The Fall
Q: Did you think it was going to go under?
A: All the time, all the time.
–Bill Gates
The troubled MITS had more to worry about than its competition. The company had grown too big too fast. “We had too many irons in the fire,” Roberts admitted later. “We had a lot more things going than a company the size of ours should have had.” The faulty memory boards that were still out there in the field were just one of the problems. Quality control was not particularly effective, and customers were complaining. Projects were often launched despite the reservations of many MITS employees. A number of products failed.
Problems and Changes at MITS
“The high-speed paper-tape reader is a good example,” Mark Chamberlain recalled, “because I know we only sold three of those.” The “spark printer” was another: MITS bought a printer from a manufacturer, rebuilt it and repackaged it, and eventually had to charge considerably more than the supplier’s retail price for the original unimproved item. Naturally, the MITS version didn’t take off. Sometimes an entire major product line was clearly a mistake to everyone at MITS except Roberts. Paul Allen objected strenuously to the 680b.
MITS’s difficulties ran deep. “It really gets into a study of personalities,” Mark Chamberlain said. “I don’t know if it’s possible to understand the situation without understanding all the aspects that were [a result of] people’s different personalities.” One thing is clear in retrospect. The channels of communication between upper-level employees and the president were not always open. “Ed isolated himself,” Gates said. “He didn’t have a good rapport with other people in the company, and didn’t know how to deal with the growth.” Roberts later acknowledged that a problem existed: “I was worried about so many things at the time that I felt like everything was a threat.”
A number of changes occurred at MITS toward the end of 1976. By that time, Roberts had brought in his childhood friend Eddie Curry as executive vice president and Bob Tindley (from the bank that had financed MITS) to help with management. But Roberts was soon to lose an important employee. Paul Allen was restless. Microsoft was becoming a more serious enterprise, and Allen was eager to take control of his own destiny. Convinced that MITS’s best days were past, he and Bill Gates began focusing all their attention on their own company.
Mark Chamberlain moved up to replace Allen as MITS’s software director.
Chamberlain found that the job bore unexpected challenges. He quickly encountered upper-level dissension over which products to build and which projects to undertake first. Chamberlain, along with his hardware counterpart Pat Godding, did not always agree with Roberts on critical decisions. In holding on so tightly to the reins of his company, Roberts may have been trying to shield others from all the uncertainty and vulnerability of the fledgling industry. He took all the responsibility upon himself rather than allowing others to share it. As Gates acknowledged, “Nobody really knew what was going on. So many things would have obviously needed to be done if you’d had the vision back then. Nobody had the view of the market.”
“He did have ideas,” Chamberlain said of Roberts. “But we didn’t fill out the product line; we didn’t provide proper support. I think that the early pioneers who used the Altair in business were up against a hell of a lot of frustration.” Among the most frustrated were Chamberlain and Godding. Too many times, they had proposed projects that they knew would generate significant income with just a small expenditure of time, only to have Roberts say that absolutely no more time would be spent on them. Convinced that their ideas had value and equally certain that Roberts would continue to reject them, they often went ahead on their projects anyway. “He didn’t know we were doing it,” said Chamberlain.
Although MITS grossed $13 million in 1976, the company was losing its edge. Its products were not regarded as anywhere near the best, deliveries were slow, and service was poor. Most other microcomputer companies at the time had similar problems to some degree, but MITS’s position in the industry led people to expect more from the firm. Furthermore, MITS had established an exclusive dealership program early on. Retailers who wished to be the only Altair dealers in their area could sell no other brands. But the knife cut both ways, and MITS began to have trouble finding dealers willing to agree to the company’s terms.
Retailers and customers alike were dissatisfied. It was not that MITS was in imminent danger of going out of business, as it had been in 1974, but its prospects were not good and the competition was getting serious. By now, more than 50 hardware companies had entered the market. At the first West Coast Computer Faire held in San Francisco in the spring of 1977, Chuck Peddle was showing Commodore’s PET, a more serious machine than the MOS/Commodore KIM-1 and a formidable competitor to the Altair machines; also, Apple introduced its Apple II amid fanfare that signaled a change in the market.
Selling the Company
On May 22, 1977, Roberts sold MITS to Pertec, a company then specializing in disk and tape drives for minicomputers and mainframe computers. “It was a stock swap,” Roberts said. “They bought MITS for essentially six million dollars.” Whether Pertec got a bargain or a dud depends on the degree to which Pertec management was responsible for MITS’s ensuing slide into oblivion.
Roberts had talked to other companies, especially semiconductor companies, before deciding on a buyer. Pertec had offered him not only personal stock in the company, but his own private research-and-development lab and the freedom to use it exactly as he pleased. The opportunity to work on new products and to somehow tie his fortunes to MITS undoubtedly meant a lot to Roberts. But he mostly just wanted to climb down off the nose cone. The bust of the calculator venture still haunted him, and he knew a similar disaster could very well happen with personal computers.
“Once you’ve been there,” Roberts said, “staying awake every night wondering whether you’re going to make payroll the following day…you’re pretty gun-shy, and you’re making decisions that aren’t terribly logical.”
The Pertec sale led to acrid fighting over ownership of the software. Gates and Allen had no intention of handing their BASIC over to Pertec. They had written the core of the BASIC before even meeting anyone from MITS, and, unlike Allen, Gates insisted that he had never been a MITS employee. “Pertec thought they were buying the software as part of the whole deal,” Gates recalled. “And they weren’t. We owned the software. It was all under license.”
Suddenly, the whole deal was in jeopardy. Gates later recalled the head of Pertec telling him that if the software were not included in the transaction, Pertec would back out of the deal. If that happened, MITS would fold. The pressure on the boys was tremendous.
“They sent out this big-time lawyer,” Gates recalled, and the matter went into arbitration. When it was all over, Gates and Allen had prevailed. The software belonged to Microsoft. Fortunately for MITS, Pertec went ahead with the purchase anyway.
Ed Roberts always held that the arbitration decision was dead wrong. Years later he felt bitter and betrayed. MITS’s agreement with Gates and Allen, he insisted, stipulated that they would receive royalties on the software up to a maximum of $200,000 and then the software would belong to MITS. His company had paid them that amount and therefore owned the software. Roberts was convinced that the arbitrator misunderstood clear issues of fact. “It was a fluke,” Roberts maintained. “It was just wrong as rain.”
Roberts blamed Gates for the outcome. “Our relationship really went to heck,” Gates said. “Ed really got his feelings hurt.” Having won in the arbitration and with no ties holding them to Albuquerque, Gates and Allen moved Microsoft to their native Washington.
Pertec didn’t back out of the MITS acquisition because of the BASIC ruling, but under Pertec, MITS gradually fell apart. Even before the acquisition, the company was losing its dominant role in the very industry it had created. But MITS didn’t start its dramatic decline until the Pertec management teams walked onto the scene.
The Suits
Figure 25. Ed Roberts After launching the personal-computer revolution and riding the roller coaster of entrepreneurship, Roberts sold the company, went back to school, and settled in rural Georgia to live out a second dream as a country doctor. (Courtesy of Ed Roberts)
The Pertec people managed to alienate virtually all key MITS personnel. “They kept patting us on the head, saying we didn’t understand the business,” Roberts recalled. The MITS regulars didn’t respond well to the Pertec management teams. The standard line on them was that they were “two-bit managers in three-piece suits.” The epithet was used so frequently it was shortened to simply “the suits.”
Pertec treated MITS as if it were a big business in an established industry. Before agreeing to buy MITS, Pertec executives asked Roberts to show them his five-year marketing forecast. At the time, MITS advance planning “consisted of where things would be on Friday,” Roberts said. To please the buyers, Roberts and Eddie Curry invented projections they figured would make the Pertec managers break out the champagne. They told Pertec that sales would double each year and provided a pie-in-the-sky guess of how many machines the company could move. Pertec bought it all. Over the following year, managers came and went at Pertec in extraordinary numbers. “People based their careers on trying to live up to that [forecast],” said Curry.
Mark Chamberlain had no use for the Pertec suits who’d invaded MITS: “They sent in team after team. Each team came in to knock off the previous team. Any given team had about 60 to 90 days to turn the mess into something good, but it wasn’t enough time. It was just long enough for the people to come in and switch from a position of trying to understand the problem to becoming a part of the problem. After 60 to 90 days, you were definitely part of the problem. And they’d send in the next guy to fire you.” Chamberlain left to go to work for Roberts in his lab. “I wanted out of that Pertec thing like right away,” he said. “That thing was crazy.” For a while, Chamberlain worked with Roberts on a low-priced computer based on the Zilog Z80 chip, but he soon left to pursue other opportunities.
Others were defecting from Pertec’s MITS group. Bunnell departed at the end of 1976 to start Personal Computing, one of many significant personal-computing magazines he would eventually launch. He published it from Albuquerque throughout 1977 with contributions from Gates and Allen. Andrea Lewis took over as editor of Computer Notes and changed it from a company-written newsletter to a slick magazine with outside contributions. Eventually she accepted an invitation from Paul Allen to move to Bellevue and take over Microsoft’s documentation department. Sometime after that, Chamberlain also joined Microsoft.
Several engineering people left Pertec to work for a local electronics company. Even Ed Roberts, after five months, became fed up with Pertec. “They told me I didn’t understand the market. I don’t think they understood it.” Roberts bought a farm in Georgia and told everyone he intended to become a gentleman farmer or go to medical school. Eventually he did both, with the same concentrated energy he had brought to MITS.
Pertec gradually came to regard the MITS operation as a bad venture and eventually abandoned it. According to Eddie Curry, who stayed on longer than any other MITS principal, Pertec continued making Altairs for about a year after the acquisition, but within two years MITS was gone.
It would be hard to overestimate the importance of MITS and the Altair to the existence and form of the personal-computer industry today. The company did more than create an industry. It introduced the first affordable personal computer and pioneered the concept of computer shows, computer retailing, computer-company magazines, users’ groups, software exchanges, and many hardware and software products. Without intending to, MITS made software piracy a widespread phenomenon. Started when microcomputers seemed wildly impractical, MITS pioneered what would eventually become a multibillion-dollar industry.
If MITS was, as writer David Bunnell’s ads proclaimed, number one in the business, the scramble to be number two was won by one of the most idiosyncratic of the early microcomputer companies.