The Original Equipment Manufacturer (OEM) Model

This may seem like a rather drab topic to read about but it actually should not be as an entire software economy and PC industry was built on the back of it.  The basis starts from the very early years when I was still in grade school – Billg wrote an article that says companies should be allowed to profit from their intellectual property (software).  Thus the idea of software licensing was born.  A second thing that led up to this model was the operating system.  In the early days of the industry computer manufactures build their own PC all with different operating systems (Atari, Commodore, Tandy, etc..).  This meant that system was unique and completely incompatible with other systems.  Then “bing” (no pun intended) Bill had a great idea.  What if Microsoft got an operating system and licensed in to hardware manufacturers.  In walks IBM.  A legendary story worth retelling.  I will offer the one from the trade rags and Microsoft halls.  Mary Gates is at a United Way board meeting and one of the other board members is a IBM person.  They are talking about this new idea of Personal Computers and Mary Gates suggests they talk to her son.  In the meantime Microsoft found a local guy in Seattle who had written his own operating systems and paid him $50,000 for the OS.  Some people would say typical Microsoft ripped off the guy, but in reality the industry we know did not exist at the time.  No one knew what it would become or where it was headed.  Microsoft attends the meeting with IBM and here’s them out says they would love to work on the project.  Microsoft would provide the software operating system for IBM’s new Personal Computer.  And at the end Bill would add one more thing, “We get to keep all the rights for the software”.   Love him or hate him, that was one hell of a brilliant move.  He had to have known going into the meeting “I want to own the rights to the software when I leave”.  As Bill always said “Software is where the magic happens”.  And now he owned the foundation of an industry.

What does this mean?  Since Microsoft now controlled the destiny of DOS they could license to anyone.  They did just that.  The licensed to Dell, Compaq, Gateway, Acer, Toshiba and a whole host of others worldwide.  The benefit?  If I have a  Compaq running WordPerfect at work and a Gateway at home running WordPerfect I could put my file on a 5.25 floppy and bring it home and load on my home PC.  Before I essentially had to have the same PC at home and at work to do that. Another great thing about software is your margins.  It costs Microsoft $5 to make a floppy and they charge IBM $100.  They charge Compaq $101.  They charge Dell $103.50…I think you can hear the cash register ringing.  For the PC folks it was good as they did not have to worry about developing and supporting their own OS.  This drove down the cost of PC’s.  As i said before the Apple OS was clearly superior, but the cost was completely inferior.  In those days a PC was in the neighborhood of $2000-$2500 and a Mac was $3500 (I am probably a little off here but you get the gist).  That my friends is how you get 90% market share.  At that time PC’s were still new so you were in a rapidly growing market and a large part of revenue was “net-new”, which is a very good thing.

Is the OEM subject drab? Well maybe at first it sounds so but it laid the foundation for an empire.  That is why today when Microsoft launches a product like Windows 7 all the Wall St people, OEM’s,  etc.. get so excited as they know with the right improvements (Windows Vista would be the wrong one) that a big financial boost can occur. 

It is a dreary rainy day in Shoreline and I have written more than normal on a topic that could be its own book.  As  I write my blog I keep coming up with more topics to discuss that I save as drafts.  If anyone has a suggestion or idea they would like to hear me discuss I am happy to do it.   Believe it or not we still have not progressed to the end of my first year at Microsoft.  I can say looking forward the 90’s was a Microsoft love fest but after that things start to change quickly and drastically.  Take care everyone, I am just going to try and stay dry.


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