IBM was well aware of the development of microprocessors and personal computers and had developed a desktop computer for scientific markets in 1975. It did not sell well. This was followed by a word processor , but it was a distant second to IBM's electric typewriter. When the personal computer became a business machine, however, William C. Lowe presented a radical plan to senior management for a personal computer which would use all outsourced components not currently in production, including software. A second break with tradition was to market the product using regular retail channels.

Surprisingly, IBM's top management agreed with Lowe's recommendation with a time frame of twelve months for a prototype. IBM's late entry into the personal computer market gave it the significant advantage of the use of sixteen bit second generation microprocessors, which would make this product significantly faster. The Intel 8088 chip was chosen, guaranteeing Intel's future prosperity.

IBM approached Gary Kildall of Data Research for an operating software for the new computer, but for some muddled reason Kindall was passed up and Microsoft entered the picture. The IBM entourage arrived at Bill Gates and Paul Allen's Microsoft headquarters in July 1980. Microsoft had thirty two people and a small rented office in downtown Seattle. Gates and Allen were so keen on winning the contact that they actually wore suits and ties! For IBM, Microsoft was a low risk, plus IBM's president John Opel, and Bill Gates' mother both served on the board of the United Way.

Rather than develop an operating system, Gates purchased one from Seattle Products for $30,000 , and this system called MS-DOS would be used on every IBM personal computer. Over the next decade, Microsoft and Gates would become billionaires, with Gates just 31 years old. Microsoft would obtain a royalty of between $10 and $50 on every copy sold. By the fall of 1980, the IBM prototype, the ACORN, was complete and production proceeded with Don Estridge in overall charge, and Lowe moving to higher management. The development team increased to one hundred, and Tandon's floppy disk plus Zenith's power supply were selected as components. Microsoft furnished BASIC for its operating system, a version of VisiCal spreadsheet, plus a word processor and several business programs.

Chicago-based Sears and ComputerLand were selected to retail the machine. Chiat Day advertising agency conducted an advertising campaign featuring a Charlie Chaplin look-alike making an appeal to both business and the home market. IBM was given a "human face". A fully equipped personal computer with 64 kilobytes of memory and a floppy disk would cost $2,880.

The IBM computer became an immediate success, and the presence of the IBM logo legitimized the personal computer, with the machine becoming an industry standard.

Most of the popular software programs were converted to run on it, but the popularity encouraged other manufacturers to produce IBM's "clones" which used the same software including Compaq.