Non-Exclusive OS Licensing Policy
Policy Statement
Microsoft shall license its operating system software on a non-exclusive basis to all qualified OEM partners. No single customer, regardless of size or strategic importance, shall receive exclusive rights to Microsoft operating systems.
Rationale
The IBM Negotiation Context
When IBM approached Microsoft in 1980, they assumed they would receive exclusive rights to MS-DOS—the standard IBM approach for component suppliers.
Bill Gates and Paul Allen made the most consequential negotiating decision in technology history: refuse exclusivity.
Strategic Logic
- IBM's market was guaranteed — They would buy DOS regardless
- Clones were inevitable — Intel chips + open architecture = competition
- Software scales infinitely — One codebase serves unlimited customers
- Standards win — Ubiquity creates network effects
- Protect independence — Never be dependent on one customer
Policy Details
Licensing Terms
| Clause | Rationale |
|---|---|
| Non-exclusive | Multiple OEMs can license same product |
| Per-copy royalty | Revenue scales with volume |
| Source code retained | Microsoft maintains control |
| Modification rights limited | Prevent incompatible forks |
| Marketing freedom | OEMs can brand (MS-DOS, PC-DOS, etc.) |
What This Enabled
When Compaq reverse-engineered the IBM PC BIOS in 1982, they needed an operating system. Because of this policy, Microsoft could (and did) license DOS to Compaq—and every clone maker that followed.
flowchart LR
IBM --> DOS[Microsoft DOS]
Compaq --> DOS
Dell --> DOS
HP --> DOS
Result: Hardware commoditized. Software captured value.
Enforcement
When IBM Objected
IBM pushed back on non-exclusivity. Microsoft's response:
- Offered lower pricing — IBM got volume discounts
- Prioritized IBM features — Technical support and customization
- Maintained principle — Non-exclusivity was non-negotiable
Internal Application
This policy applies to all Microsoft operating system products:
- MS-DOS
- Windows
- Windows NT
- Windows Server
No exceptions for "strategic" customers.
Consequences
Positive
- +IBM clones licensed DOS — Microsoft revenue grew 10x faster than IBM PC revenue
- +Standard established — "IBM compatible" meant "DOS compatible"
- +Hardware commoditization — OEMs competed on price, Microsoft captured margin
- +Independence preserved — No customer represented >15% of revenue after 1985
Negative
- −IBM relationship tension — IBM felt betrayed
- −Clone quality variance — Not all OEMs maintained compatibility
- −Support burden — Multiple OEM configurations to test
Historical Impact
This single policy decision is arguably the most important in Microsoft's history. It:
- Created the PC software industry structure
- Enabled Microsoft's 90%+ market share
- Prevented IBM from controlling the PC platform
- Established the business model for 40+ years
Comparison: Apple's Approach
| Microsoft | Apple |
|---|---|
| License to all | Hardware exclusive |
| Commoditize hardware | Integrated stack |
| 90%+ OS market share | 5-15% OS share |
| Lower margin, higher volume | Higher margin, lower volume |
Related Records
- DEC-005: Partner with IBM
- DEC-006: Buy QDOS
- CUS-001: IBM Customer Profile
- PRC-001: OEM Licensing Program
- STR-001: Success Reinforces Success Strategy