License BASIC to 1977 Trinity
Setting
- Three personal computers launched that would define the industry:
- Apple II (April 1977)
- Commodore PET (January 1977)
- RadioShack TRS-80 (August 1977)
All three needed BASIC—the standard programming language for personal computers. After winning the MITS arbitration (DEC-016), Microsoft was free to license.
The question: How to price and structure these deals?
People
- Responsible: Bill Gates, Paul Allen
- Approvers: Gates (owner)
- Consulted: Kazuhiko Nishi (Japan partner)
- Informed: OEM partners
The Strategic Choice
Option A: Maximize Per-Deal Revenue
Price each deal at market value. Extract maximum dollars.
Calculation:
- Apple might pay $200-300K for exclusive
- Commodore similar
- RadioShack similar
- Total: ~$700K-1M
Risk: Some might build their own BASIC. Market fragments.
Option B: Minimize Price, Maximize Adoption
Price aggressively low. Ensure Microsoft BASIC becomes THE standard.
Calculation:
- Lower per-deal revenue
- But: Ubiquitous standard = platform power
- Future leverage from installed base
Decision
Chosen: Option B — Aggressive pricing for ubiquity
Actual Deal Terms
| Company | Price | Terms |
|---|---|---|
| Apple | $31,000 | 8-year license, flat fee |
| Commodore | ~$25,000 | Similar structure |
| RadioShack | ~$50,000 | TRS-80 BASIC |
Total: ~$106,000 — Far below market value.
Why So Cheap?
Bill Gates' exponential thinking:
- Standard wins everything — If all three use Microsoft BASIC, it becomes impossible to displace
- Developers train on BASIC — Code skills become Microsoft-specific
- Hardware commoditizes — Multiple vendors = price competition = more PCs = more BASIC
- Future leverage — Once standard, pricing power follows
"Success reinforces success. A small advantage in the beginning can compound into market dominance." — Bill Gates
Consequences
Immediate
| Metric | 1976 | 1977 | 1978 |
|---|---|---|---|
| Revenue | $22K | $381K | $1.3M |
| OEM Partners | 1 (MITS) | 4+ | 10+ |
| Market Position | Startup | Standard | Dominant |
Strategic
- BASIC standard established — No competitor could match installed base
- OEM model proven — Template for DOS licensing
- Platform thinking validated — Ubiquity > per-unit margin
- Pricing confidence — Willingness to sacrifice short-term for long-term
The Japan Factor
Kazuhiko Nishi became Microsoft's exclusive Japan distributor. By 1979:
- Japan = ~50% of Microsoft revenue
- Japanese PC makers standardized on Microsoft BASIC
- International expansion validated early
Connection to IBM Deal
The Trinity strategy made the IBM deal possible:
| Trinity Proof Point | IBM Relevance |
|---|---|
| BASIC was standard | Microsoft only credible language partner |
| OEM model worked | Template for DOS licensing |
| Low pricing builds market | IBM got good deal, clones got same deal |
| Platform > product | Non-exclusive benefited everyone |
When IBM came calling in 1980, Microsoft had:
- Proven OEM relationships
- Track record of delivery
- Reputation as standard
- Business model that worked
The Long View
The Trinity deals exemplify Gates' strategic genius. He could have extracted ~$1M from the 1977 market. Instead, he invested in market share.
Return on that "investment":
- 1977 revenue: $381K
- 1980 revenue: $8M (IBM year)
- 1990 revenue: $1.18B
- Peak market cap: $600B+ (1999)
The $31,000 Apple deal alone generated billions in downstream value through the standard it helped establish.
Key Insight
"The software industry has minimal marginal costs. High technology products in great volume have minimal marginal cost increases. We understood this before anyone else." — Bill Gates
This understanding—that software economics reward ubiquity over margin—became the foundation of Microsoft's 40-year dominance.