By Aman Sardana
“It was a cloudy Seattle day in late 1980, and Bill Gates, the young chairman of a tiny company called Microsoft, had an appointment with IBM that would shape the destiny of the industry for decades to come. He went into a room full of IBM lawyers, all dressed in immaculately tailored suits. Bill’s suit was rumpled and ill-fitting, but it didn’t matter. He wasn’t here to win a fashion competition.” – The Triumph of the Nerds(A Documentary)
Over the course of the day, a contract was worked out whereby IBM would purchase, for a one-time fee of about $80,000, perpetual rights to Gates’ MS-DOS operating system for its upcoming PC. IBM also licensed Microsoft’s BASIC programming language, all that company’s other languages, and several of its fledging applications. The smart move would have been for Gates to insist on a royalty so that his company would make a small amount of money for every PC that IBM sold.
But Gates wasn’t smart. He was smarter.
IBM ignored the personal computer industry long enough that it was forced to rush out a PC design that was easy (and legal) to clone. Having done so, the company immediately wanted to put the genie back in the bottle and take the industry back from the copycats. When IBM announced the PS/2 and OS/2, many industry pundits seriously thought the company could do it.
So why did IBM fail so badly with OS/2? Why was Microsoft able to deftly cut IBM out of the picture and then beat it to death with Windows? And more importantly, are there any lessons from this story that might apply to hardware and software companies today?
Unfortunately, IBM was being pulled in two directions. The company’s legacy mainframe division didn’t want any PCs that were too powerful, lest they take away the market for big iron. The PC division just wanted to sell lots of personal computers and didn’t care what it had to do in order to meet that goal. This fighting went back and forth, resulting in agonizing situations such as IBM’s own low-end Aptivas (Newer Alpha) being unable to run OS/2 properly and the PC division promoting Windows instead!
IBM was clueless about the importance of controlling the OS and underplayed the threat from clones. In the beginning itself, they should have bought MS no matter the cost. Allowing MS to be independent and have permission to sell to clones was setting up a dangerous competitor.
IBM always thought that PCs would be best utilized as terminals that served the big mainframes it knew and loved. OS/2’s networking tools, available only in the Extended Edition, were mostly based on the assumption that PCs would connect to big iron servers that did the heavy lifting. This was a “top-down” approach to connecting computers together. In contrast, Microsoft approached networking from a “bottom-up” approach where the server was just another PC running Windows. As personal computing power grew and more robust versions of Windows like NT became available, this bottom-up approach became more and more viable. It’s certainly much less expensive.
IBM also made a crucial error in promoting OS/2 as a “better DOS than DOS and a better Windows than Windows.” Having such amazing compatibility with other popular operating systems out of the box meant that the market for native OS/2 apps never had a chance to develop. Many people bought OS/2. Very few people bought OS/2 applications.
It is said that big companies with dominant positions in legacy markets are institutionally incapable of shifting over to a new disruptive technology, even though those companies frequently invent said technologies themselves. IBM invented more computer technologies and holds more patents than any other computer company in history. Still, when push came to shove, it gave up the personal computer in favor of hanging on to the mainframe. IBM still sells mainframes today and makes good money doing so, but the company is no longer a force in personal computers. Today, many people have observed that Microsoft is the new dominant force in legacy computing, with legacy redefined as a personal computer running Windows. The new disruptive force is smartphones and tablets, an area in which Apple and Google have become the new dominant forces. Microsoft, to its credit, responded as quickly as it was able to meet this new disruption. The company even re-designed its legacy user interface (the Windows desktop) to be more suited to tablets.
It could be argued that Microsoft was slow to act, just as IBM was. It could also be argued that Windows Phone and Surface tablets have failed to capture market share against iOS and Android in the same way that OS/2 failed to beat back Windows. However, there is one difference that separates Microsoft from most legacy companies: the company doesn’t give up. IBM threw in the towel on OS/2 and then on PCs in general. Microsoft is willing to spend as many billions as it takes in order to claw its way back to a position of power in the new mobile landscape. Microsoft still might not succeed, but for now at least, it’s going to keep trying.
The second lesson of OS/2—to not be too compatible out of the box with rival operating systems—is a lesson that today’s phone and tablet makers should take seriously. Blackberry once touted that you could easily run Android apps on its BB10 operating system, but that ended up not helping the company at all. Alternative phone operating system vendors should think very carefully before building in Android app compatibility, lest they suffer the same fate as OS/2.
Timeline for Microsoft and IBM in the PC era
The story of OS/2 is now fading into the past. In today’s fast-paced computing environment, it may not seem particularly relevant. But it remains a story of how a giant, global mega-corporation tried to take on a young and feisty upstart and ended up retreating in utter defeat. Such stories are rare, and because of that rarity they become more precious. It’s important to remember that IBM was not the underdog. It had the resources, the technology, and the talent to crush the much smaller Microsoft. What it didn’t have was the will.