Microsoft's Pattern-Breaking History
The Acquired Podcast episode on Microsoft is a must-listen
The Pattern Breakers book is now available wherever you buy your books.
This week, one of my favorite podcasts, Acquired, put out an essential episode on the history of Microsoft. If you haven't tuned into Acquired in the past, you've been missing out. Ben Gilbert and David Rosenthal meticulously unravel the histories of the most iconic firms and figures in history. Their analysis is exhaustive, mirroring the fervor of startup founders engrossed in their obsessions with the future. Episodes on Porsche, LVMH, and Visa stand out to me, alongside their study of Benchmark Capital’s history. With so many excellent episodes, it's tough to single out just a few.
Back to the history of Microsoft.
I know the Microsoft story well; my father, Mike Maples senior, worked there when I was a young adult. Hearing Ben and David mention him brought a smile to my face and brought back many great memories. It again showed their commitment to historical depth. Some of you might enjoy these “artifacts” from that era:
Hearing Ben and David tell the story, I was repeatedly struck by something: Without using the exact language, they vividly captured how inflections, insights, and living in the future shaped Microsoft’s path to becoming the world’s most valuable company, both then and now.
This week, I wanted to build on Ben and David’s work as a vivid example to connect with what we've been discussing in the Pattern Breakers newsletter.
Microsoft’s Inflections
Ben and David brought up some staggering statistics: from 1975 to 1986, PC sales surged with a compound annual growth rate of 98%, skyrocketing from 4,000 units to 9 million annually. And software was the first industry where the marginal cost per unit sold was effectively zero.
From the episode: “New generations of technology enable market dislocation. Unless you are in a transformational moment [where] a new technology comes out that enables something that wasn’t possible before—that’s going to rearrange the whole value chain and open up new markets—it’s pretty hard to challenge an incumbent.”
Bill Gates and Paul Allen saw the potential of the microprocessor early on, crafting a version of BASIC crucial for operating these emerging computers. The inflection was he advent of the MITS Altair personal computer, which catalyzed Bill Gates’ decision to drop out of Harvard, move to New Mexico where MITS was located, and devote his energies to software full time.
Microsoft wasn’t the first to market in spreadsheets (most no longer remember Lotus 1-2-3 and VisiCalc before them). But Microsoft capitalized on the inflection of graphical user interfaces to break the current pattern and make Excel the industry standard to this day.
Under Satya Nadella's leadership, Microsoft has seen a renaissance, earning him accolades as one of the finest non-founder CEOs. His tenure has been marked by leveraging key inflection points, particularly in AI, positioning Microsoft to further its dominance in business software.
Microsoft’s Insights
Microsoft had many profound insights, but perhaps the most important was the insight that software could be a gigantic business in the first place. All of their key strategic decisions reflected this understanding. Examples included:
Focus on Software: Unlike many of its competitors who were focused on hardware, Microsoft concentrated primarily on software. This focus allowed it to create products that could be used across various hardware platforms, increasing their marketability and utility.
Prioritizing Partnerships: Microsoft's early partnership with IBM was crucial. This relationship allowed Microsoft to supply the operating system for IBM's first personal computer, positioning the company at the forefront of the PC revolution.
Licensing Model: In what the acquired guys called “the greatest business deal ever,” Microsoft made themselves the linchpin of future software applications by licensing their operating system to IBM. As part of this deal, Bill Gates had the insight to retain the licensing rights to Microsoft's operating system software, even when selling it to IBM. This decision meant that Microsoft could license the software to other PC manufacturers, creating a vast new revenue stream that was independent of hardware sales.
Living In the Future
Many believe Bill Gates' vision for Microsoft began at Harvard, but the roots go deeper. The "Acquired" hosts emphasize pivotal moments earlier in his life that shaped him. At 13, Bill's prep school, Lakeside, acquired a teletype and rented time on a General Electric computer in Seattle. As Ben and David pointed out, Bill and his friend Paul Allen were uniquely positioned to glimpse the future.
They started the Lakeside Programmers Group, becoming top programmers at school. This early exposure gave them a crucial advantage—they were prepared to exploit the future before it became mainstream. Their foresight bore fruit when the MITS Altair launched during Gates’ freshman year at Harvard. Seizing the moment, Gates and Allen headed to New Mexico, where MITS was based, to develop software for the new machine. This venture laid the foundation for Microsoft, which they later relocated to Seattle, marking the beginning of their historic journey.
Congrats to the Acquired team on an amazing job. Their effort is legendary. And speaking of podcasts to consider, watch this space over the next week or so 🙂
Thought-stimulating piece - how do I shape my business around those three pillars - Focus on Software, Prioritizing Partnerships, Licensing Model? Even as a service business, how can we think of it as software and position it to scale with minimal additional unit cost?
Thanks for the recommendation! I will definitely listen. As a former Microsoft employee and current alumnus I still find the history fascinating. I’ll always be a proud Softie. It was a privilege to work and “grow up” there under three great leaders.