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Remember When Even IBM Couldn't Compete With Microsoft?

By Alex Planes - Apr 2, 2013 at 12:33PM

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Learning from the market's past to understand its present.

On this day in economic and financial history...

The PC wars were largely over by 1987. IBM (IBM 1.74%) -- or, more precisely, IBM-compatible machines -- and Microsoft (MSFT 2.76%) had won, thanks to standardization, clones, and MS-DOS. But neither company was content to rest on its laurels. Time recounts the day that IBM tried to break free of DOS:

It was one of the most ambitious computer-product announcements in history. On April 2, 1987, at twin press conferences in New York and Miami, IBM unveiled its plans to reinvent the PC industry, which it had jump-started less than six years earlier with the introduction of the first IBM PC. The company introduced four new computers dubbed the PS/2 line, including an $11,000 model that it said was seven times faster than current models. The new products were rife with advanced features, including 32-bit processors, fancy graphics, 3.5-in. hard-shell floppy-disk drives and optical storage.

And the new hardware was accompanied by a next-generation operating system, OS/2. Co-developed by IBM and Microsoft, it was intended to replace DOS, the aging software that then powered most of the planet's microcomputers.

Of course, this didn't actually happen. OS/2 became one of IBM's biggest computing failures. It was an ambitious new operating system that promised to avoid DOS' shortcomings by not building atop it, as had Microsoft's Windows (released a year earlier). But the April announcement gave way to waiting for an incomplete operating system to finally flesh itself out. The first version, 1.0, was DOS-like and had no graphical interface. The first graphical OS/2 didn't arrive until the fall of 1988. A year after that, fewer than 200,000 copies had sold -- OS/2 was simply too much of a system hog to run well on most of the day's machines.

Microsoft, meanwhile, continued to develop Windows on its own. Version 3.0 came out in 1990, and by then it was beginning to catch on, giving Microsoft all the rationale it needed to cut off its co-development work on OS/2. By the time IBM pushed OS/2 2.0 out the door in 1992, Microsoft's operating-system lead on PCs was virtually insurmountable. Although version 2.0 sold nearly two million copies, it wasn't enough to blunt the growth of Windows, and IBM's operating system remained a single-digit player in a market it had essentially created years earlier.

By the time Windows 95 came out, OS/2 was a sloppy, poorly built mess of a graphical operating system -- it earned the lowest score of the four major operating systems available in a PC World test just after Windows 95 hit the market. OS/2 simply wasn't built for the average user, and without the support of the average user, no consumer operating system can succeed.

The divergence of Windows and OS/2 is reflected in the share prices of the two longtime collaborators. In the decade following OS/2's first announcement, Microsoft gained 3,400%, but IBM's share price grew only 25% -- a dire underperformance during a period in which the Dow Jones Industrial Average (^DJI 1.76%) grew 180%. During this period, IBM suffered one of the most dramatic declines in its century-plus history, losing more than $15 billion through 1992 and 1993 as Microsoft was really starting to catch fire. Microsoft's focus on Windows and abandonment of OS/2, is one of the biggest reasons for this divergence, which would bring Microsoft into the Dow in 1999.

IBM has long since ceased development of OS/2, but it hasn't died. You may even use it every day without realizing it, particularly if you live in the Northeast. New York City's subway card access system runs on OS/2, as do the checkout systems at Safeway supermarkets. Some other city subways and supermarket chains also use OS/2, as do certain bank ATMs. This is far from the success IBM had originally hoped for in 1987, when Windows was still just a rough-hewn upstart and DOS was a highly flawed default choice.

An electric debut for a new industry
The first permanent motion-picture theater in the world opened its doors to the public on April 2, 1902. Tally's Electric Theater of Los Angeles offered early moviegoers much the same establishment that modern moviegoers now enjoy as a matter of course: comfortable seats, quality sound, pleasing decor, and professional ushers. Its popularity was so overwhelming that the initial evening showings were quickly augmented with matinees. Soon, people across the country were enjoying movies at theaters like the Electric thanks to a vibrant film industry that was quickly expanding in the Los Angeles area.

There are more theaters operating in the U.S. today than the Electric Theater's proprietors could have imagined more than 110 years ago. At last count, some 40,000 indoor theater screens entertained patrons throughout the U.S., resulting in nearly $11 billion in gross ticket revenue. The largest operator, Regal Entertainment (NYSE: RGC), maintained nearly 7,000 of those screens at last count. No other country has quite so many theaters, but China is fast catching up -- at last count, the Middle Kingdom boasted more than 36,000 screens. 

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Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
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International Business Machines Corporation Stock Quote
International Business Machines Corporation
$139.27 (1.74%) $2.38
Microsoft Corporation Stock Quote
Microsoft Corporation
$273.24 (2.76%) $7.34

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