The Windows Division Vanishes From Microsoft — the Product That Brought Computers to Everyone and Shaped the Software Industry | QDaily Business History

Windows made good on Gates's vision of a software industry and carried business into the age of information and the internet — but it never caught up with the mobile era itself.

Press the power button. The indicator light flickers fast, the hard drive clatters, and line after line of jargon surfaces on the screen. Then the screen goes dark, lights up again, and the four-color window logo and a huge "Windows" appear.

This is how hundreds of millions of people picture Microsoft. It is also where the computer began to spread through human society.

Microsoft used to be the Windows company. Every other business it ran was built on Windows's success.

Now the Windows company no longer has a Windows division.

Early on the morning of March 29, Seattle time, Microsoft CEO Satya Nadella sent a company-wide email announcing a reorganization: the Windows and Devices Group, one of the company's main business units, was broken up and folded into two other divisions. There is no longer a standalone Windows division.

"This is the most sweeping reorganization I can remember," Brad Silverberg told the Wall Street Journal. He ran the Windows division in the Windows 95 years.

Microsoft executive vice president Terry Myerson announced he was leaving the company along with the reorganization, which makes him the last head of the Windows division. Two years earlier, when Microsoft killed its Lumia phone business, Myerson had complained that Windows once had a real chance in the mobile market but never got enough backing from the company. After Myerson left, the most senior executive with anything to do with Windows sat two rungs below where he had been, and no longer reported to the CEO.

A few years earlier, a reorganization like this would have counted as heresy inside Microsoft. As late as 2012, then-CEO Steve Ballmer was still saying "nothing is more important at Microsoft than Windows."

Nothing shows how much the world has changed better than this: six years later, hardly anyone cared that the Windows company had done away with its Windows division.

The capital markets were even more supportive. U.S. stocks fell for several days running, along with a few other big tech companies, from the 29th of last month to the 3rd of this month; Microsoft dropped just 0.11% over that stretch. Morgan Stanley argued that Microsoft's earlier fixation on the Windows operating system had left its share price trailing other tech companies for a long time. Brad Reback, an analyst at the brokerage Stifel Nicolaus & Co., praised Nadella for being "clearly unencumbered by history."

Look only at Windows's numbers and all of these reactions make sense.

Over the past two fiscal years, Windows brought in just 9% of Microsoft's total revenue. It will keep getting updated for years, and hundreds of millions of PCs running Windows will keep the world turning. But just as power lines and railroad track no longer excite anyone the way they did 100 years ago, Windows as infrastructure excites no one either — we have all got used to it.

From nothing, to changing the world, to becoming infrastructure: it took Windows 33 years.

A couple of years ago, looking back on the founding of Amazon, Jeff Bezos said: "It also would only have worked in that particular year, 1995. We were a 10-person company, and I was driving packages to the post office myself. We had a whole set of infrastructure behind us. Without that infrastructure, a company that small could never have started Amazon.com — it just couldn't have been done."

The infrastructure Bezos meant included the postal system, the internet, and Windows computers.

By 1995 the United States already had more than 50 million personal computer users and 16 million people online — the infrastructure the internet started from. That same year brought Windows 95, the first version of Windows everybody knew.

For most companies and households, Windows 95 was where the personal computer began. "A PC on every desk" did not stay a slogan Gates used to rally his employees.

You could say every one of today's biggest tech giants is tied up with Windows somehow. Mark Zuckerberg wrote thefacebook.com on a Sony Windows computer in 2004. The iPod, so important to Apple's recovery, only started selling in real volume after its third generation added Windows support. For a long stretch after it was founded, Tencent's only product was a piece of Windows software called OICQ.

The best summary of the software business Microsoft started may still come from Steve Jobs, in his last public conversation with Gates, in 2007. Asked what they made of each other's contribution to the computer industry, Jobs said: "Bill built the first software company in the industry. I think when he started the first software company, nobody in our industry even knew what a 'software company' was."

Windows was not Microsoft's first piece of software. But Windows was where Microsoft truly created the software industry, and in the end changed the world. And in the end, Windows changed the company too.

Gates turned software development from a hacker's hobby into a real industry

In 1976, less than two years after dropping out of Harvard, Bill Gates wrote to computer hobbyists in a letter called An Open Letter to Hobbyists:

"Most computer hobbyists must realize that most of you steal your software. Hardware must be paid for, but software has become something to share. Who cares if the people who worked on it get paid?"

"Who can afford to do professional work for nothing? What hobbyist can put three man-years into programming, finding all bugs, documenting his product and distribute for free? The fact is, no one besides us has invested a lot of money in personal computer software."

The letter was signed: Bill Gates, General Partner, Micro-Soft.

Gates and Paul Allen founded Microsoft in 1975 and wrote the Altair BASIC program for MITS's computer, expecting anyone who bought the machine and used their software to pay a royalty.

Gates then found that fewer than 10% of Altair owners had bought BASIC, while the number of people actually using it was far higher. In late 1975 a reel of punched tape holding a pre-release copy of Altair BASIC went missing from Microsoft, and 50 unauthorized copies of Altair BASIC turned up at a hackers' gathering. That was one of the things that set off Gates's manifesto.

Use the software, pay for it: obvious enough today. At the time it enraged hackers, who held that using a computer should carry no restrictions and that all information should be free.

Hal Singer, founder and editor of Micro-8 Newsletter, a newsletter that covered early personal computer hardware and software, said that after the open letter reached him he felt "the most rational response was to tear up the letter and not think about it again."

The software business had not yet taken shape. Nearly all software development was done by hardware makers, who folded the cost of writing or buying it into the machines they sold.

Selling software was not a thing anyone did in the personal computer market yet, and few people saw software as something that could carry copyrights or patents. Most copying of data happened either as an exchange of information inside labs or by word of mouth among computer enthusiasts, who often called themselves hackers.

Hackers mostly wrote software and built fun, novel hardware out of interest. Steven Levy's 1984 book on the growth of computing, Hackers: Heroes of the Computer Revolution, describes dozens of people who contributed to early computing.

Among them: Ken Thompson, who created Unix and UTF-8; Kevin Mitnick, who broke into the North American air defense command's systems at 15; Free Software Foundation founder Richard Stallman; and Gates, Jobs, and Steve Wozniak.

Of that crowd, Gates was probably the only one already good at business in the 1970s. Even Jobs, after founding Apple, hired a CEO to run the company so that he and Wozniak could go off and tinker with new products. The rest were closer to a band of hippies, trying to make art and beauty on computers and holding that all information should move freely.

In the end, of course, the personal computer world ran on the rules Gates had imagined. It started with Microsoft in 1975. Then came Oracle's database in 1977, Lotus's Excel office software in 1982, and after that Adobe — one batch of software companies after another.

The fortunes of Gates and of Microsoft piled up on Windows and the run of products built around it afterwards, Office among them. Windows 1.0 arrived in 1985 with a graphical interface that spared users from typing commands at the screen; Microsoft went public the following year, and Gates, holding 45% of it, became a billionaire at a stroke.

In 1995 the release of Windows 95 blew Gates's fortune wide open: that year, worth $12.9 billion, he became the youngest person ever to be the world's richest. Over the 23 years since, he has held that title for 18 of them, losing it to Bezos only this year.

Windows was born in Microsoft's tenth year, and made it a grown-up company

In 1980, Tim Paterson, an employee of Seattle Computer Products, spent four months writing the 86-DOS operating system. The next year Microsoft bought the full rights to it for $50,000 and renamed it MS-DOS.

IBM then released its first personal computer, running Seattle Computer Products's 86-DOS. But Microsoft quickly improved MS-DOS and got it adopted as the operating system for IBM's machines.

IBM did not know at first where MS-DOS came from, and Paterson, when he made the deal, did not know about Microsoft's arrangement with IBM. Microsoft had made a shrewd buy.

IBM, for years a byword for bureaucracy and secrecy, suddenly opened up under Don Estridge, the father of the IBM PC. It published the hardware standard for the personal computer and let Microsoft sell MS-DOS to other computer companies.

At the same time Intel was making good on Moore's Law, iterating fast on semiconductor processes and feeding the personal computer market new processors. In three short years, the IBM PC and its clones together reached twice Apple's market share. And every IBM PC ran Microsoft's system.

A bought-in system, Intel's hardware, IBM's open standard: together they made Microsoft the master of the early PC market.

But what really made Microsoft Microsoft was Windows.

In the early 1980s Jobs began work on the first Macintosh, having already taken the idea of the graphical interface from Xerox. He went to Gates, Apple's partner of many years, hoping Microsoft would build a simple, easy-to-use programming language for the Macintosh and write some application software — word processing, charting, and data-handling programs.

After hearing Jobs describe the Macintosh as a graphical-interface computer built for ordinary people, Gates signed. It was a punishing project: Gates later recalled that most of the Apple and Microsoft engineers who worked on the Macintosh quit once it was done.

The partnership did not go well, because Apple soon found that Microsoft was collecting details of how the new system's interface worked.

In 1983 Gates announced that Microsoft planned to build a Windows operating system for the IBM PC, and showed preview images at New York's Plaza Hotel. Microsoft got in ahead of the Macintosh, demonstrating a new system with a graphical interface, windows, icons, and a mouse you could point and click.

Jobs confronted Gates at Apple's headquarters, shouting at him: "You're ripping us off! I trusted you, and now you're stealing from us!"

Gates just sat there and gave his famous answer: "Well, Steve, I think there's more than one way of looking at it. I think it's more like we both had this rich neighbor named Xerox, and I broke into his house to steal the TV set and found out that you had already stolen it."

Windows 1.0 shipped in 1985, on Microsoft's tenth anniversary. Like most of Microsoft's first-generation products, it was miserable to use and not much software ran on it. Sales only picked up when Microsoft Works, an office application, reached Windows in 1986.

But Microsoft was good at fixing problems. After that it brought out a major update roughly every two to three years. By Windows 95, the Windows operating system held more than 80% of the market, and Microsoft's annual sales passed $1 billion for the first time.

By 1991, when Fortune was putting together a cover story looking back on "ten years of the personal computer," it went only to Jobs and Gates. Nobody cared about IBM any more.

Windows 95 made the personal computer easy enough to use that it began to spread through homes and offices.

But its famous blue screen was never solved: the kernel it rested on was not stable enough. Businesses had taken up Windows and Office for everyday office work, yet through the 1980s and 1990s they still used workstations and servers, machines apart from the PC, for work that demanded more stability and more performance.

What gave Microsoft control of the whole computer market was Windows NT.

In 1988 Microsoft poached David Cutler and his team from DEC to build a new operating system. Cutler had programmed at DuPont early on, moving to DEC in 1971 to work on the RSX-11M operating system; he started thinking about leaving after DEC killed a project he had spent a long time preparing.

Cutler worked apart from the Windows team of the day and put together a more senior team of his own. After five years of development and several delays along the way, Windows NT went out to be pressed at the factory in July 1993.

Windows NT went on to take over Microsoft's server systems, and after the enormous failure of Windows Me it replaced the old kernel outright, becoming the kernel of Windows XP, Windows 7 and other more personal systems. Starting with Windows NT, Microsoft let personal computers begin to replace workstations and dedicated servers, wrecking what was left of IBM's and Sun's hardware businesses.

Windows gave Microsoft a perfect business model for years

Microsoft always sold boxed Windows discs in software shops, but that was a marginal slice of its revenue. Its main income came from corporate customers, who paid Microsoft licensing fees either through preinstalled Windows or through bulk purchases. Microsoft's total revenue in fiscal 2000 passed $22.9 billion, and corporate customers accounted for $20.4 billion of it.

And from roughly the release of Windows 95 until now, every personal computer built anywhere in the world has run Windows. Computer makers rose and fell: some built gaming machines, some built premium ones, some fought price wars. Some went bankrupt, some went public, and some, like Dell, went public, went private, then went public again.

But whatever these machines looked like, every personal computer brand other than Apple ran essentially only Windows, and one machine could never differ enough from another.

So the PC market came down to price wars. Over the past few years, all computer makers combined took in four to five times the revenue Apple gets from selling Macs, and one-eighth the profit. Nearly all the profit in the PC market went to two companies: Intel and Microsoft.

PC makers updated their products to the development rhythm Intel and Microsoft set. In handing over the software and the core hardware, they handed over the market's profit too.

To consumers Windows was just an operating system. To PC makers it was a supermarket chain squeezing its suppliers for everything they had. To sell a machine to a consumer, a PC maker had to pay Windows a slotting fee first.

So PC makers drove prices lower and lower, cheaper computers put machines within reach of more people, and the spreading personal computer pushed Windows out to still more users. Round and round: Microsoft's profits piled up, and Windows's market share approached 90%.

In 2012, global PC shipments fell 4% year on year — and Microsoft's and Intel's combined operating profit still ran 700% above the combined profit of the world's three largest PC makers.

Windows made a great deal of money by itself, and it also became the base from which Microsoft pushed its other businesses.

Once a large company became a Microsoft customer, it would sign an Enterprise Agreement (EA) with Microsoft. As part of that agreement, Microsoft discounted the software the agreement covered — Windows licensing fees, say, or SQL Server database licensing fees, or Office.

Having paid to run Windows, companies went on to buy more Microsoft software. Around 1994, Word, Excel and PowerPoint together held more than 50% of the market; by 1998 it was close to 100%.

Even Office 365, the cloud office suite Microsoft talks about today, is a continuation of that same system.

Microsoft's layer upon layer of control sped up the computerization of business, and it brought Microsoft handsome profits.

In 1991 American businesses spent about $124 billion on information technology, only 2% of U.S. GDP. By 2000 that share had risen to 4.6%, or $472.8 billion. Over the same period Microsoft's revenue rose from $1.8 billion to $23 billion, and its net profit from $463 million to $9.4 billion.

Set against that, Apple may have become the more profitable company after the iPhone, but its business was never as easy as Microsoft's: it has to keep making the best software and hardware, and use a wide enough gap in experience to make people pay more. That is getting harder all the time.

Microsoft, by contrast, made a serious mess of roughly every other generation of Windows, and its monopoly did not budge.

Until, of course, the smartphone became more important than the PC.

Windows's last chance came in 2010

Part of Microsoft's long run of success lay in the barriers it managed to put up: they kept competitors out, and they made switching expensive for its own customers.

In the PC market Microsoft's monopoly still holds to this day, and it still takes the makers' profit. But the phone was a new market.

QDaily has told the story of how Microsoft and Windows lost the phone market before, in five episodes.

Looking back now, Windows's last chance in the mobile market was 2010, the year Apple had just launched the iPhone 4 — a product that left every other competitor in the industry far behind in hardware, in form, in software experience — and was speeding into markets worldwide.

Android, after a run of patching and repair, had just come of age, and Samsung, Motorola and HTC each launched Android phones that sold more than a million units apiece.

Apple was overwhelming, and Google's disruption of several traditional industries had put carriers and handset makers on guard as well. In 2010, both were willing to take on one more operating system. A redesigned Windows Phone 7 arrived that summer.

But a series of choices Microsoft made cost it that chance.

On the business model, Microsoft still wanted to copy what it had done in the personal computer market: Microsoft would make the operating system, phone makers would build the hardware, and they would pay a licensing fee for every phone that ran Windows. Android, by contrast, was free.

To keep the user experience consistent, Microsoft forbade other phone makers to preinstall apps or alter the interface design, and required their hardware to meet Microsoft's specifications.

But phone makers and carriers both wanted differentiation. Everyone knew what a PC industry without it had come to: contract manufacturing.

Today Google dominates and pushes phone makers to give up their own interfaces, but it was not like that in 2010. In 2010 you could see Motorola with a fashionable custom home screen full of social network updates; HTC porting the weather and date widgets it had tried on older systems over to Android; even Samsung running its own interface style.

Worse, after WP7 shipped Microsoft did not keep iterating on the system. It proposed instead a grand plan to unify phone and computer, which left Windows standing still in the phone market for two years.

By the time Nadella took over Microsoft in 2013, Windows had already lost. Kevin Turner, then Microsoft's chief operating officer, admitted in 2014 that only 14% of connected devices worldwide ran the Windows operating system. Ten years before, that number had been 97%.

Nadella then used a series of reorganizations to weaken Windows's standing inside Microsoft. The two most important steps: first, folding the hardware business into the Windows division, which saddled the richly profitable Windows with the hardware division's losses. Every division at Microsoft answers for its own profit and loss, so the Windows division was in the end forced to give up the phone business. Second, letting core businesses such as Office build for other operating systems first — the touch-redesigned Office appeared on the iPad before anywhere else, which would have been impossible before.

When Windows held 90% of the market, every Microsoft product tied itself to Windows as tightly as it could, which kept users from leaving. But once Windows kept sliding and became a niche product, tying other products to it only dragged them down. Nadella's de-Windows-ing was a choice he had no way around.

Nadella has now pulled Microsoft off Windows successfully. Freed of it, Office, cloud computing and the rest have grown fast, and Microsoft's brand value has risen to $695 billion, behind Apple and Google (a recent slide in Amazon's share price has put Microsoft back ahead of it, too).

But every one of these businesses was built on Windows's monopoly to begin with. Windows no longer matters, and how long they can keep users locked in is hard to say.

Apple and Google, and big tech companies like Amazon, JD.com, Alibaba and Tencent, all have a concrete shape in users' minds — the iPhone company, the search and Android company, the e-commerce company, the social company.

What kind of company is Microsoft without a Windows division? Its shape in users' minds is blurring, the way IBM's did after it lost the computer market.

Cover image/Fortune