A deal that changed the world..

This blog is adapted from an Economics guest lecture I had today-

In the 1980s there were majorly only three operating systems available in the market:

1) Mackintosh OS Developed by Apple in the year 1984, this OS gave rise to an era of GUI and it focused on ease of use, making it a much more superior OS of its time!

2) CP/M Short for Control Program/Monitor it was a mass-market operating system developed in 1974 for Intel 8080/85-based microcomputers by Gary Kildall of Digital Research. The first to enter the market but lost steam as microcomputers started getting replaced by PCs.

3) DOS The protagonist of this blog; I would define it as an outcome of well planned Jugaad. Details of how MS-DOS came into existence will be delved into further in the article.

CP/M had a first mover advantage, followed by DOS and finally Macintosh, which was characterized by a superior ease of use. Yet, DOS emerged to be a the winner in terms of market share. How? It was difficult to use, derided by professionals at that time and it wasn’t the first OS to enter the market.

Enters IBM and DOS deal!

In the summer of 80, IBM was developing its own line of personal computers but they didn’t have an OS to go along. After a failed deal with CP/M, the reached out to Microsoft for help. Now Microsoft didn’t really have an OS of their own but they licensed Q-DOS owned by Seattle Computer Products who had an OS similar to CP/M. Microsoft built upon Q-DOS and made their own version. In 1981, they brought Q-DOS. And IBM, later that year introduced its first line of PCs running on Microsoft’s OS, the MS-DOS, which BTW wasn’t the best of OS and Macintosh was superior in terms of ease of use.

One would have expected Microsoft to charge heavy royalties and upfront payments. However, in a masterstroke, Microsoft asked for a clause to let Microsoft sell its OS to other companies instead. Once IBM’s computers were out, other companies were quick to copy its hardware and of course, Microsoft was more than happy to let out its OS.

Knowledge based or technology companies are a perfect example of an increasing returns to scale type industry. And, what happened with Microsoft were the hallmarks of this phenomenon —

Hallmarks of an increasing returns to scale type industry :

Unpredictability
A few events can reshape History just like the Microsoft deal with IBM

Lock in the market
Ones who get ahead get really ahead. Eg. Facebook- everyone is on Facebook because everyone is on Facebook.

Dominance of Inferior product
Let’s face it, at the time Microsoft wasn’t probably the best in class yet it grew. The same is the case with QWERTY keyboard which apparently had some better competitors. Economists call it the “path dependence” where a not so superior product becomes the way forward just because it was first to the market.

Large Markups and hence higher profits
Once MS-DOS got ahead, it expanded even more bringing down its per unit cost of OS while keeping its mark ups high!

Yet another deal

Microsoft made a deal with Apple in 1985 where it was granted non-exclusive, worldwide, royalty-free, perpetual, nontransferable license to use [parts of the Mac technology] in present and future software programs, and to license them to and through third parties for use in their software programs. This paved way for more success for Microsoft, as it developed its productivity tools like word, excel, PPT etc both for itself and Apple’s mac..

Phew! Well played Microsoft.