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Paul Allen and Bill Gates, childhood friends with a passion in computer programming, were seeking to make a successful business utilizing their shared skills. In 1972 they founded their first company named Traf-O-Data, which offered a rudimentary computer that tracked and analyzed automobile traffic data. Allen went on to pursue a degree in computer science at the University of Washington, later dropping out of school to work at Honeywell. Gates began studies at Harvard. The January 1975 issue of Popular Electronicsfeatured Micro Instrumentation and Telemetry Systems's (MITS) Altair 8800 microcomputer. Allen noticed that they could program aBASIC interpreter for the device; after a call from Gates claiming to have a working interpreter, MITS requested a demonstration. Since they didn't actually have one, Allen worked on a simulator for the Altair while Gates developed the interpreter. Although they developed the interpreter on a simulator and not the actual device, the interpreter worked flawlessly when they demonstrated the interpreter to MITS in Albuquerque, New Mexico in March 1975; MITS agreed to distribute it, marketing it as Altair BASIC.:108, 112–114 They officially established Microsoft on April 4, 1975, with Gates as the CEO. Allen came up with the original name of "Micro-Soft," the combination of the words microcomputer and software, as recounted in a 1995 Fortune magazine article. In August 1977 the company formed an agreement with ASCII Magazine in Japan, resulting in its first international office, "ASCII Microsoft". The company moved to a new home in Bellevue, Washington in January 1979.
Microsoft entered the OS business in 1980 with its own version of Unix, called Xenix. However, it was MS-DOS that solidified the company's dominance. After negotiations with Digital Research failed, IBM awarded a contract to Microsoft in November 1980 to provide a version of the CP/M OS, which was set to be used in the upcoming IBM Personal Computer (IBM PC).For this deal, Microsoft purchased a CP/M clone called 86-DOS from Seattle Computer Products, branding it as MS-DOS, which IBM rebranded to PC DOS. Following the release of the IBM PC in August 1981, Microsoft retained ownership of MS-DOS. Since IBM copyrighted the IBM PC BIOS, other companies had to reverse engineer it in order for non-IBM hardware to run as IBM PC compatibles, but no such restriction applied to the operating systems. Due to various factors, such as MS-DOS's available software selection, Microsoft eventually became the leading PC operating systems vendor.:210 The company expanded into new markets with the release of the Microsoft Mouse in 1983, as well as a publishing division named Microsoft Press.:232 Paul Allen resigned from Microsoft in February after developing Hodgkin's disease.:231
While jointly developing a new OS with IBM in 1984, OS/2, Microsoft released Microsoft Windows, a graphical extension for MS-DOS, on November 20, 1985.:242–243, 246 Microsoft moved its headquarters to Redmond on February 26, 1986, and on March 13 the company went public; the ensuing rise in the stock would make an estimated four billionaires and 12,000 millionaires from Microsoft employees. Due to the partnership with IBM, in 1990 the Federal Trade Commission set its eye on Microsoft for possible collusion; it marked the beginning of over a decade of legal clashes with the U.S. Government. Microsoft announced the release of its version of OS/2 to original equipment manufacturers (OEMs) on April 2, 1987;:243–244 meanwhile, the company was at work on a 32-bit OS, Microsoft Windows NT, using ideas from OS/2; it shipped on July 21, 1993, with a new modular kernel and the Win32 application programming interface (API), making porting from 16-bit (MS-DOS-based) Windows easier. Once Microsoft informed IBM of NT, the OS/2 partnership deteriorated.
In 1990, Microsoft introduced its office suite, Microsoft Office. The software bundled separate office productivity applications, such as Microsoft Word and Microsoft Excel.:301 On May 22 Microsoft launched Windows 3.0 with a streamlined user interface graphics and improved protected mode capability for the Intel 386 processor. Both Office and Windows became dominant in their respective areas. Novell, a Word competitor from 1984–1986, filed a lawsuit years later claiming that Microsoft left part of its APIs undocumented in order to gain a competitive advantage.
On July 27, 1994, the U.S. Department of Justice, Antitrust Division filed a Competitive Impact Statement that said, in part: "Beginning in 1988, and continuing until July 15, 1994, Microsoft induced many OEMs to execute anti-competitive "per processor" licenses. Under a per processor license, an OEM pays Microsoft a royalty for each computer it sells containing a particular microprocessor, whether the OEM sells the computer with a Microsoft operating system or a non-Microsoft operating system. In effect, the royalty payment to Microsoft when no Microsoft product is being used acts as a penalty, or tax, on the OEM's use of a competing PC operating system. Since 1988, Microsoft's use of per processor licenses has increased."
Following Bill Gates's internal "Internet Tidal Wave memo" on May 26, 1995, Microsoft began to redefine its offerings and expand its product line into computer networking and the World Wide Web. The company released Windows 95 on August 24, 1995, featuring pre-emptive multitasking, a completely new user interface with a novel start button, and 32-bit compatibility; similar to NT, it provided the Win32 API.:20 Windows 95 came bundled with the online service MSN, and for OEMs Internet Explorer, a web browser. Internet Explorer was not bundled with the retail Windows 95 boxes because the boxes were printed before the team finished the web browser, and instead was included in the Windows 95 Plus! pack. Branching out into new markets in 1996, Microsoft and NBC Universal created a new 24/7 cable news station, MSNBC. Microsoft created Windows CE 1.0, a new OS designed for devices with low memory and other constraints, such as personal digital assistants. In October 1997, the Justice Department filed a motion in the Federal District Court, stating that Microsoft violated an agreement signed in 1994 and asked the court to stop the bundling of Internet Explorer with Windows.:323–324
Bill Gates handed over the CEO position on January 13, 2000, to Steve Ballmer, an old college friend of Gates and employee of the company since 1980, creating a new position for himself as Chief Software Architect.:111, 228 Various companies including Microsoft formed the Trusted Computing Platform Alliance in October 1999 to, among other things, increase security and protect intellectual property through identifying changes in hardware and software. Critics decry the alliance as a way to enforce indiscriminate restrictions over how consumers use software, and over how computers behave, a form of digital rights management; for example the scenario where a computer is not only secured for its owner, but also secured against its owner as well. On April 3, 2000, a judgment was handed down in the case of United States v. Microsoft, calling the company an "abusive monopoly"; it settled with the U.S. Department of Justice in 2004. On October 25, 2001, Microsoft released Windows XP, unifying the mainstream and NT lines under the NT codebase. The company released the Xbox later that year, entering the game console market dominated by Sony and Nintendo. In March 2004 the European Union brought antitrust legal action against the company, citing it abused its dominance with the Windows OS, resulting in a judgment of €497 million ($613 million) and to produce new versions of Windows XP without Windows Media Player, Windows XP Home Edition N and Windows XP Professional N.