How IBM misjudged the PC revolution

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Computer giant IBM has been through many changes. Thirty years ago, the US company 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.

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."

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. e 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.

"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.

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 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.

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