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Last Updated: Monday, 4 April, 2005, 07:30 GMT 08:30 UK
How IBM misjudged the PC revolution
By Vicki Broadbent
BBC World Service business reporter

A 1981 model of IBM's personal computer
IBM pioneered the PC, but did not make the most of it

Computer giant IBM has been through many changes.

Thirty years ago, the US company - which made a profit of $3.1bn (1.6bn) in the fourth quarter of 2004 - dominated the information technology market.

Now the landscape is very different, with competitors such as Hewlett-Packard and Dell taking it on on equal terms.

But things could have been very different for the company often referred to as 'Big Blue'.

The company cut its teeth on mainframes and servers, but it might have ruled the personal computer market too - had it not been for certain decisions made more than 20 years ago.

PC revolution

For decades IBM ruled every phase of the development of the industry - both in hardware and software.

Nobody in the organisation saw that far from being an item in the future, [the PC] was the future
Robert Heller, author and management consultant

At the beginning of the 1980s, IBM was a leading developer of the PC.

Other companies had explored the idea of producing a computer which would sit on every worker's desk - Apple, for one, produced a desktop computer in 1977 - but the name IBM gave the product mainstream credibility.

But IBM failed to realise the new product's significance, says David Bradley, one of the team of 12 who produced the PC at IBM.

"At the time, we didn't think it was going to be a revolutionary change," he says. "We knew we were working on an exciting project and we certainly hoped it was going to be successful, but we never imagined it was going to take over the world the way it did."

'Very clever'

IBM needed an operating system to run its new PC. The company approached Microsoft co-founder Bill Gates, then a 19-year-old college dropout.

He provided IBM with the PC operating system it required, but crucially the company allowed Mr Gates to hold on to the property rights of the system - a mistake, at least from IBM's point of view, not lost on Mr Gates.

"We had to be very clever, we actually did not get a royalty from IBM but we kept the rights so we were getting royalties from other people," Mr Gates told the BBC in 1994.

"It was only as [the operating system] grew in volume and power that then IBM recognised that having us control such a key aspect might be a mistake for them."

Still, in 1985 IBM was the most profitable company in the world, making profits of almost $6.6bn.

But it relied on income generated from its core business - mainframe systems for corporate customers.

Major losses

Author and management consultant Robert Heller says IBM did not understand the importance of the PC.

IBM and Lenovo executives
All smiles - IBM is selling its PC business to Lenovo of China

"The IBM people never took it seriously at that stage. Nobody in the organisation saw that far from being an item in the future, it was the future," he says.

In 1993, IBM stunned the world by reporting quarterly losses of $8bn, caused by increased competition and a changing market.

IBM was failing to compete with the new breed of innovative software companies and hardware producers who could make computers much more cheaply.

"Prices for mainframe computers dropped, eventually they dropped by 90%," says Mr Heller. "This was an immense blow to IBM. It lost money, it lost market share and became a company in denial. It couldn't believe it was no longer the dominant force in computing."

Chinese deal

It was time for IBM to break with tradition, and for the first time an outsider, Louis Gerstner, was brought in to head up the company.

Tens of thousands of jobs were cut worldwide and the company moved into business services.

The seminal moment in this shift away from its roots came in December last year with the announcement of the $1.75bn sale of IBM's once revolutionary PC business to the Chinese company Lenovo.

Under the terms of the deal, IBM will gain valuable access to huge Chinese markets for its services.

But the company will be exiting a market it pioneered, and which many critics believe is better left now to low cost manufacturers.

Robert Heller, author and management consultant
"IBM did not take the PC seriously at first."

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