IBM & Microsoft History
In 1980, IBM first approached Bill Gates of Microsoft, to discuss the state of home computers and what Microsoft products could do for IBM. Gates gave IBM a few ideas on what would make a great home computer, among them to have Basic written into the ROM chip. Microsoft had already produced several versions of Basic for different computer system beginning with the Altair, so Gates was more than happy to write a version for IBM.
As for an operating system (OS) for an IBM computer, since Microsoft had never written an operating system before, Gates had suggested that IBM investigate an OS called CP/M (Control Program for Microcomputers), written by Gary Kildall of Digital Research. Kindall had his Ph.D. in computers and had written the most successful operating system of the time, selling over 600,000 copies of CP/M, his operating system set the standard at that time.
The Secret Birth of MS-DOS
IBM tried to contact Gary Kildall for a meeting, executives met with Mrs Kildall who refused to sign a non-disclosure agreement. IBM soon returned to Bill Gates and gave Microsoft the contract to write a new operating system, one that would eventually wipe Gary Kildall's CP/M out of common use.
The "Microsoft Disk Operating System" or MS-DOS was based on Microsoft's purchase of QDOS, the "Quick and Dirty Operating System" written by Tim Paterson of Seattle Computer Products, for their prototype Intel 8086 based computer.
However, ironically QDOS was based (or copied from as some historians feel) on Gary Kildall's CP/M. Tim Paterson had bought a CP/M manual and used it as the basis to write his operating system in six weeks. QDOS was different enough from CP/M to be considered legally a different product. IBM had deep enough pockets in any case to probably have won an infringement case, if they had needed to protect their product. Microsoft bought the rights to QDOS for $50,000, keeping the IBM & Microsoft deal a secret from Tim Paterson and his company, Seattle Computer Products.
Deal of the Century
Bill Gates then talked IBM into letting Microsoft retain the rights, to market MS-DOS separate from the IBM PC project, Gates and Microsoft proceeded to make a fortune from the licensing of MS-DOS. In 1981, Tim Paterson quit Seattle Computer Products and found employment at Microsoft.