How the IBM PC became the winner and then the loser of the PC market – IEEE Spectrum

How the IBM PC became the winner and then the loser of the PC market - IEEE Spectrum

Tech Highlights:

  • Soon, though, the world began embracing little computers by the millions, with IBM dominating those sales. The personal computer vastly expanded the number of people and organizations that used computers. Other companies, including Apple and Tandy Corp., were already making personal computers, but no other machine carried the revered IBM name. IBM’s essential contributions were to position the technology as suitable for wide use and to set a technology standard. Rivals were compelled to meet a demand that they had all grossly underestimated. As such, IBM had a greater effect on the PC’s acceptance than did Apple, Compaq, Dell, and even Microsoft.

  • The IBM PC, introduced in August 1981, helped reassure corporate customers that personal computing was serious.
    On 12 August 1981, at the Waldorf Astoria Hotel in midtown Manhattan, IBM unveiled the company’s entrant into the nascent personal computer market: the IBM PC. With that, the preeminent U.S. computer maker launched another revolution in computing, though few realized it at the time. Press coverage of the announcement was lukewarm.

Despite this initial dominance, by 1986 the IBM PC was becoming an also-ran. And in 2005, the Chinese computer maker Lenovo Group purchased IBM’s PC business.

At the outset, though, things looked rosy.

What occurred between IBM’s wildly successful entry into the personal computer business and its inglorious exit nearly a quarter century later? From IBM’s perspective, a new and vast market quickly turned into an ugly battleground with many rivals. The company stumbled badly, its bureaucratic approach to product development no match for a fast-moving field. Over time, it became clear that the sad story of the IBM PC mirrored the decline of the company.

How the personal computer revolution was launched
IBM did not invent the desktop computer. Most historians agree that the personal computer revolution began in April 1977 at the first West Coast Computer Faire. Here, Steve Jobs introduced the Apple II, with a price tag of US $1,298 (about $5,800 today), while rival Commodore unveiled its PET. Both machines were designed for consumers, not just hobbyists or the technically skilled. In August, Tandy launched its TRS-80, which came with games. Indeed, software for these new machines was largely limited to games and a few programming tools.

Photo of Steve Jobs in front of an Apple Computer sign
Tom Munnecke/Getty Images
Apple cofounder Steve Jobs unveiled the Apple II at the West Coast Computer Faire in April 1977.

IBM’s large commercial customers faced the implications of this emerging technology: Who would maintain the equipment and its software? How secure was the data in these machines? And what was IBM’s position: Should personal computers be taken seriously or not? By 1980, customers in many industries were telling their IBM contacts to enter the fray. At IBM plants in San Diego, Endicott, N.Y, and Poughkeepsie, N.Y., engineers were forming hobby clubs to learn about the new machines.

The logical place to build a small computer was inside IBM’s General Products Division, which focused on minicomputers and the successful typewriter business. But the division had no budget or people to allocate to another machine. IBM CEO Frank T. Cary decided to fund the PC’s development out of his own budget. He turned to William “Bill” Lowe, who had given some thought to the design of such a machine. Lowe reported directly to Cary, bypassing IBM’s complex product-development bureaucracy, which had grown massively during the creation of the System/360 and S/370. The normal process to get a new product to market took four or five years, but the incipient PC market was moving too quickly for that. Photo of IBM CEO Frank T. Cary
IBM CEO Frank T. Cary authorized a secret initiative to develop a personal computer outside of Big Blue’s product-development process.

Cary asked Lowe to come back in several months with a plan for developing a machine within a year and to find 40 people from across IBM and relocate them to Boca Raton, Fla. Lowe’s plan for the PC called for buying existing components and software and bolting them together into a package aimed at the consumer market. There would be no homegrown operating system or IBM-made chips. The product also had to attract corporate customers, although it was unclear how many of those there would be. Mainframe salesmen could be expected to ignore or oppose the PC, so the project was kept reasonably secret.

A friend of Lowe’s, Jack Sams, was a software engineer who vaguely knew Bill Gates, and he reached out to the 24-year-old Gates to see if he had an operating system that might work for the new PC. Gates had dropped out of Harvard to get into the microcomputer business, and he ran a 31-person company called Microsoft. While he thought of programming as an intellectual exercise, Gates also had a sharp eye for business. In July 1980, the IBMers met with Gates but were not greatly impressed, so they turned instead to Gary Kildall, president of Digital Research, the most recognized microcomputer software company at the time. Kildall then made what may have been the business error of the century. He blew off the blue-suiters so that he could fly his airplane, leaving his wife—a lawyer—to deal with them. The meeting went nowhere, with too much haggling over nondisclosure agreements, and the IBMers left. Gates was now their only option, and he took the IBMers seriously.

The normal process to get a new IBM product to market took four or five years, but the incipient PC market was moving too quickly for that.
That August, Lowe presented his plan to Cary and the rest of the management committee at IBM headquarters in Armonk, N.Y. The idea of putting together a PC outside of IBM’s development process disturbed some committee members. The committee knew that IBM had previously failed with its own tiny machines—specifically the Datamaster and the 5110—but Lowe was offering an alternative strategy and already had Cary’s support. They approved Lowe’s plan. Lowe negotiated terms, volumes, and delivery dates with suppliers, including Gates. To meet IBM’s deadline, Gates concluded that Microsoft could not write an operating system from scratch, so he acquired one called QDOS (“quick and dirty operating system”) that could be adapted. IBM wanted Microsoft, not the team in Boca Raton, to have responsibility for making the operating system work. That meant Microsoft retained the rights to the operating system. Microsoft paid $75,000 for QDOS. By the early 1990s, that investment had boosted the firm’s worth to $27 billion. IBM’s strategic error in not retaining rights to the operating system went far beyond that $27 billion; it meant that Microsoft would set the standards for the PC operating system. In fairness to IBM, nobody thought the PC business would become so big. Gates said later that he had been “lucky.”

Back at Boca Raton, the pieces started coming together. The team designed the new product, lined up suppliers, and were ready to introduce the IBM Personal Computer just a year after gaining the management committee’s approval. How was IBM able to do this? Much credit goes to Philip Donald Estridge. An engineering manager known for bucking company norms, Estridge turned out to be the perfect choice to ram this project through. He wouldn’t show up at product-development review meetings or return phone calls. He made decisions quickly and told Lowe and Cary about them later. He staffed up with like-minded rebels, later nicknamed the “Dirty Dozen.” In the fall of 1980, Lowe moved on to a new job at IBM, so Estridge was now in charge. He obtained 8088 microprocessors from Intel, made sure Microsoft kept the development of DOS secret, and quashed rumors that IBM was building a system. The Boca Raton team put in long hours and built a beautiful machine.

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