, perhaps because Gates went on to such great success, while Roberts became something of a Robert Goddard, the scientist who laid the foundation of modern rocketry and then was all but forgotten by history.

At page 117 – “Roberts still maintains that MITs was the rightful owner of BASIC that helped make Gates a billionaire several times over. He does not dispute that Gates an Allen were the authors. But MITs, he said, footed the bill for the development costs that turned BASIC into a marketable product for microcomputers. He estimated that Gates and Allen used several hundred thousand dollars’ worth of computing time while working on BASIC at MITS. “I was naïve,” Roberts said. “It sounds self-serving now, but I was really concerned with not trying to screw those guys. Bill was only 19 and Allen was only a couple years older, but it turns out they were a lot older than I was – Bill was for sure. Paul is a totally honourable guy.”