Win MITS Arbitration
Setting
September 1977. MITS (Micro Instrumentation and Telemetry Systems), maker of the Altair 8800, had been acquired by Pertec in May 1977 for $6.5 million.
The problem: Microsoft's original contract with MITS gave MITS exclusive rights to license BASIC. With MITS now owned by Pertec, Microsoft faced losing control of its core product.
Bill Gates was 21 years old. He decided to fight the acquisition in arbitration.
People
- Responsible: Bill Gates
- Approvers: Paul Allen
- Consulted: Microsoft's lawyers
- Informed: Pertec/MITS
The Contract Dispute
Original MITS Agreement (1975)
- MITS had exclusive rights to sublicense Altair BASIC
- Microsoft received $30 per copy + 50% of sublicensing
- Lifetime cap: $180,000
- Key clause: MITS agreed to use "best efforts" to license BASIC
Microsoft's Argument
MITS had failed to use "best efforts":
- Pricing too high (discouraging adoption)
- Poor marketing
- Not pursuing sublicensing opportunities
- Piracy left unchallenged
Therefore, the exclusivity clause should be void.
Pertec's Argument
- Contract was valid and binding
- "Best efforts" was subjective
- Microsoft was a 5-person company trying to escape a bad deal
- Pertec paid $6.5M partly for BASIC rights
The Stakes
| If Microsoft Lost | If Microsoft Won |
|---|---|
| BASIC rights stay with Pertec | Microsoft gains freedom |
| Cannot license to Trinity (Apple, Commodore, RadioShack) | Can pursue 1977 Trinity market |
| Company potentially worthless | Foundation for platform strategy |
The Gamble
Why This Was Risky
- 21-year-old vs. corporate legal team
- Subjective "best efforts" standard
- No guaranteed outcome
- Microsoft had minimal resources
Why Gates Fought
- BASIC was Microsoft's only product
- Personal computer market was exploding (Trinity)
- Being locked to dying Altair was death sentence
- "Best efforts" clause was genuine loophole
Decision
Chosen: Pursue arbitration aggressively
Gates personally prepared for the case, gathering evidence of MITS's failures to promote BASIC.
The Arbitration
Microsoft's Evidence
- MITS sold BASIC at $500 (too expensive)
- MITS made minimal sublicensing efforts
- Piracy flourished while MITS did nothing
- Revenue far below potential ($16K in 1975, $22K in 1976)
Outcome
Microsoft won.
The arbitrator ruled that MITS had not used "best efforts," voiding the exclusivity provision. Microsoft regained rights to license BASIC independently.
Consequences
Immediate
- Apple deal possible — Microsoft licensed BASIC to Apple ($31,000)
- Commodore deal possible — Licensed to Commodore PET
- RadioShack deal possible — Licensed to TRS-80
- Revenue explosion — 1977: $381K (vs $22K in 1976)
Strategic
- Never sign exclusive again — POL-001 principle established
- Fight for rights — Microsoft would litigate when necessary
- Contracts matter — Close attention to legal terms
- Youth not weakness — Pertec underestimated the 21-year-old
The Lesson
Pertec's leadership dismissed Gates as a kid who got lucky. They didn't prepare seriously for arbitration.
"The new ownership underestimated the 21-year-old Bill Gates." — Acquired podcast
This pattern would repeat: IBM in 1980, Netscape in 1995. Competitors consistently underestimated Microsoft's strategic sophistication and willingness to fight.
Historical Significance
The MITS arbitration is often overlooked, but it may be the most pivotal legal victory in Microsoft's history. Without it:
- No Apple BASIC deal
- No Commodore deal
- No RadioShack deal
- No "success reinforces success" strategy
- Possibly no Microsoft at all
At 21, Bill Gates bet his company on a legal argument and won. The IBM deal gets the headlines, but MITS made that deal possible.