How Microsoft Bought DOS for $75,000

In the summer of 1980, IBM was secretly building the personal computer that would ship the next year as the IBM PC. They needed an operating system. They flew to Seattle to meet Bill Gates, whose Microsoft had been writing programming languages for hobbyist machines, and asked him to provide one. Microsoft did not have an operating system. Gates told IBM to talk to a small outfit called Digital Research, which sold the dominant CP/M.

Digital Research and IBM did not strike a deal. The story varies in detail — a missed meeting, a wife who declined to sign IBM's NDA — but in late summer 1980 IBM came back to Gates. This time, Gates said yes.

To deliver, Microsoft needed an existing operating system it could ship under contract. Twenty miles down the road from its offices, Seattle Computer Products had been writing one. Their 24-year-old engineer Tim Paterson had spent the spring of 1980 reverse-engineering the CP/M API, calling the result QDOS — Quick and Dirty Operating System. By the time Microsoft called, it had been renamed 86-DOS.

In December 1980, Microsoft licensed 86-DOS from SCP for $25,000, with the right to sublicense it. They renamed it MS-DOS for their own product, PC-DOS for the version they would ship to IBM. In July 1981, Microsoft paid SCP another $50,000 to buy 86-DOS outright. The total was $75,000.

The IBM PC shipped on August 12, 1981. Within five years, IBM-compatible clones from Compaq, Dell, and dozens of others were running MS-DOS under licence — and that licence revenue, not the original IBM contract, was what built Microsoft. Tim Paterson left SCP, joined Microsoft to port his code, and never owned a share of the operating system he had written.