The Birth Of An Industry

In 1976, Bill Gates, then 20, and Paul Allen, 23, were running a company they had started the year before in Gates's college dorm in Boston. That same year, Gary Kildall, 34 was starting a company in his backyard toolshed in California. Tony Gold, 30, was still a credit officer at a New York City bank. Dan Fylstra, 25, was starting at the Harvard Business School. Dan Bricklin, 25, was getting ready to apply to business schools in Massachusetts, and Bob Frankston, 27, was working as a computer programmer near Boston.

All seven of these people started and now run companies that produce and/or publish software for personal computers. All five of their companies -- whose combined revenues just missed $50 million in 1981 -- are doubling or tripling in size each year. All of these entrepreneurs are, or soon will be, millionaires. All are likely to be the leaders of the personal-computer software industry -- quoted during economic crisis, looked up to by future business-school students.

The five companies they founded have created a new industry from scratch. And now they've been joined by as many as 1,000 more companies offering for sale some 5,000 software programs. The pressures to stay on top in the industry are intense. Some of the biggest companies in the country have turned their attention to micro software in recent months. Professional investors are scrambling to pour millions of dollars of venture capital into the leading companies. And the independents -- only a dozen or so had sales of more than $1 million in 1981 -- are straining to stay out in front.

"It's a tremendous business to be part of," says Mike Belling, 32, who bought the three-month-old Stoneware Inc. in June 1980 with his partner, Kenneth Klein, 42. "But it has its pitfalls, like cars used to. It's all so brand new that there's nothing to go by yet. There's no history to tell you how many copies of a program to produce, for instance."

Five years ago, the micro-software industry didn't exist. The first "personal computers" were introduced in 1975, but they were sold as kits and had no keyboards or video monitors: You used them by flicking on-off toggle switches and watching flashing red lights. In 1977, though, both Apple Computer Inc. and Tandy Corp.'s Radio Shack Division introduced preassembled and attractively packaged personal computers. And last October, the $26-billion computer giant, IBM, started shipping its own personal computers.

Now the installed base of personal computers has passed the 1 million mark and is forecast to grow as much as 50% a year for the next decade. The demand for programs, or software, to run these machines has mushroomed. In 1981, sales of micro software totaled about $500 million. By 1985, forecasts suggest that sales will range between $1 billion and $5 billion.

The beginnings of this ow-hot industry were inauspicious. Late one night in January 1975, Bill Gates was playing poker in his Harvard dorm. He was losing heavily, when a friend showed him that month's issue of Popular Electronics. The cover featured the first personal computer, called an Altair. "I decided that I better buy one," says Gates, who had been planning to go into law despite an extensive background in programming. "I thought it was a better use of my money than losing at poker."

Gates did buy an Altair. With his good friend Paul Allen, who was working at Honeywell Inc.'s Boston facilities, he began writing a programming language. The two of them had decided that these little machines needed a simple, "high-level" language with which users could write programs. (High-level means that it's easy for people rather than machines to understand.)

Gates's dorm room at Harvard became the site of weeks of what Gates fondly calls "working in the hard-core mode." They named their finished language Microsoft BASIC and started Microsoft Inc. to market it. They've since sold more than 600,000 copies of Microsoft BASIC, and the company, which they moved first to Albuquerque, N.Mex., and then to Seattle, had revenues of $15.8 million last year.

Like most of the other industry leaders, Gates likes to think of himself as a pioneer. Microsoft BASIC, he says, proved that high-level languages could be written for personal computers and opened up programming to nontechnical people. "We turned software into an independent industry," says Gates.

At about the same time that Gates and Allen were working in the hard-core mode in Boston, Gary Kildall was trying, without success, to sell his own program. In 1975, Kildall was teaching computer science at a small naval college in California and was consulting for Intel Corp., manufacturer of the first microprocessor used in personal computers. On his own, Kildall had developed an operating system (the program that controls how different parts of the computer work together).He called it CP/M, short for Control Program for Microcomputers.

Kildall offered the program to Intel, whch turned it down. So in 1976, he and Dorothy McEwen, now his wife, formed Digital Research Inc. in his toolshed in Pacific Grove, Calif., and set out to persuade manufacturers to use the program in their computers. The operating system is now used in a number of major brands, including Xerox, Vector Graphic, and Zenith Data Systems. Because it allows users to switch easily from one brand to another, CP/M has become the industry standard.

In 1981, Digital Research had revenues of $6 million; for 1982, it forecasts revenues of $20 million.The company, which now employs 75 people, has acquired two other software firms and was one of the first in the industry to accept venture capital. "It feels good to know that my program has inspired other authors to write best-sellers," says Kildall. "But with all other overnight successes, people tend to forget that you're bound to have some flops. I wrote 18 programs on speculation before I came up with my first hit."

By early 1977, two of the four building blocks of the industry were in place. Microsoft BASIC broadened the base of programmers who couild work with personal computers. CP/M promised a large, standardized market for those programs. Two elements were missing, however: a way to distribute the programs widely and a popular application program (the program that actually tells the machine how to execute specific tasks) to show people how useful the machines could really be.

Development of the distribution system began in 1977. Tony Gold was responsible for analyzing corporate reorganizations for Citicorp in New York and had to both write reports and crunch numbers. He started using a small computer at home to help him with both tasks. "I quickly became aware that there was very little software readily available," says Gold.