1975–1985: The founding of Microsoft

In late 1974, Paul Allen, a programmer at Honeywell, was walking through Harvard Square when he saw the cover of the January 1975 issue of Popular Electronics that demonstrated the Altair 8800, the first microcomputer. Allen bought the magazine and rushed to Currier House at Harvard College, where he showed it to high school friend Bill Gates. They saw potential to develop an implementation of BASIC for the system.

Gates called Altair manufacturer Micro Instrumentation and Telemetry Systems (MITS), offering to demonstrate the implementation. Allen and Gates had neither an interpreter nor an Altair system, yet in the eight weeks before the demo, they developed an interpreter with the help of Monte Davidoff. When Allen flew to Albuquerque to meet with MITS, the interpreter worked and MITS agreed to distribute Altair BASIC. Allen moved to Albuquerque, Gates soon quit Harvard to join him, and they co-founded Microsoft there. Revenues of the company totalled $16,005 by the end of 1976.

Allen came up with the original name of Micro-Soft, a portmanteau of microcomputer and software. Hyphenated in its early incarnations, on November 26, 1976, the company was registered under that name with the Secretary of State of New Mexico. The company's first international office was founded on November 1, 1978, in Japan, entitled "ASCII Microsoft" (now called "Microsoft Japan"), and on November 29, 1979, the term, "Microsoft" was first used by Bill Gates. On January 1, 1979, the company moved from Albuquerque to a new home in Bellevue, Washington, since it was hard to recruit top programmers to Albuquerque. Shortly before the move, eleven of the then-thirteen employees posed for the staff photo on the right.

Steve Ballmer joined the company on June 11, 1980, and would later succeed Bill Gates as CEO from January 2000 until February 2014. The company restructured on June 25, 1981, to become an incorporated business in its home state of Washington (with a further change of its name to "Microsoft Corporation, Inc."). As part of the restructuring, Bill Gates became president of the company and chairman of the board, and Paul Allen became executive vice president. In 1983, Allen left the company after receiving a Hodgkin lymphoma diagnosis, though he remained on the board as vice-chairman.

Microsoft's early products were different variants of Microsoft BASIC which was the dominant programming language in late 1970s and early 1980s home computers such as Apple II (Applesoft BASIC) and Commodore 64 (Commodore BASIC), and were also provided with early versions of the IBM PC as the IBM Cassette BASIC.

Microsoft also marketed through an Apple dealer in West Palm Beach, Florida two products for the Radio-Shack TRS-80. One was "Typing Tutor" which led the user through learning to use a keyboard. The other was authored by a professor at the University of Hawaii called "MuMATH" and had the ability to do mathematics in long integer math to avoid floating point numbers.

The first hardware product was the Z-80 SoftCard which enabled the Apple II to run the CP/M operating system, at the time an industry-standard operating system for running business software and many compilers and interpreters for several high-level languages on microcomputers. The SoftCard was first demonstrated publicly at the West Coast Computer Faire in March 1980. It was an immediate success; 5,000 cards, a large number given the microcomputer market at the time, were purchased in the initial three months at $349 each and it was Microsoft's number one revenue source in 1980.

The first operating system publicly released by the company was a variant of Unix announced on August 25, 1980. Acquired from AT&T through a distribution license, Microsoft dubbed it Xenix, and hired Santa Cruz Operation in order to port/adapt the operating system to several platforms. This Unix variant would become home to the first version of Microsoft's word processor, Microsoft Word. Originally titled "Multi-Tool Word", Microsoft Word became notable for its use of "What You See Is What You Get", or WYSIWYG pioneered by the Xerox Alto and the Bravo text editor in the 1970s.

Word was first released in the spring of 1983, and free demonstration copies of the application were bundled with the November 1983 issue of PC World, making it one of the first programs to be distributed on-disk with a magazine. (Earlier magazine on-disk distributions included Robert Uiterwyk's BASIC in the May 1977 issue of Information Age). However, Xenix was never sold to end users directly although it was licensed to many software OEMs for resale. It grew to become the most popular version of Unix, measured by the number of machines running it (note that Unix is a multi-user operating system, allowing simultaneous access to a machine by several users). By the mid-1980s Microsoft had gotten out of the Unix business, except for its ownership stake in SCO.

IBM first approached Microsoft about its upcoming IBM Personal Computer (IBM PC) in July 1980. On August 12, 1981, after negotiations with Digital Research failed, IBM awarded a contract to Microsoft to provide a version of the CP/M operating system, which was set to be used in the IBM PC. For this deal, Microsoft purchased a CP/M clone called 86-DOS from Tim Paterson of Seattle Computer Products for less than US$100,000, which IBM renamed to IBM PC DOS. The original CP/M was made by Gary Kildall of Digital Research, Inc. Due to potential copyright infringement problems with CP/M, IBM marketed both CP/M and PC DOS for US$240 and US$40, respectively, with PC DOS eventually becoming the standard because of its lower price. Thirty-five of the company's 100 employees worked on the IBM project for more than a year. When the IBM PC debuted, Microsoft was the only company that offered operating system, programming language, and application software for the new computer. The IBM PC DOS is also known as MS-DOS.

InfoWorld stated in 1984 that Microsoft, with $55 million in 1983 sales,

is widely recognized as the most influential company in the microcomputer-software industry. Claiming more than a million installed MS-DOS machines, founder and chairman Bill Gates has decided to certify Microsoft's jump on the rest of the industry by dominating applications, operating systems, peripherals and, most recently, book publishing. Some insiders say Microsoft is attempting to be the IBM of the software industry.

In 1983, in collaboration with numerous companies, Microsoft created a home computer system, MSX, which contained its own version of the DOS operating system, called MSX-DOS; this became relatively popular in Japan, Europe and South America. Later, the market saw a flood of IBM PC clones after Columbia Data Products successfully cloned the IBM BIOS, quickly followed by Eagle Computer and Compaq. The deal with IBM allowed Microsoft to have control of its own QDOS derivative, MS-DOS, and through aggressive marketing of the operating system to manufacturers of IBM-PC clones Microsoft rose from a small player to one of the major software vendors in the home computer industry. With the release of the Microsoft Mouse on May 2, 1983, Microsoft continued to expand its product line in other markets. This expansion included Microsoft Press, a book publishing division, on July 11 the same year, which debuted with two titles: Exploring the IBM PCjr Home Computer by Peter Norton, and The Apple Macintosh Book by Cary Lu.