The Story of Microsoft and the Three Men Who Made It


Photo by Amit Chattopadhyay

The story of Microsoft, considering its creation spawned 3 of the 60 richest men in the world today, is an important one to understand.  Bill Gates, Paul Allen, and Steve Ballmer have amassed incredible amounts of wealth from Microsoft.  This is the story of how. 

Although Steve Ballmer has gotten very rich from Microsoft, I can’t find significant evidence that he contributed noticeable value to the organization.  Since Ballmer took over in 2000, the company has lost more than half its value.  So…quite interesting that Ballmer has become a very rich man from this company.  But that’s a completely different story.

The actual three largest contributors were probably Paul Allen, Bill Gates, and Rowland Hanson (in that order).  Allen coded the majority of DOS, which eventually paved the way for Microsoft’s success.  Gates was a tireless salesman, and his efforts got them many contracts.  Hanson created the Microsoft brand, which is one of the five most valuable brands in the world.

In order to fully explain the mental models that combined to create the phenomenal success of Microsoft, I’ve relied fairly heavily on Hard Drive: Bill Gates and the Making of the Microsoft Empire.  The authors engage in occasionally comical hyperbole, but this is still the most exhaustive and insightful writing on the company.

From the outset, two factors worked together to give Gates and Allen an advantage in computer software: Deliberate Practice and Compounding.  Although Allen was a few years older, both he and Gates attended the same middle and high school (Lakeside).  And Lakeside was one of a very few schools anywhere that had a computer.  So, at a young age, both boys were able to spend time learning about the computer.  By the time they were in college, they had years upon years of practice with computer coding.  Gates had the additional benefit of needing very little sleep: he had the ability to go 36 hours without sleep, crash for 10 hours, and then do it again.  This further separated his level of knowledge from others.  All these hours of Deliberate Practice created a Compounding effect – his knowledge scaled at a faster rate than his competitors.  By the time Gates was 19, he had an incredible total advantage over almost anyone who could have competed against him.  Anyone other than Allen of course, who shared many of the same advantages.  This was proven out when Gates and Allen wrote the BASIC code used for the Altair 8800 (the first minicomputer priced for the masses).

After writing the BASIC code for the Altair 8800, Microsoft began a steady ascent into the computer software world.  Now that Gates was on the right path, three different factors assisted in his ability to steadily grow Microsoft: Zipf’s Law, Metcalfe’s Law and Minimum Effective Dose.

Zipf’s Law played an important role because it explains the value of being #1 in anything.  In computer software, many feel that the person who controls the operating system controls the direction of the industry.  And Gates sought to do exactly this with DOS – it was his money-making monopoly.  Being #1 in any industry usually means a disproportionate share of that industry, so there is a natural race for #1.  George Zipf demonstrated this through language, noting that the most common word in a language is used far more heavily than the second most common word.

Metcalfe’s Law tells us that the value of a network is proportional to the square of the number of connected users of the system.  Stated simpler, the membership of a network grows incrementally (one by one); the value of a network grows exponentially (in leaps).  So an operating system only becomes valuable if there are a significant number of users.  Gaining users is certainly easier when a company is perceived as #1 in its industry.

Minimum Effective Dose is the mental model that Microsoft consistently used in trying to attain that #1 status.  In order to best position themselves for #1, the company would constantly put out software before it was ready.  According to Vern Raburn (former president of Microsoft’s Consumer Products division), “With few exceptions, they’ve never shipped a good product in its first version.  But they never give up and eventually get it right.”  George Patton liked to say that a good plan, violently executed today, is better than a perfect plan next week.  That was how Microsoft operated, and it’s an example of Minimum Effective Dose.  They were doing “just enough,” but it sufficed.

As Gates became entrenched in Microsoft, the focus shifted to three more models: Game Theory, Competitive Advantage, and Redundancy/Back-up Systems.

Gates ruthlessly used Game Theory and Competitive Advantage to his benefit.  A basic tenet of Game Theory is that you improve the probability you are going to win if you have fewer competitors.  Gates took this to an extreme, and his strategy was to absolutely smash people.

Gates coupled this interpretation of Game Theory with what was likely the most enviable Competitive Advantage in the computer software world.  Microsoft’s application group (Word, Excel) got inside information from the operating systems group (DOS, Windows).  Insider applications writers had far more knowledge than outside competitors.  This was an advantage enjoyed by no other company in the software industry.

Despite an incredible upper hand in the competitive landscape, Gates admittedly couldn’t predict the future.  So he always tried to cover his bet by having more than one thing going at once.  He didn’t want to commit everything to one product, on the off chance that it didn’t work.  In other words, he built Back-ups into the System.

Of course, Gates had his share of miscues.  He was able to overcome them – perhaps partially due to luck – but nonetheless, he was not flawless in his execution.  The two primary areas where Gates struggled were in Comparative Advantage and Cognitive Misjudgment.

The idea behind Comparative Advantage is that we would be better off outsourcing certain things as opposed to doing them ourselves.  As Microsoft developed, Gates became better at this.  But, this was not initially the case.  The original Windows was delayed and delayed because Gates kept changing his mind about the graphics presentation on it.  He should have just stayed out of it.  For someone who is addicted to control, the ability to outsource is almost always a challenge.  Gates was no exception.

Gates also struggled with people – really, with understanding people.  He didn’t understand basic tenets of human behavior, and this often cost him dearly in his ability to attract and retain talent.  There are 25 Cognitive Misjudgments which help us to understand human behavior, and it’s inherent flaws.  Four of them in particular repeatedly victimized Gates:

  • Inconsistency-Avoidance Tendency: Microsoft introduced the OS/2 at a price more than twice as high as DOS, at the same time that DOS was being used on more than 20 million personal computers.  The OS/2 didn’t sell.  People resisted the OS/2 because it’s simply easier to remain consistent in behavior (and not switch to the OS/2).
  • Kantian Fairness Tendency:  Microsoft approached business relationships through very cold means.  Instead of approaching a relationship as a partnership, Microsoft would craft complex legal documents with favorable loopholes, and then use the legal document as the relationship.  This blatant sense of unfairness made partnerships very difficult.
  • Over-Optimism Tendency:  Too often Gates set unrealistic goals for product development.  He constantly misapprised both he and his team’s ability to deliver within a certain window.
  • Liking/Loving Tendency: Gates often became too attached to a product, and subsequently sought perfection of it.  This liking or loving of a product led to incredible product delivery delays.  Gates also let all of his coding friends become his senior managers, which hurt Microsoft’s ability to have a more diverse set of skills and viewpoints.

In the end, Gates’ faults weren’t enough to stop Microsoft from becoming a behemoth.  Despite his social miscues, Gates was incredibly passionate about computers, coding, and winning.  It was hard for employees to ignore this about him – they saw his work ethic and energy.  And this often acted as a Catalyst for everyone else, allowing that same work ethic and energy to quickly spread throughout the organization.  In the end, Gates’ catalytic nature may be what ultimately made Microsoft into what it is today.