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Originally published June 27, 2008 at 12:00 AM | Page modified June 27, 2008 at 2:03 PM

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Gates' big-picture memos shaped Microsoft, changed tech world

Bill Gates, who today ends his full-time involvement with the company he and Paul Allen cofounded 33 years ago, was often right. The Microsoft empire of 91,200 employees, billions in profit and ubiquitous products stands as testament.

Seattle Times technology reporter

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He made a career, a company and an industry by looking over the horizon and charting a course.

Bill Gates, who today ends his full-time involvement with the company he and Paul Allen cofounded 33 years ago, was often right. The Microsoft empire of 91,200 employees, billions in profit and ubiquitous products stands as testament.

Now, Seattle's most famous son points his full intellect and attention to the world's poor, giving them a voice in a global market that responds disproportionately to the rich.

Microsoft's success, which has enabled Gates, 52, to launch a second career that could install him as history's greatest philanthropist, was not a sure thing. Aided by a growing crew of technical and business smart guys, Gates spotted opportunities and challenges, and pushed his company toward them.

He wrote a series of course-setting memos to lead the company in these new directions — a new computer interface, the Internet, computer security. They stand as signposts at several key junctures in Microsoft's history.

The 1995 Internet memo in particular

marked an important turning point, when Microsoft's huge software success confronted an uncertain future online.

In many cases, these prescient missives launched the company toward ever-greater heights. But even Gates couldn't see everything coming. And he knew it.

The confident competitor was also constantly paranoid that an unknown would seize the next big trend in technology and ride it past Microsoft. It drove him to be vigilant and abhor complacency, an important imprint Gates leaves on Microsoft.

"We never come into work and say, 'Hey, we're golden. You know, hey, let's just lie around today,' " Gates said in an interview with The Seattle Times last week. "That's not our culture. And so it's a hungry company, and it's always thinking. ... "

An Open Letter to Hobbyists

February 1976:

"As the majority of hobbyists must be aware, most of you steal your software. ... Who cares if the people who worked on it get paid?"

Gates wrote his first famous memo when Micro-Soft was still spelled with a hyphen. "An Open Letter to Hobbyists," published in the early newsletter Computer Notes, came at a time when communicating with his handful of colleagues required only shouting across their small office in Albuquerque, N.M. He aimed this brief at the small and growing community of computer users for whom Gates and staff wrote programming languages.

With his characteristic sarcasm, Gates argued that software had economic value — a necessary condition for a successful software company.

"Nothing would please me more than being able to hire 10 programmers and deluge the hobby market with good software," Gates concluded.

Dennis Báthory-Kitsz, a composer, author and technologist, followed the intellectual-property debate raging in computer clubs and courtrooms that would set the rules of the software game. In a 1980 interview, Gates told Báthory-Kitsz: "There's nobody getting rich writing software that I know of."

"He didn't mean they weren't getting back their investment, but rather they were not making a lot of money," Báthory-Kitsz said. "[Gates], as a prime example of the capitalist notion, felt that high investment of time, energy and imagination deserved a multiple return rather than equal return."

Applications Strategy

June 1983:

"Microsoft believes in mouse and graphics as invaluable to the man-machine interface. We will bet on that belief by focusing new development on the two new environments with mouse and graphics ... Macintosh and Windows."

Gates' memos often gathered the thinking of many in the company and were sometimes signed by other executives. In 1983, he and Steve Ballmer, who had joined the company three years earlier, ordered Microsoft full speed ahead toward the graphical user interface. They laid it out in the "Applications Strategy" memo, written on a Mac.

Charles Simonyi, an illustrious Microsoft alumnus who was leading application development at Microsoft at the time, said in a recent e-mail that Microsoft had been studying graphical user interface, a big step up from controlling computers with text commands, for two years when the memo was sent.

Simonyi, now CEO of Bellevue-based Intentional Software, said Gates was a visionary who could see big shifts coming, but that's not the hard part.

Gates, he said, "selects the promising ideas that are over the horizon but not too far over, studies them in great detail, and then communicates them very effectively to the company, but also to the industry."

Others say Gates' skill was not in pointing Microsoft toward promising ideas, but rather toward promising targets — competitors the company could follow into a new market and clobber.

"Let 100 companies blossom, let one survive and then we'll take that one down — we'll replace that one," Mark Anderson, a Friday Harbor-based analyst and adviser, said of the company's approach.

Microsoft's bet on the graphical user interface started paying off big-time by the late 1980s.

Windows was taking off on IBM's PC and its clones. Microsoft applications were grabbing market share on the Apple Macintosh. The company had its initial public offering in 1986.

In spring 1987, Bill Gates, despite being "conservative ... about self-congratulations and celebrating our achievements," took a moment to enjoy some hard-fought success.

"I have to say, as today went on, I got pretty excited about the fact that we are now the number 1 software company in every respect (sales, profit, units, leadership, people ... )," Gates told his top lieutenants in an e-mail written after midnight.

The overtaken foe was Lotus. Gates, always wary of complacency, quickly noted that "their sales may go past ours again," but for a moment, he was exultant.

By 1995, Microsoft, in business 20 years, was king of the hill. It was the dominant provider of operating systems and launched Windows 95 with previously unseen fanfare.

Michael Cusumano, the MIT software-industry and business-management expert, wrote "Microsoft Secrets" that year with Richard Selby, providing a close look at a company of more than 17,000 30-somethings working hard and getting rich.

"They were really just reaching their apex with Windows 95 coming out," Cusumano said. "... Just tremendous confidence in their development abilities, their marketing abilities. The world was the limit."

Gates turned 40 that year, still a newlywed, not yet a father. He had built an empire with astonishing speed. That summer, Forbes named him the richest private individual on Earth with an estimated net worth of $12.9 billion.

But as a careful student of business history, Gates knew "some startup just like Microsoft could come in and blindside them," Cusumano said.

The Internet Tidal Wave

May 1995:

"In this memo I want to make clear that our focus on the Internet is critical to every part of our business."

Netscape Communications was that startup. In 1994, it released its Internet browser, providing a gateway to the growing volume of content on the World Wide Web and diminishing the importance of Windows because the browser worked the same regardless of a computer's operating system.

On May 26, 1995, Gates sent one of his most famous memos, comparing the arrival of the Internet with IBM's PC. It would "set the course of our industry for a long time to come," he predicted.

He distilled his ideas and those of Microsoft's best thinkers in nine single-spaced pages under the title "The Internet Tidal Wave." Much of what was forecast in the memo has since become the modern Internet.

The memo had the desired effect. Microsoft charged ahead with programming languages better suited to Internet development, server software that runs more than a third of the world's Web sites and a browser that only recently has seen a meaningful threat. But its tactics went too far. Microsoft bundled its Internet Explorer browser with Windows, a move that helped make IE the dominant browser. But it also helped land the company in a draining, decadelong antitrust battle that damaged its reputation, cost billions and has continuing repercussions.

Government Exhibit 20 in U.S. v. Microsoft was "The Internet Tidal Wave" memo.

The episode showed another side of the company's character.

"You see the paranoid side come out," Cusumano said. "... Microsoft would have won the browser wars anyway without illegally doing things to limit Netscape's presence in the market."

Larry Page and Sergey Brin were still bickering Stanford graduate students when Gates set his company on course for the Internet.

Today, the company they founded, Google, is the unquestioned leader in what has become the Internet's all-important application and business model: search and online advertising.

In a bid to catch up, Microsoft spent the first half of this year in an as-yet-unsuccessful courtship of Yahoo, which Gates described in the 1995 memo as one of the "hot sites to try out." Instead, Google and Yahoo announced a search-advertising pact earlier this month.

Gates dismissed the notion that Microsoft overlooked search in the mid-1990s.

"The whole 'information at your fingertips' thing" — an idea Gates first introduced in a 1990 industry speech — "is a superset of search, in the sense that you don't want to just get a bunch of links back. That's not an end to itself," Gates said last week.

"You want to organize a trip, you want to pick a product, you want to compare two different reviews. And information at your fingertips, that actually predates the Internet Tidal Wave memo."

Microsoft didn't field a search engine based on its own technology until 2005.

Gates, who said he will work on search as a Microsoft part-timer, acknowledged that "the importance that advertising would play is not in [the memo]."

But, he said, advertising was not part of the early plans of Google or other rivals, either. Google's advertising machine wasn't started in earnest until 2000.

Microsoft Chief Executive Steve Ballmer, in a separate interview, credits Google for capitalizing on the idea that relevant advertising displayed next to search results not only generates revenue, but actually improves the search results themselves.

"Google really got the business model right," he said. " ... [It's] a thing which I would claim we didn't see — maybe should have — and others didn't see. Where was Yahoo?"

Internet Services Disruption

October 2005:

"The broad and rich foundation of the internet will unleash a 'services wave' of applications and experiences available instantly over the internet to millions of users."

In the fall of 2005, several months before he announced plans to "reorder his personal priorities," Gates put his hand to another major memo. This time, he wrote only a brief introduction, in which he handed off strategic leadership for this next big shift.

The body was written by Chief Software Architect Ray Ozzie, a highly respected software veteran who spent most of his career at Lotus, and one of two executives tapped to fill Gates' shoes at Microsoft. The broad, course-setting memos will come from them now, Gates said last week.

But the number of markets, opportunities and challenges the company faces today leave plenty of room for Gates, who will remain Microsoft chairman, to contribute.

"In fact," he said, "there's one that I'm thinking about writing now."

Benjamin J. Romano: 206-464-2149 or bromano@seattletimes.com

Copyright © 2008 The Seattle Times Company

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