Last week on Methods of Prosperity

Slaughterhouses inspired Henry Ford. His inspiration for the assembly line came from observing their efficiency. He applied the same systematic process to manufacturing the Model T.

He also discovered vanadium steel, which gave his cars a competitive advantage. Ford implemented a system of vertical integration. He was one of the first employers to offer his workers benefits. Which included as paid vacations, health care, and retirement plans. Thus creating a loyal workforce. In opposition to labor unions, he used social engineering and control techniques. Manipulating his workers’ personal lives came with the job.

Henry Ford was one of the wealthiest individuals in history. He made a significant fortune through his innovative business practices. He also disseminated anti-Semitic sentiments through his newspaper and publications. Nazi Germany awarded him the grand cross of the German eagle. It was the highest honor Nazis could give to any foreigner.

The following is Methods of Prosperity newsletter number 20. It was originally deployed November 2, 2023. As of July 11, 2024, original subscribers have received up to issue number 56 (Sir Richard Branson, conclusion).

Part 20: Bill Gates

TL;DR

In 1980, Mary Gates was a board member of United Way of King County. She influenced IBM CEO John Opel to consider her son’s company, Microsoft, for IBM’s “Project Chess”. Project Chess was an initiative to develop software for IBM's new personal computer. A company named Digital Research lost the contract for the job. IBM hired Microsoft to replace Digital Research. Microsoft didn’t have an existing operating system. Bill Gates outsourced the work. He purchased 86-DOS from Seattle Computer Products for $50,000 and adapted it for IBM. This strategic move set Microsoft on a path to dominate the PC software market. Bill Gates became the youngest American billionaire. He amassed a net worth between $123 and $125 billion by November 2023. The Bill and Melinda Gates Foundation manage his philanthropic efforts today.

Key lessons:

• Find a buyer for your product or service before it exists.

• Like gravity, no one can see the cause, only the effect.

• Get the contract and outsource the work.

• Follow your own obsession.

In 1980, a persuasive mother would set into motion a chain of events. Mary Gates was on the board of United Way of King County, a charity organization in Seattle. John Opel was IBM’s CEO at the time. John Opel was also on the board. IBM was developing its own PC brand, but they did not have an operating system to run on it.

By that time, IBM was late to the emerging PC market. Apple was ahead. The Apple II was the first of its kind. It was a fully-built personal computer marketed to consumers as a complete unit in 1977. To fulfill the demand, IBM wasted no time developing their own software. IBM needed help for the project, which they called “Project Chess”. IBM was considering many software companies, including Digital Research. 

Imagine alternative history. Life would be very different today if IBM’s talks with Digital Research didn’t fall apart. IBM and Digital Research did not come to an agreement on an operating system for IBM’s personal computer. The two parties argued over non-disclosure agreements and other legal issues. IBM presented Digital Research with a one-sided non-disclosure agreement. The company refused to sign it. The exact reason for the failure of the deal is not clear. The founder of Digital Research was not interested in working with IBM. His name is Gary Kildall. His reasons for refusing to work with IBM are unknown.

Mary Gates persuaded John Opel to consider her son’s company, Microsoft, for Project Chess. Opel then spoke to IBM executives about the company. Opel remembered Microsoft as the company “run by Bill Gates, Mary Gates’ son.” This is according to The Seattle Times. As a result, IBM “took a chance,” and hired Microsoft for the job.

I know what you’re thinking. “Sean Allen Fenn, last week you told us the story of Henry Ford and now we jumped to the 1980’s.” Between the birth of Ford and Gates, no individual American reached this degree of wealth. That time span was over 92 years. Since the early 20th century, technological, political, and market forces changed fast.

In the 1940’s, IBM built one of the first large machines known as the Mark 1. IBM designed the Mark 1 to execute long computations. What you might not be aware of, is that computers existed in one form or another, since 1842. Ada Lovelace translated writings by Charles Babbage. In 1822, he theorized about changeable punch cards in a machine to do calculations. Ada Lovelace invented the first computer algorithm. She’s considered the world’s first computer programmer. Herman Hollerith was a German-American statistician, inventor, and businessman. He developed an electromechanical tabulating machine for punched cards. His machine assisted in summarizing information and, later, in accounting. For a short time, Hollerith worked for the Census Office in the run-up to the 1880 census. That’s where he developed a device that could tabulate census data. He patented his invention, the punched card tabulating machine in 1884. This marks the beginning of the era of mechanized binary code. It was the beginning of semiautomatic data processing systems. His concept dominated that landscape for a century. Hollerith founded the Tabulating Machine Company in 1896, which later became IBM.

William Henry Gates III was born October 28, 1955 in Seattle Washington. His maternal grandfather was founder of National City Bank in Seattle. His name is James Willard Maxwell. His paternal grandfather owned a furniture store in Bremerton, Washington. His name is William Henry Gates I. William Henry Gates II, who studied law, married Maxwell’s daughter Mary. Young Bill Gates would attend Lakeside School. There, he and his friends had access to a computer terminal. It was at Lakeside that he became friends with Paul Allen. He would be Gates’ future business partner and co-founder of Microsoft. Microsoft wasn’t their first venture. At the age of 15, they earned $20,000 from Traf-o-Data, a program which measured traffic in Seattle.

The Altair 8800 was the first personal electronic computer kit in 1975. MITS made the Altair 8800. They were a small company in Albuquerque, New Mexico. Bill and Paul promised to deliver a program for the Altair 8800. Before testing it to be certain that it worked, they delivered their new software to MITS. Luckily, their program worked. Bill decided to drop out of Harvard and start Microsoft with Paul. After a falling out with MITS, Microsoft fought to keep control of their software. They moved the company to Bellevue, Washington in 1979.

When IBM partnered with Microsoft to deliver software for their new PC, Microsoft didn’t have it. This is the genius of Bill Gates. As with the Altair 8800, he invented vaporware. That is, a digital product which does not actually exist before you buy it. Instead of coding the new IBM software from scratch, Bill Gates did a kind of arbitrage play. Microsoft thought it wiser to buy an existing solution than to build its own. Seattle Computer Products sold Microsoft a non-exclusive license for their 86-DOS. Microsoft purchased the rights to 86-DOS from Seattle Computer Products for $50,000. That was in July 1981.

This move allowed Microsoft to become the leading PC software company. It set the stage for the company’s future success. The licensing arrangement was IBM’s idea. IBM approached Microsoft to discuss the PC market. The talks were in general terms. In about a month’s time, the software shipped on an IBM PC.

You have to understand how the concept of licensing software was new. Let’s take a dive down a rabbit hole for a moment. This perspective is necessary to understand how a significant breakthrough occurs. It can make us a fortune, upon its discovery. As with the discovery of electromagnetism, recognizing emergent phenomena can be elusive. At least, we usually take it for granted and miss the opportunity to invent something new. For example, we seldom think about the second law of thermodynamics at work. Not when cracking and cooking an egg. Imagine playing a game of chess on the computer. We seldom consider that the program beats us and not the physical computer hardware. You can come out of the rabbit hole now.

In conclusion, Bill Gates was the youngest American billionaire. In 1987, the value of his shares in Microsoft surpassed $1 billion. He was 31 years old. As of November 2023, Bill Gates has an estimated net worth of $123 to $125 billion. Much of his wealth goes to philanthropic causes. The Bill and Melinda Gates Foundation manages his philanthropy.

I like you,

– Sean Allen Fenn