Big Blues
Carroll, Paul
T his book is a horror story. Expertly reported and engagingly written by Wall Street Journal reporter Paul Carroll, Big Blues is the tale of how a great, indeed even a noble corporation went from...
...IBM stock has lost $75 billion in value...
...The company had never laid anyone off and never intended to...
...As Carroll notes, "This is a very sad story...
...The Hayes software commands became the industry standard...
...Big Blues recounts in devastating detail other, less-publicized blunders from the same period: • A small company called Software Publishing came up with a popular set of basic business programs, the "Assistant Series," which were sold under the IBM label...
...The trouble was that the effect of this circuitry was not noticeable to users, who were just as happy with the circuitry the clone-makers were using, the same circuitry IBM used in its AT series...
...But when that business fell off, as it was bound to in an age of smaller systems, Big Blue hit the wall...
...Openarchitecture made the PC easier for outside software companies to write programs for, and helped outside hardware developers to build modems, memory expansion cards, and other products to enhance it...
...Its share of the PC market declined from more than 80 per cent to less than 20 per cent today...
...It doesn't, of course, have IBM's hidebound Management Committee to deal with...
...But as much as other hardware makers hurt IBM, nobody hurt it more than the software giant Microsoft and its nerdy, brilliant founder, Bill Gates...
...Other companies continued making AT-compatibles, and made a fortune on them...
...It bombed...
...In 1982, Mitch Kapor, who founded Lotus Development, pleaded with IBM to buy the exclusive rights to a new spreadsheet program called "1-2-3...
...But IBM's bureaucracy consists of a host of baronies that guard their turf ferociously...
...In 1986, when Intel had just brought out the 80386 chip that would power a new generation of PCs, IBM started selling its Intel stock, for an eventual profit of $625 million on a $400 million investment...
...If IBM had held the stock, its shares would be worth more than $5 billion today...
...The company worried not about whether its PCs would be competitive with other microcomputers, but whether they would compete with other IBM systems...
...But the fact that IBM did not own the PC's basic technology opened the way to competition...
...But the XT-286 box was smaller than the AT's, so circuit boards and other products made for the AT wouldn't fit in it...
...Instead, it has Congress...
...IBM would be bested in hardware by a number of smaller, more agile firms that were able to bring more powerful PCs to market at lower prices than IBM could, or would...
...It wasn't easy...
...IBM is still trying to catch up...
...IBM got none of the royalties, and the PFS line competed with IBM's—exactly what the company had been trying to avoid...
...Lotus 1-2-3 went on to become the single most popular program ever written for the IBM PC, the program that made the PC a bestseller...
...Anything major had to be approved by IBM's Management Committee at headquarters in Armonk, New York, where the thinking born of years of IBM dominance in mainframe computers prevailed...
...The IBM printer division in Lexington, Kentucky, couldn't get anywhere with a line of printers that cost less to make than comparable Japanese models, but which had only an 8 percent profit margin...
...That's because the Boca team contracted with Microsoft to develop the operating system for the original PC...
...The group made several crucial decisions that would ultimately help the PC succeed and, ironically, help IBM fail...
...It was often necessary to get nearly everybody to agree to nearly everything...
...That was fine with IBM...
...IBM owned 20 percent of Intel, the semiconductor company that produces the central processing chips that drive the IBM PC and its successors...
...By then, however, there already were cheaper versions of the PC...
...It spent $8 billion a year on research and development...
...When the microcomputer revolution was born in the garages and basements of hobbyists and hackers in the late 1970s, IBM didn't just sit there...
...IBM was in a hurry and getting the job done in-house would have taken forever...
...So Software Publishing went off on its own with what became the highly successful "PFS" programs...
...When IBM brought out its first laptop, the PC Convertible, in 1986, it didn't have a bright screen, a feature already available in laptops from Toshiba and other competitors...
...At the time, of course, there were no other PC makers, and IBM, with the insular view of the world that would contribute so much to its future blunders, no doubt thought there never would be...
...M eanwhile, IBM and Microsoft co-developed a new operating system for more advanced PCs called OS/2...
...The AT was the most popular PC IBM had ever made, but since IBM wanted to make the "Micro Channel" the new standard, it decided it to kill the AT...
...It made more computer chips than any company in the world...
...As Compaq and other makers of PC clones seized a growing share of the market, IBM tried to distinguish its products with a new, proprietary standard that the clone-makers could not match...
...IBM stuck with it, but Microsoft hedged its bets with "Windows" software, a less piggish alternative to OS/2 which Microsoft owns alone, and which has been a smash hit...
...It sent a team off to Boca Raton, Florida, to build what would become the IBM PC, which set a standard for personal computers that nearly every PC in the world would follow...
...IBM eventually reversed itself, sort of, and brought out an AT-class computer called the'XT-286...
...When IBM finally got a modem to market, it used a different command set that left it incompatible with the modems people already owned...
...IBM was prepared to buy the DOS (disk-operating system) software outright from Microsoft for a million dollars, but Gates had other ideas: he wanted a small royalty on every copy IBM shipped...
...Gates's deal allowed Microsoft to sell DOS to any other PC maker it pleased...
...It had developed the disk drives that are now a part of every computer system...
...If IBM, whose viscous bureaucratic structure resembles nothing so much as the federal government, could make such a hash of things, imagine what Washington will do...
...Software Publishing intended to improve the programs, but IBM decided it should knock out certain improvements because IBM wanted to reserve those features for some other product it was planning...
...Expertly reported and engagingly written by Wall Street Journal reporter Paul Carroll, Big Blues is the tale of how a great, indeed even a noble corporation went from being the most profitable company in history to a basket case in a decade...
...Anything that didn't carry the kind of profit potential IBM was accustomed to was regarded with suspicion...
...The consequences have been crushing...
...And this fine book should be read as a cautionary lesson by Al Gore and the other high-tech enthusiasts in the Clinton administration, eager to "invest" taxpayer money in a data superhighway and other such ventures...
...At the outset of their decade-long struggle, Carroll writes, IBM had "340,000 employees, $27 billion of assets, $26 billion of sales and $3.6 billion of profits, while Microsoft began their relationship with 32 people and little else...
...The result of such management was that IBM ended up with products nobody wanted to buy at prices nobody wanted to pay...
...Roughly 140,000 IBM employees have lost their jobs...
...Other companies' IBM workalikes—the so-called "clones," or "compatibles"—were beginning to flood the market, and people who wanted cheaper PCs bought them...
...IBM made virtually the same mistake when Microsoft wanted to sell it a chunk of its stock in 1986...
...The PCjr was a spectacular, embarrassing flop...
...The Convertible became a laughingstock...
...The decision cost IBM billions...
...Even more inexplicably, it had no modem, because, as Carroll reports, "the product manager couldn't bring himself to put a Hayes modem in the computer and IBM didn't yet have a modem available...
...As Carroll puts it, "IBM had turned into acompany where everybody could say no, and no single person could say yes, and IBMers were considered wimpy if they didn't say no at least a few times on each project...
...T hroughout most of their battle for control of the personal computer industry, IBM and Microsoft were ostensibly partners...
...The Boca group was unusual in that it had a mandate from on high that allowed it to work fast, without clearing everything through IBM's multi-layered decision process...
...About half of that money," Carroll reports, "was lost by the half-million individual' holders of IBM stock, most of whom thought of IBM as a classic 'widows and orphans' stock that they could sock money into and count on for their retirement...
...IBM said no...
...IBM would still find a way to lose...
...Even before its PC came to market, IBM had made mistakes that would cost the company billions, but it was just getting started...
...It flopped, naturally...
...No computer can do much of anything without the operating system, which handles such boiler-room functions as managing memory, keeping track of disk drives, loading software, and copying and deleting data...
...The early success of the PC fostered the illusion that the invincibility the company had enjoyed in mainframe systems would continue in the new world of microcomputers...
...In 1981, IBM had not only dominated the world computer industry for decades, but seemed poised to do so well into the twenty-first century...
...The company remained profitable into the 1990s, thanks to its mainframe sales...
...It had some new capabilities but it consumed vast amounts of storage and memory, and nobody wanted it...
...DOS has been a cash cow for Microsoft, fueling the company's rise from scratch to a value of more than $25 billion...
...It came out with a new type of internal circuitry it called the "Micro Channel...
...When IBM brought out the PCjr in 1984, it deliberately made the machine difficult to enhance so that people couldn't expand it into a cheaper version of the PC...
...All along, there were people inside IBM who had good ideas and wanted to see IBM compete...
...The PC would be an "open system," which meant that most of its basic technology would be non-proprietary...
...A Georgia company called Hayes Microcomputer products was doing a brisk business selling modems for the IBM PC...
Vol. 26 • October 1993 • No. 10
