How IBM Created the Future of the PC -- and Almost Destroyed Its Own

On this day in economic and business history...

International Business Machines (NYSE: IBM  ) burst into the growing personal computer field Wednesday by announcing a new system that will be sold through IBM's own stores, ComputerLand dealers, and Sears, Roebuck & Co's new Business System Centers.

The IBM personal computer, designed for home, school, or small business use, will range in price from $1,565 for a basic home system attached to an audio cassette player and television system to as much as $6,300 for business systems using color graphics and printers.

With its announcement, made with great fanfare at media conferences held simultaneously in Chicago and other cities, IBM presented its challenge to Apple Computer; Tandy's Radio Shack; and Commodore International. Those firms now dominate the personal computer market, which has grown to $1.5 billion in revenues since the mid-1970s.

-- Chicago Tribune, "Personal computers to join IBM lineup." Aug. 13, 1981.

IBM changed the world on Aug. 12, 1981, when it launched the 5150 personal computer. It was not the first to market -- Apple, RadioShack, and Commodore had created the first "trinity" of true PCs in 1977 (click the links to read more about their groundbreaking products) -- but IBM blew the doors off the competition, purely by accident. In fact, it was because IBM acted in a most un-IBM-like way that its PC became the de facto computing standard for more than three decades.

The personal-computing market was already growing rapidly by 1981. Contemporary estimates showed the size of that market doubling every year since the launch of the 1977 trinity, and by the time IBM was ready to hit the market, approximately 80,000 computers were shipped each month, resulting in monthly revenue of about $250 million. Every month that IBM waited would see it fall further behind in an exploding market.

The company could have developed proprietary components and built its PC from the ground up, as its competitors had, but that might have taken years. When IBM executives reached out to Bill Lowe, the director of IBM's General Systems Division lab in Boca Raton, Fla., to develop a personal computer, they granted him and his team wide latitude for the sake of development speed. As a result, the Boca Raton team did something IBM had never done before in developing a new system: They used other companies' parts. IBM's history describes this fast-paced environment:

The manufacturing strategy was to simplify everything, devise a sound plan and not deviate. There was not time to develop and test all components. So they shopped for completely functioning and pretested subassemblies, put them together and tested the final product. Zero defects was part of the plan.

In sum, the development team broke all the rules. They went outside the traditional boundaries of product development within IBM. They went to outside vendors for most of the parts, went to outside software developers for the operating system and application software, and acted as an independent business unit. Those tactics enabled them to develop and announce the IBM PC in 12 months -- at that time faster than any other hardware product in IBM's history.

At a press conference at the Waldorf Astoria ballroom in New York City, [PC project lead Don] Estridge announced the IBM Personal Computer with a price tag of $1,565. Two decades earlier, an IBM computer often cost as much as $9 million and required an air-conditioned quarter-acre of space and a staff of 60 people to keep it fully loaded with instructions. The new IBM PC could not only process information faster than those earlier machines but it could hook up to the home TV set, play games, process text and harbor more words than a fat cookbook.

IBM sold 100,000 5150 PCs by Christmas of 1981. It did not immediately become the best-selling machine on the market -- the Commodore 64 held that title until IBM-based PCs took the lead in 1985 -- but it set in motion a sea change in the computing industry that would eventually push two of the 5150's component suppliers to all-time market-cap records. Because the IBM PC's core components were supplied by other companies, all it took was a "clean room" reverse engineering of the IBM PC's basic input/output system for other manufacturers to figure out how to build copycat machines without running afoul of any IBM copyrights.

Columbia Data Products launched first IBM PC clone less than one year later after taking the 5150 through the clean-room reverse-engineering process. This clone retained the two most important parts of the original 5150: the Intel (NASDAQ: INTC  ) 8088 microprocessor and Microsoft's (NASDAQ: MSFT  ) MS-DOS operating system. Wintel was thus allowed to spread beyond IBM's control, and before long there were a wide array of IBM-compatible PCs on the market. The first "portable" IBM PC, the Compaq Portable, launched shortly after Columbia's clone, and by the mid-'80s, Compaq and other low-cost manufacturers had begun to push the PC standard forward with the use of better Intel chips and more advanced Microsoft operating systems.

By the late 1980s, IBM had effectively lost control of the technical standard it had created. Its effort to build a proprietary operating system (with Microsoft's help) fell flat, and Windows took off shortly thereafter. The spread of commoditized PCs was an incredible boon to Intel and Microsoft, as both companies retained full control over the pricing of the PC's two most essential components. However, IBM was floundering. The venerable tech company reported a $5 billion annual loss for the 1992 fiscal year, a record for U.S. corporations, despite holding the lead in global PC market share. PCs had become a commodity, and IBM couldn't keep cutting its prices.

The decision to use off-the-shelf components had far-reaching effects on the business world. PCs would almost certainly have continued to spread without IBM, but the computers that would have spread in the 5150's absence would have looked and worked differently. Instead of establishing IBM at the head of the computing pack, the PC eventually produced market caps in excess of $500 billion for both Microsoft and Intel, while IBM sought buyers for its distressed PC manufacturing operations. After IBM lost the market-share lead in the 1990s, Hewlett-Packard eventually stepped up in its stead, particularly after it merged with PC clone pioneer Compaq in 2002.

The Dow Jones Industrial Average (DJINDICES: ^DJI  ) recognized Microsoft and Intel's importance to the PC era in 1999, two years after it added HP to its roster. No other easily identifiable product can claim as much responsibility for the success of so many Dow components as the IBM 5150. Unfortunately, these companies' continued reliance on the PC industry in a post-PC era might make them the PC's next wave of victims, as well.

The tech world has been thrown into chaos as the biggest titans invade one another's turf. With the PC era ending, what's at stake is the future of a trillion-dollar revolution: mobile. To find out which of these giants is set to dominate the next decade, we've created a free report called "Who Will Win the War Between the 5 Biggest Tech Stocks?" Inside, you'll find out which companies are set to dominate and give in-the-know investors an edge. To grab a copy of this report, simply click here -- it's free!


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  • Report this Comment On August 12, 2013, at 12:16 PM, techy46 wrote:

    A good lesson that Apple hasn't learned.

  • Report this Comment On August 12, 2013, at 1:22 PM, FoolishLonghorn wrote:

    Although nothing you have written is false, IBM had for more problems than PCs in the early 90s. Even at its peak, PCs were never anywhere close to the majority of IBM's business.

    The decline of the mainframe hurt more than the commoditization of PCs.

    In addition, IBM was in the copier, printer, hard drive, and memory business. These were all sold off in the 90s.

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