Attack Of The Clones: How IBM Lost Control Of The PC Market

In my column last week, on the 40th anniversary of the IBM PC, I shared how a single application birthed the original IBM Personal Computer on August 21, 1981.

Thanks to VisiCalc, IBM decided it was necessary to create a personal computer to defend its historical position as a computing tabulation company. Most inside IBM felt the Apple II and other early personal computers were toys or hobbyist machines at best. However, Bill Lowe and Don Estridge had the foresight to understand a new application like VisiCalc, which did a lot of things their expensive mainframes and mini-computers did for financial planning, could be a threat to their business in the future. 

IBM was used to developing proprietary technology for their mainframes and minicomputers and the semiconductors they were creating during most of the 1960s-1970s. The R&D cycle for these systems was measured in years in development time to bring them to market. From the time IBM started their IBM PC project to the time they brought it to market was only about a year. That meant that to get this product to market quickly and begin to thwart any threat to their dominance in computing financial programs, they had to move fast and use off-the-shelf parts. 

They chose a semiconductor from Intel, a PC OS from Microsoft and the memory and storage drives were from established companies who could sell these parts to anyone, not only IBM. The goal was to get their IBM PC to market fast, and to do so they did not have time to create their proprietary technology that could make their PC unique and hard to copy.

As I wrote in the article last week, IBM's business plan for the IBM PC projected that they would only sell about 400,000 PCs during the life of the product. They did not know that they were about to birth the PC revolution and, at that time, did not anticipate that there would be copycats that could challenge them in this market in the future. 

To their surprise, the demand for the IBM PC took off fast. 

Six months later, we started to see the first IBM PC clones. The most notable one was from Compaq Computer.

I had the privilege of talking to Compaq's Co-Founder, Rod Canion, not long after the Compaq computer launched. I asked Mr. Canion why he and his partners, Jim Harris and Bill Murto, decided to create a clone of IBM’s PC and start Compaq. 

Mr. Canion was an executive at Texas Instruments before co-founding Compaq and he told me that at Texas Instruments he followed whatever IBM did closely. He explained that one thing he learned is that when IBM did something, it was going to be successful. He said that when IBM launched its PC, he immediately decided that doing a "clone" and following IBM's lead had potential. He invited fellow TI executives Mr. Murto and Mr. Harris to join him for coffee to discuss this idea and a friend who joined them, Ted Papajohn, sketched out the design for what would become the first Compaq computer on a pie shop's placemat. 

In that meeting, he showed me that placemat and the original design, which looked kind of like a sewing machine case. It became their first product called the Compaq Portable, which shipped in March of 1983. That placemat hung in a history exhibit at Compaq until the company was sold to HP in 2002.

With clones showing a lot of promise, other companies entered the PC clone market, including HP and Dell Computer, led by Michael Dell who created his first IBM clone in his dorm room. The clones, which were cheaper in most cases, took off and by 1985 dominated the overall sales of IBM PCs that ran Microsoft's DOS and used the same off-the-shelf parts that IBM used in their machines.

IBM's choice of using off-the-shelf parts to create their PC was great for birthing the clone market and giving users many more choices that were also cheaper. However, this was detrimental to IBM's PC growth and they decided to try and gain back control of the market. In 1987 they introduced the IBM Personal System/2 or PS 2 with a completely new and proprietary technology called Micro Channel Architecture (MCA). At the same time, IBM announced a new OS called OS/2, which worked with their new MCA technology in a bid to bring more control back to IBM when it came to the future of the PC market.

By creating a new standard in the PC market with MCA and OS2, IBM had hoped to force all of the clone makers to license these proprietary technologies and gain more control of a market that they believed they created. 

At that time IBM put great pressure on Compaq, Dell, HP, Acer, and all of the clone makers to move to MCA, which represented a more powerful approach to delivering greater computing capabilities on a PC.

However, most of the clone makers, lead by Rod Canion, who was CEO of Compaq at the time, were highly resistant to paying any licensing fees to IBM. In what turned out to be a highly fortuitous decision, this group told IBM they would not agree to any license for PS 2 and MCA and would take the chance of working with Intel, Microsoft, and other key partners to evolve the PC on their terms. 

To this day the clone makers standing up to IBM is considered one of the greatest business coalitions to preserve what turned out to be one of the first open hardware architectures. Keep in mind that at this time IBM was a major force in enterprise-based PCs. Not licensing PS/2 and MCA was a big gamble that could have killed the clone market. Instead, it eventually caused IBM to back down and forced them to sideline MCA and OS/2 and up until 2007, when they sold their PC business to Lenovo, they continued to create PCs on the established open designs they created in 1982.

IBM's decision to get out of the PC market was driven mostly by the fact that the clones dominated that market and that they as a company were beginning to move from being a hardware-focused company to being a technology service provider.

It has turned out to be a wise move for IBM as they are a stronger company without a heavy reliance on hardware anymore.

IBM’s entry into the PC market helped develop a trillion-dollar industry over the last four decades. It paved the way for the eventual birth of laptops, tablets, smartphones, and made it possible for the Internet to flourish. IBM's contribution to the PC market has been enormous.