IBM's Personal Computer

The entry of International Business Machines Corporation (IBM) did more to legitimize personal computers than any event in the industry's history. By 1980 the personal computer field was starting to interest the large computer companies. Hewlett-Packard, which had earlier turned down Stephen G. Wozniak's proposal to enter the personal computer field, was now ready to enter this business, and in January 1980 it brought out its HP-85. Hewlett-Packard's machine was more expensive ($3,250) than those of most competitors, and it used a cassette tape drive for storage while most companies were already using disk drives. Another problem was its closed architecture, which made it difficult for third parties to develop applications or software for it.

Throughout its history IBM had shown a willingness to place bets on new technologies, such as the 360 architecture. (See the earlier section The IBM 360.) Its long-term success was due largely to its ability to innovate and to adapt its business to technological change. Big Blue, as the company was commonly known, introduced the first computer disk storage system, the RAMAC, which showed off its capabilities by answering world history questions in 10 languages at the 1958 World's Fair. From 1956 to 1971 IBM sales had grown from $900 million to $8 billion, and its number of employees had increased from 72,500 to 270,000. IBM had also innovated new marketing techniques such as the unbundling of hardware, software, and computer services. So it was not a surprise that IBM would enter the fledgling but promising personal computer business.

In fact, right from project conception, IBM took an intelligent approach to the personal computer field. It noticed that the market for personal computers was spreading rapidly among both businesses and individuals. To move more rapidly than usual, IBM recruited a team of 12 engineers to build a prototype computer. Once the project was approved, IBM picked another small team of engineers to work on the project at its Boca Raton, Florida, laboratories. Philip Estridge, manager of the project, owned an Apple II and appreciated its open architecture, which allowed for the easy development of add-on products. IBM contracted with other companies to produce components for their computer and to base it on an open architecture that could be built with commercially available materials. With this plan, IBM would be able to avoid corporate bottlenecks and bring its computer to market in a year, more rapidly than competitors. Intel Corporation's 16-bit 8088 microprocessor was selected as the central processing unit (CPU) for the computer, and for software IBM turned to Microsoft Corporation. Until then the small software company had concentrated mostly on computer languages, but Bill Gates and Paul Allen found it impossible to turn down this opportunity. They purchased a small operating system from another company and turned it into PC-DOS (or MS-DOS, or sometimes just DOS, for disk operating system), which quickly became the standard operating system for the IBM Personal Computer. IBM had first approached Digital Research to inquire about its CP/M operating system, but Digital's executives balked at signing IBM's nondisclosure agreement. Later IBM also offered a version of CP/M but priced it higher than DOS, sealing the fate of the operating system. In reality, DOS resembled CP/M in both function and appearance, and users of CP/M found it easy to convert to the new IBM machines.

IBM had the benefit of its own experience to know that software was needed to make a computer useful. In preparation for the release of its computer, IBM contracted with several software companies to develop important applications. From day one it made available a word processor, a spreadsheet program, and a series of business programs. Personal computers were just starting to gain acceptance in businesses, and in this market IBM had a built-in advantage, as expressed in the adage, “Nobody was ever fired for buying from IBM.”

IBM named its product the IBM Personal Computer, which quickly was shortened to the IBM PC. It was an immediate success, selling more than 500,000 units in its first two years. More powerful than other desktop computers at the time, it came with 16 kilobytes of memory (expandable to 256 kilobytes), one or two floppy disk drives, and an optional colour monitor. The giant company also took an unlikely but wise marketing approach by selling the IBM PC through computer dealers and in department stores, something it had never done before.

IBM's entry into personal computers broadened the market and energized the industry. Software developers, aware of Big Blue's immense resources and anticipating that the PC would be successful, set out to write programs for the computer. Even competitors benefited from the attention that IBM brought to the field; and when they realized that they could build machines compatible with the IBM PC, the industry rapidly changed.