Silicon Valley: The Computer Revolutionizes America

SILICON VALLEY: THE COMPUTER REVOLUTIONIZES AMERICA

A New Day

During the 1970s and 1980s, many people made fortunes in the computer business. Beyond the importance of individual fortunes, the computer and the various industries that produced computers and related materials dramatically changed American society. The desktop and the laptop computers made it possible for individuals working a wide variety of environments to accomplish tasks that before required substantially more resources.

Mainframe

The computer industry in the United States is only about forty years old. Originally the computer industry was dominated by IBM, or International Business Machines. During the 1960s the phrase "IBM and the seven dwarfs" was used to describe the computer industry because of IBM's dominance. During the 1960s both RCA and General Electric tried to enter the computer business only to fail. RCA finally wrote off $300 million in losses in 1970. IBM specialized in manufacturing mainframe computers, the computers that were as big as a room—sometimes larger—and required specially trained employees to program and enter data into the computers through punch cards. Indeed, IBM intended for those computers to last for decades and to make most of the profit not through the initial sale but through servicing the mainframe. To escape from IBM's virtual monopoly, many American companies, such as Honey-well, began buying Japanese systems. The government frowned upon IBM's dominance of the market and the Justice Department brought an antimonopoly suit against IBM to promote competitiveness in the industry. The Justice Department intended to break IBM up into a set of little IBMs. The suit, costing millions of dollars, dragged on for more than a decade before it was settled in 1982. Under the agreement IBM ended its practice of discouraging customers from buying competitive systems. IBM also agreed to provide competitors with technical specifications since IBM products often set the standard in the industry. Significantly, IBM also agreed to unbundle its software, that is, IBM would sell software as separate items rather than making software part of the price of the computer. This opened the door for dramatic growth in the software business. The agreement was reached after the computer industry had undergone revolutionary changes. The Defense Department also funded research and development in the industry, resulting in some significant breakthroughs in computer speed.

Microcomputers

During the 1980s there was an explosion in the sale and development of microcomputers. These personal computers, based on microprocessors, eventually made the mainframe all but obsolete and caught IBM off guard. Apple first introduced the easy-to-use personal computer in the 1970s and was soon followed into the business by start-up companies. IBM was slow to follow the market. When IBM did enter the market the company did so in a big way, using the corporation's vast resources and name recognition to dominate the personal computer market temporarily. Initially, IBM did not manufacture computers but bought computers from other manufacturers and then applied the IBM name to them. It was this temporary dominance that led to the term IBM clone to describe computers that operated from IBM's Disk Operating System (DOS) rather than the Apple and Macintosh operating systems.

The Personal Computer

IBM made record profits during the early 1980s but failed to lay the groundwork for future success. IBM managers, who were reluctant to enter the microcomputer business in the first place, turned their attention to personal computers and ignored the $4-billion per-year mainframe business. When IBM began losing market share in the personal computer business IBM found itself in considerable trouble by the late 1980s. For the most part IBM slippage was the result of poor planning. The selling of software is a prime example of IBM not planning well. IBM spent millions of dollars developing bad software even as the upstart Microsoft Corporation sold its DOS system on IBM computers. Eventually Microsoft would dominate the software business. By the early 1990s IBM had lost $75 billion in assets.

The Soul of the New Machine

During the 1980s the entrepreneurial spirit was still alive in the computer industry. Many of the upstarts of the late 1960s and 1970s faced the same problems that IBM did as the companies matured and took on more bureaucrats. Apple, the company that had done so much to pioneer the field of personal computers, was also in trouble. Although Apple had introduced the technically innovative Macintosh, Steve Jobs and Steve Wozniak, the founders of Apple, found themselves on the opposite side of office politics. Wozniak left the company and eventually Jobs also left the company, leaving Apple under the control of John Scully, a business executive brought into Apple's management to improve the company's management structure. Jobs then founded NEXT, a company that built sophisticated scholar workstations that were marketed to universities. Often people with brilliant technical vision lacked the skills, or the interest, to build a company that would last for generations or even for years. Still, the American computer industry did well—despite IBM's troubles—both at home and in international markets. Throughout the 1980s the United States ran a balance of trade surplus in computers, although it declined from $7 billion in 1981 to $3 billion in 1987. In the 1980s people founded both hardware and software companies. Fred Gibbons founded the Software Publishing Corporation in 1981, and by 1985 he had 6 percent of the $400 billion software business. The Intel Corporation, founded in 1968 by Andrew Grove, Gordon Moore, and Robert Noyce, remained a leading developer and manufacturer of microprocessors throughout the decade. J. Reid Anderson's Verbatim Corporation did well selling magnetic storage media, including floppy disks. The Hewlett-Packard Company, founded in 1939, proved it could still be innovative when it introduced the laptop computer in 1984. Two factors have helped to defend computer markets against assault. The American computer industry is well balanced between entrepreneurs with vision and technological dreams who start companies with a big splash and large well-financed firms such as IBM, Digital Equipment, and Hewlett-Packard. These companies had the staying power and the size needed to exert influence over the structure of the industry

Sources:

Paul Carroll, Big Blues: The Unmaking of IBM (New York: Crown, 1993);

Michael L. Dertouzos, Richard K. Lester, and Robert M. Solow, Made in America: Regaining the Productive Edge (New York: Harper & Row Perennial Library, 1989);

Irvin Farman, Tandy's Money Machine: How Charles Tandy Built Radio Shack Into the World's Largest Electronics Chain (Chicago: Mobium Press, 1992);

Robert Slater, Portraits in Silicon (Cambridge: Massachusetts Institute of Technology Press, 1987).