Critics said the new IBM 5150 with DOS 1.0 wasn't nearly as good as Apple Computer's well-known computer or even Radio Shack's TRS-80. Nonetheless, it was a hit, and not just for IBM. In less than two years, the number of PC makers grew from 25 to 100, and annual PC sales grew from $1.8 billion to $5 billion.
You know the rest of the story. That little parts supplier, Microsoft, became the largest software company in the world while licensing that operating system to old companies like Hewlett-Packard and start-ups like Compaq and Dell. The Web was invented and became wildly popular, and many think the PC was a key to making that happen because it was an ideal platform to access the online world. Geeks became cool. Lots of people got really rich. But none of them became richer than Microsoft's co-founder, Bill Gates.
Now, here's an interesting question that looks back 25 years: What if IBM demands an exclusive license to that operating system? One of two things happens: Microsoft and IBM don't get a deal done, or Microsoft caves. Let's follow both scenarios as far as they can go:
Scenario one: Microsoft and IBM go their separate ways
Frustrated by its inability to find an operating-system supplier, IBM, which probably employs more programmers than any other company on the planet, assigns an internal design team to write the software. This go-it-alone philosophy, which IBM eventually has to employ with the microprocessor after breaking off negotiations with Intel, slows development of the PC, and allows Apple to make significant inroads into the corporate market.
Eventually, the IBM PC gets out the door with an operating system it simply calls OS (a second, graphical version will be called OS2), but it's pricier than many would have liked. (The real IBM 5150 cost $3,005. It's hard to imagine mainframe maker IBM would have been able to match that price without parts suppliers like Microsoft and Intel). Nonetheless, the PC catches on. But new ideas in the operating system and software, such as word processors and spreadsheets, suffer because an emboldened IBM continues to insist on building everything in-house.
Disappointed but still trusting his instincts, Gates convinces co-founder Paul Allen to pitch other big computer makers like HP and Digital Equipment. But execs at the two companies are slow to realize the opportunity, and only react when they see corporate computing sales slipping because of the newfangled machines IBM and Apple are selling.
Nonetheless, Microsoft manages to sell its operating system and a third, significant PC operating system gathers steam. Young software companies are happy to build software that works with this new operating system, since Apple has become increasingly difficult to work with and Big Blue just won't play nice.
This third wing of the PC hardware and software industry is where real innovation happens. But the PC-driven Silicon Valley boom of the 1980s never quite happens, because venture capitalists don't see much "white space" in a market so thoroughly dominated by IBM and Apple. Happily, housing prices never go through the roof in the San Francisco Bay Area. Unhappily, the pace of innovation suffers. And somewhere in Texas a young guy named Michael Dell goes to medical school.
Microsoft still does very well, but it never becomes the giant that people know today. Indeed, it's no bigger than other software companies like Lotus (which in the real world, was actually acquired by IBM) and Novell (which in the real world, ain't what it used to be).
Apple thrives, but can't hold on to its market lead. In fact, the Microsoft-made operating system, thanks largely to all those partners and Gates' tough business sense, becomes the dominant PC operating system by the end of the 1990s. By 2006, it has somewhere between 40 and 50 percent of all PC sales, while the Apple and IBM operating systems split the rest, and a new operating system by the fledgling open-source software movement starts to gain some traction.
IBM becomes ever bigger, ever more bloated, ever more arrogant. For much of the '80s and '90s, Big Blue is rolling in cash. But by the end of the decade, it begins to collapse under its own weight, unable to respond to products created by smaller, more flexible companies. IBM executives fret that the only way to right the old giant is to split it into three parts around mainframes, PCs and consulting. They don't do it, and by 2006, IBM looks as unhealthy as Digital did in the real world in 1996.
Scenario two: Microsoft caves This isn't all that different from the first scenario, with one big exception: Microsoft never becomes the centerpiece of that third PC "ecosystem." Instead, Microsoft is one of many parts suppliers to IBM and is eventually acquired by its partner.
But innovation, even if it's slowed, is inevitable. (Mr. Dell agrees with me on this.) Eventually, a third operating system starts to gain traction with computer companies outside of Apple and IBM. Who builds it? Hard to say. Maybe it's Sun Microsystems. Maybe it's another company that never came to be in the real world. While Apple continues to produce the slickest computers and IBM has the best salespeople, this third column of the tech industry is again where the exciting stuff (if you consider as exciting the idea of entrepreneurs taking a chance) happens.
In both scenarios, the Web is invented, but takes far longer to catch on because it takes longer for PC prices to drop enough for regular people. More importantly, the tech industry's frenetic innovation culture takes a lot longer to develop because venture capitalists have hedged their bets in tech and put more money in other areas like biotechnology.
Indeed, if that 1981 deal didn't play out the way it did, things we take for granted like online news, online banking and virtual chats would look today like they did five, maybe even 10 years ago. Would the tech industry have eventually evolved? Of course. But it would have taken a lot longer if IBM had played that deal differently.
We can quibble about Windows versus the Mac. Which is better? It's a good argument. What really matters is that in 1981, the modern tech industry was born.
Jim Kerstetter heads up CNET News.com's Access, Digital Life and Media sections.
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