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October 01, 2007

Comments

Chris Ward

OK, here's IBM Lotus Symphony. http://symphony.lotus.com/

No charge, just download it from the web site.

Sharing ? For sure. I don't think Sam P wants a red cent for each copy deployed. Share away to your heart's content, then.

Destructive to markets ? Anticompetitive ? Should IBM be trying to sell it for more than the cost of development and distribution ? Will Microsoft have legitimate cause for complaint, if it trashes the sales of Microsoft Office ? Does IBM worry about the job security of the Lotus Smartsuite service team ? Or rejoice that they can be redeployed now to something more productive.

Not my field. I just do the engineering, the development. I trust Sam P to set the price the way he thinks best.

A good advertisement for IBM Lotus Notes http://www-306.ibm.com/software/lotus/notesanddomino/ , for sure, too.

New millennium. New businesses. Blow hard, that 'wind of creative destruction'.

Toby Esterhaze

Let's try to parse this quick and perhaps willfully ignorant review of IBM's history and market power:

"For about twenty years, since its launch in the mid 1960s to the late 1980s, IBM's mainframe business - the S/360 family, later renamed S/370 - enjoyed a commanding position in the IT industry."

Commanding, indeed. In fact, IBM had maintained a huge, 75%-plus share of the data processing market (first in punch card machines and then, electronic computers) for many decades before the S/360 was even a twinkle in Gene Amdahl's eye. IBM had faced three previous government anti-trust suits, the intended effects of which it had skillfully evaded.
What should also be recognized is that IBM's share of the computer industry's total profits held steady at around 90% - completely defying classical economics. In a truly competitive market, theory holds, these high profits would have been eroded and kept in check by rivals selling viable substitute products. That these profits stayed in IBM's hands for as long as they did just shows that IBM enjoyed monopolistic market power. Repeatedly, IBM's own self-evaluations in the 1950s, 60s, and 70s found the company's products technically deficient versus those of competitors.

"So successful and profitable was the S/360 that in 1969 the US Justice Department filed an antitrust suit against IBM."

It wasn't the S/360's success or profits that bothered the government, it was the mechanisms fueling those profits - namely, anti-competitive behavior on IBM's part, including a highly-sophisticated scheme of price discrimination. Look at IBM's own books from the period and you will see that 1) IBM's own analysts found its new machine to be quite lacking and deficient compared to those of Burroughs and Univac and other manufacturers; and 2) to make up for those shortcomings, IBM chose to give away entry-level models of each member of the S/360 to win and retain customers one by one. Unlike rivals, IBM could afford to do this - offering lots of technical support at no charge, for instance - because it had a large reservoir of locked-in customers whom it was charging high-profit prices for earlier generations of gear. Once the new S/360 customer was hooked, IBM charged hefty, high-profit prices for additional memory and peripherals that customers soon needed - and that were not yet available from any other source. Because IBM customers using pre-S/360 gear had to convert their software and retrain their people in the new machine, they were in effect freed to choose from any of the mainframe brands then available. But because IBM's system was actually deficient in comparison, and because IBM wanted direly to maintain its monopoly, the company resorted to giving away its S/360s to make damned sure none of the "Seven Dwarfs" won any new market share.
Later, when plug-compatible sources of add-on gear did become available, IBM had more tricks up its sleeve. It manipulated its mainframes' key interfaces to block competitors and effectively diminish the value of their products. In short, IBM managed to segment its market again and again, charging low where it faced competition (in the market for complete entry-level systems) and high where it faced no competition (where its arbitrary control of interfaces blocked rivals from attaching their peripherals and memory.) When PCM disk drives were gaining ground, IBM moved the profits of its mainframes into the processor - which drew the attention of Amdahl and Japanese makers, who now had new, advanced VLSI technologies in hand.
Again and again (and again), in other words, IBM blocked and evaded and nailed to the table Adam Smith's hallowed invisible hand. The result, of course, was that IBM got fat and lazy, its technologies quite uncompetitive in many ways - and increasingly so, as VLSI took hold and spawned the microprocessor and PC.

"In 1986, for example, IBM was the most profitable company in the Fortune 500, with more than 400,000 employees around the world.
Then everything changed. Rapid advances in microprocessor technologies in the late 1980s opened the door for new competitors to attack the mainframe with less expensive, client-server, UNIX and PC-based platforms."

In fact, less-expensive technologies had been attacking the IBM mainframe business continuously, at least since the first S/360 left the factory floor. The steady advancement of LSI chip technology enabled rivals (and IBM) to produce a steady flow of new mainframes and minicomputers, each providing more computing per dollar than its predecessor. Yet, IBM managed to ward off this threat for two decades and maintain its high profits all the while. How? By bringing out a steady succession of new ever-less-expensive computer lines - System/3, Series/1, System/32, 36, 38, etc. - each of which used its own unique operating system and distinct set of peripherals and interfaces. Again, IBM was segmenting the expanding market, charging new users (who were free to choose vendors) less money per MIPS (to pick just one simplisitic measure) than those who were already locked-in and lacking much choice. IBM might have cloned the S/360 into ever-smaller machines, but that would have encouraged users to adopt those machines for their work instead of paying the (relatively) high prices that IBM charged for its high-end mainframes. Every timesharing app, for instance, was a potential app for a minicomputer, but IBM had to make sure those apps stayed on the S/370 and kept that high-profit business growing.
All the while, IBM's engineers were warning top management of the mess that this market segmentation was creating. It was clear that the future of computing was in networked computers, but with 16 or more distinct hardware architectures and as many operating systems to cope with, IBM was at a huge disadvantage vs. rivals who could offer a single architecture across a wide range of computer models. Hence the roaring success of Digital Equipment and its VAX line - and its DECnet networking scheme, which was hugely more efficient and attractive than the tangled, mainframe-centric SNA networking that IBM and its customers were forced to wrestle with.

"We knew what we had to do - transition the mainframes to exploit CMOS microprocessor technologies and introduce IBM's own client-server platforms. However, these new CMOS-based platforms, along with the software and services around them, commanded significantly lower profit margins than the mainframe margins to which we had become accustomed."

Yes, of course, IBM had to make a huge and difficult transition. But had the company permitted the invisible hand to do its work all along, during all those previous decades, that is, IBM would never have fallen so out of synch with and into such a disadvantage to the rest of its industry. It was quite addicted to those high mainframe profit margins, which were maintained not through tireless innovation in every component and in the face of fierce competition but rather, through exploiting market power - thru changing interfaces willy-nilly and segmenting the market into a hodge-podge of incompatible architectures.

"So we had to lower costs and expenses significantly, close factories, lay off people and take a number of additional, very painful actions in order to adapt to the new environment. By 1994, we had lost almost $16 billion in the previous three years, and our employee population had fallen to 220,000. A plan was initiated that was leading toward breaking up the company into a loose federation of baby blues. We were very close to ending IBM as a major company."

Had IBM been broken up years earlier, as the government and many independent economic observers had called for, this mess might never have happened. A truly competitive computer business, with three or four equally strong, equally viable makers of mainframes duking it out as they slid rapidly down the steepening cost-curve described by Moore's Law. would likely have been much better for customers all along. (And for the American economy, too, but that's another story.) Indeed, without a computer monopoly in existence, it would have been virtually impossible for even as clever an upstart as Bill Gates to establish one in the PC business.

"Welcome to Adam Smith's world."

Better late than never, it seems!

Jeff Paul Big League Players Club

Hi, Great post! I felt great reading your blog post. I’m working with my friend in a small internet marketing business as a web developer. When I’m free I go around for some IT info

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