Gary Kildall, Bill Gates and the "Gentleman's Agreement"

10 min read Original article ↗

In fact, there was an unwritten agreement between Gates and Kildall that Microsoft would stay out of the operating system end of the business, and Kildall would not get into microcomputer languages, according to industry sources.

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In 1980, the microcomputer software industry was tiny compared to today’s $824 billion global software market size - it was almost certainly under $100 million1. When it comes to application software, VisiCorp’s Visicalc led the new spreadsheet market and MicroPro’s WordStar was the most popular word-processing program. On the systems software side, the market was split between Microsoft and Digital Research Inc (DRI): the former focused on programming languages, and the latter on operating systems, including CP/M which became the standard for 8-bit business computers.

For a while, or at least until Microsoft released MS-DOS, there was a belief that the leaders of the two companies, Bill Gates and Gary Kildall, had agreed not to compete with each other. It was hearsay and nobody was actually able to point to a source for the claim - people were just passing rumors around:

David Kaplan, the author of the engaging Silicon Boys, says there seemed to be a gentleman’s agreement that neither would get involved in the other’s business. “DRI would stay away from languages, and Microsoft would leave operating systems alone.”

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Was there anything more than gossip behind the agreement between Kildall and Gates?

The entire concept of dividing the system software market into programming languages and operating systems sounds odd nowadays. In the early era of personal computers, disk drives were rare, and many machines booted straight into a BASIC interpreter stored in ROM. The language functioned somewhat like a command line shell in modern operating systems: it was the user interface through which most users interacted with the machine. Early computer culture even assumed that most users would learn at least some programming. In that sense, Microsoft BASIC was system software, if not a full-fledged operating system. It became even closer to that role when disk support was added - originally by Bill Gates himself, and later by Marc McDonald who developed a real file system, called FAT that was bundled with BASIC. As time went by, Microsoft also developed compilers for FORTRAN, COBOL and even announced APL, though it was never actually released.

On the other hand, as disk drives became more common, there was a need for a traditional operating system stored on a disk and loaded into RAM where it would provide system calls to applications. Several appeared very early on, including Intel’s ISIS, iCOMs FDOS and NorthStar DOS, but by late 1977 it became clear the winner was DRI’s CP/M: inexpensive, easily portable and very light on resources. Initially developed in 1973/742, before any commercial microcomputers even existed, CP/M was in the beginning used as a teaching tool at Naval Postgraduate School where Kildall taught. First commercial licenses were issued in 1975, and after the deal with IMSAI in 1976, CP/M became the de-facto standard for Intel 8080 based business computers. By 1979, Kildall felt it was time to move on to more capable systems that would support multitasking and networking, and DRI developed MP/M and CP/NET.

Both Microsoft and DRI recognized that their businesses complemented each other, and the word “synergy” started popping up on both sides:

At this time, I was quite friendly with Bill, and we always talked of the “synergism” of our two businesses.

Gary Kildall

Dan Fylstra, Bill Gates and Gary Kildall in 1984

It made our lives a lot easier if someone would just go license CP/M and get that up on their machines and then our stuff would pretty much run as is. And Gary would do likewise. If someone went to him to license CP/M and they were looking for languages, he would refer people to Microsoft. It was a very synergistic kind of thing.

Steve Wood, Microsoft’s early employee

At some point, there was even discussion of a merger between the two companies. According to Kildall3, “one day in 1977” Gates paid him a visit while traveling from Albuquerque to Seattle. The two pioneers of the microcomputer software industry bonded over a home-cooked dinner and complained about their numerous speeding tickets. After the meal, they discussed the possibility of combining their businesses. At that time, Microsoft’s contract with the original microcomputer maker MITS had dissolved and its founders were looking to leave Albuquerque. Gates preferred a move to California and a merger with DRI seemed like a plausible idea; Allen insisted on moving back to Seattle, which is what eventually happened.

It was a tantalizing “what-if” moment:

The combination of Kildall and Gates could have been a killer-deal in those days. I had the operating systems for the decade to come, and he had the opportunistic approach to garner business. But, our attitudes differed entirely, and that could also have been a disaster. I think we both realized this and simply let the “deal” die.

Gary Kildall

But all this talk of “synergy” did not mean there was a deal to stay out of each other’s business. Indeed, if we look at the early history of the two companies, there is plenty of evidence that both were interested in expanding on the other side of the fence.

Even if we disregard the fact that Microsoft’s Standalone BASIC was almost an operating system, it is clear Microsoft considered building a “real” operating system from the very beginning:

Early on in New Mexico we talked about developing an operating system. We asked ourselves if we should really be referring all this business to Gary. We always came back with the same answer: We have all this other stuff to do.

Steve Wood

In 1979, Marc McDonald developed software that was without any doubt an operating system: it was called M-DOS or MIDAS4. M-DOS was based on the same FAT filesystem that was shipped with BASIC; it supported multitasking, but not multiple users and, like CP/M, was influenced by the TOPS-10 operating system that ran on DEC’s PDP-10 mainframes - Microsoft’s primary development environment in the 1970s. Before M-DOS was completed, though, Microsoft leaders decided to shelve it5.

In the meantime, in 1978, Intel released the first 16-bit microprocessor: the 8086. Microsoft was one of the few companies ready to bet on the new technology: they hired Jim Lane to write an 8086 simulator for the PDP‑10 and as soon as it was finished Bob O’Rear started porting the Standalone BASIC to 8086. The product was ready by early 1980 - just in time for one of the first 8086 based systems: Seattle Computer Product’s S-100 8086 board.

BASIC was, of course, the priority, but Gates saw the impending shift to 16-bits as a chance to gain a foothold in the operating systems market. In the late 1970s, UNIX was becoming popular at universities, which received not only binaries, but also source code from AT&T that at the time was prohibited from selling it commercially.

Gates and Allen decided to bet that UNIX would become the standard for 16-bit microprocessors. In February 1980 Microsoft licensed UNIX source code from Western Electric (the manufacturing arm of AT&T), and on August 25, 1980, announced its own product based on it: XENIX. The new operating system was first released for the DEC PDP-11 minicomputer - the model UNIX was developed on; later it was ported to 16-bit microcomputers.

One might expect that Microsoft licensing UNIX would have seemed like a serious threat to DRI. Gary Kildall did not see it that way:

UNIX was not in the marketplace we were into. It was mostly for scientific workstations, as it is now. It was never a threat to us in our business markets.

Gary Kildall

He was right. XENIX achieved some success during the 1980s, but it never came close to becoming the standard for 16-bit personal computers6. It was not a good fit for the 8088 CPU and required more memory than the personal computer models of the early 1980s could usually provide7.

But spending $2 million on a license for UNIX source code clearly showed that Microsoft was serious about the operating systems. There was no “agreement”, written or unwritten, that would keep them out of that market; they just picked the wrong product at first.

Gary Kildall is mostly remembered as the author of the CP/M operating system. However, he was above all a programming language expert:

There was never any chance Gary Kildall would abandon his work on languages. In fact, CP/M itself was created as a side effect of his PL/M work - only because he wanted to run the PL/M compiler on an Intellec-8 microcomputer development system rather than cross-compiling it on a PDP-10 mainframe.

That said, before 1980 Digital Research was not producing programming languages. PL/M was sold to Intel for $20k in 1974 and PL/I-80 was released only in late 1980. The compiler that apparently upset Gates the most was originally not even a DRI product - it was CBASIC, developed and sold by a former student of Gary Kildall - Gordon Eubanks. It seems that DRI started promoting CBASIC sometime in 19799, but did not acquire it until 1981.

Once IBM decided to license MS-DOS for its IBM PC computer, any semblance of the “synergy” between the two companies disappeared: they became fierce competitors.

Microsoft won decisively, and by 1985 DRI was on the brink of bankruptcy. The board authorized Gary Kildall to find a buyer for the company, and he went to Bill Gates, asking $26 million. Gates did not think the company was worth more than $10 million, and the second attempt to combine the two companies failed. Kildall hired a new CEO, IBM veteran Dick Williams, who managed to keep the company afloat and eventually sell it to Novell in 1991 for $120 million.

Gary Kildall died three years later at the age of fifty-two. His old friend and business rival had this to say about him:

Gary Kildall was one of the original pioneers of the PC revolution. He was a very creative computer scientist who did excellent work. Although we were competitors, I always had tremendous respect for his contributions to the PC industry. His untimely death was very unfortunate, and he and his work will be missed.

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In the end, the supposed “gentleman’s agreement” between Kildall and Gates was really just an acknowledgment of the situation as it existed at the time. The two men respected each other’s work, and for a while their businesses were complementary. Neither believed that arrangement was permanent, and both were ready to cross the boundary when the opportunity presented itself.