International Business Machines Corporation

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International Business Machines Corporation

Armonk, New York 10504
U.S.A.
(914) 765-1900
Fax: (914) 765-4190

Public Company
Incorporated: 1910 as Computing-Tabulating-Recording Company
Employees: 383,200
Sales: $62.71 billion
Stock Exchanges: New York Midwest Pacific Philadelphia Cincinnati Boston Paris Frankfurt Vienna Tokyo Zurich Geneva Basel Montreal Toronto Brussels London Amsterdam Lausanne

International Business Machines (IBM) may truly be said to have attained a place of mythic importance in contemporary culture. Because of its enormous size, power, and success, and because it sells that most modern of tools, the computer, IBM has come to symbolize modern life itself for many. The company’s nickname—Big Blue—is a phrase that may have been originally suggested by IBM’s army of uniformly dressed salesmen, whose dark suits and white shirts were required by the firm’s leader, Thomas Watson Sr. Watson transformed a company called Calculating-Tabulating-Recording into a world leader in information technology known as IBM.

Calculating-Tabulating-Recording (CTR) was formed in 1910 by Charles Ranlett Flint. The so-called “father of trusts” merged two of his earlier creations, International Time Recording Company and Computing Scale Company of America, with a third, unrelated entity known as Tabulating Machine Company. The latter had been founded some years before by Herman Hollerith, an engineer who invented a machine that would sort and count cards based on the pattern of holes punched in each.

Hollerith had supplied the U.S. Census Bureau with these machines for use in the 1890 and 1900 census, and the device was quickly adopted by other organizations in need of rapid computation. As perfected, the tabulator operated in a simple three-step manner. Small cards were punched in a variety of patterns, each one representing a different category of the subject under survey; the assembled cards were run through a sorting machine, set to distribute them according to relevant categories; at the same time an accounting machine kept track of the results, and, in the later, more sophisticated models, performed any number of calculations based on those results.

Such a machine found increasing use in a society evolving rapidly into a largely urban, commercial matrix, where the ability to monitor and analyze large sums was critical to business profitability. Flint was less interested in Tabulating Machine Company than in the other two members of his new creation, which in any case got off to a slow start and threatened to stay that way.

In 1914 Flint hired a new general manager for CTR. Thomas Watson was already a well known, if not notorious, figure in U.S. business. Watson had gone to work for John Patterson at National Cash Register (NCR) in 1895 and quickly proven himself a quintessential “NCR man”: bright, aggressive, and loyal, he rose to the position of general sales manager for the entire company in 1910. At Patterson’s order, Watson then set up a company whose supposed purpose was to compete with NCR. The company’s real purpose, however was to eliminate NCR’s competitors. In 1912, along with John Patterson, his former employer at NCR, Watson was convicted of violating the Sherman Antitrust Act on behalf of the company. Shortly after Watson and Patterson were convicted, Patterson fired Watson. Watson was then hired by Charles Flint. Watson never admitted any wrongdoing, and in 1915 the government dropped its case against NCR after the company became famous for its help during a catastrophic flood in its hometown of Dayton, Ohio. The threat of a jail sentence now past, Watson was made president of CTR.

Watson understood immediately that his company’s future lay in its tabulating division, and it was there that he committed most of his energy and resources. Scales and clocks were useful items, but the United States would soon be a nation of office workers in need of basic office tools like the tabulator. Watson hired many ex-NCR men and patterned his own well-disciplined sales force along NCR lines—intense competition was combined with equally intense corporate loyalty; salespeople were courteous, spotlessly dressed, and, above all, understood that CTR sold not a product but a service. A completed sale was just the beginning of the salesman’s job; in effect, he had to become a partner in the customer’s business, and together they designed a tabulating system for that particular organization.

As was the case at NCR, Watson’s sales force became a key factor in his company’s success. In a pattern that still holds today, many customers remained loyal because they trusted and to an extent relied upon the CTR salesman’s knowledge of their business. Numerous, well-trained, devoted, and well-paid, the CTR sales staff actually dominated the company, ensuring that new technology followed upon the needs of customers and not the reverse. Throughout IBM’s history—the company’s name was changed to International Business Machines Corporation in 1924—it has been not technological leadership but massive and talented sales energy that has kept the company ahead of competitors.

Watson pushed hard in the late 1910s to make CTR the industry leader in tabulating design. He gradually turned back all boardroom challenges to his plans, and by 1925 was both chief executive officer and chief operating officer. In the ten years since Watson’s arrival, CTR sales had shot up from $4.2 million to a temporary peak of $13 million in 1919, weathered a minor crises in the early 1920s, and now stood poised to ride the booming U.S. economy. The newly named IBM faced some formidable competitors—Remington Rand, Burroughs, and NCR, among others—but from the beginning Watson steered clear of mass-produced, low-priced office products like typewriters and simple adding machines, concentrating instead on the design of large tabulating systems for governmental and private customers. With superior products and a more dedicated salesforce, by 1928 IBM was the clear leader in its specialized field and a force in office technology as a whole.

The company was remarkably profitable. In 1928, for example, its profit of $5.3 million was nearly as great as that of giant Remington Rand, though the latter more than tripled IBM’s sales of $19.7 million. In 1939, IBM’s profit of $9.1 million exceeded that of the next four companies combined, and was an impressive 23% of sales.

IBM’s business was particularly profitable for several reasons: the company focused on large-scale, custom-built systems, an inherently less competitive segment of the business; IBM’s policy of leasing, rather than selling, its machines to customers was very profitable; IBM maintained cross-licensing agreements dating back to the mid-1910s with its chief competitor, Remington Rand, preventing the two leaders from falling into competitive squabbles. The company required its customers to buy IBM cards for their IBM tabulators. The cards could not be read by any other machine. This last condition made it almost impossible for IBM customers to try other products. With literally millions of such cards already punched, IBM’s clients tended to stay put.

The U.S. government filed a suit in 1932 alleging that the IBM-Remington Rand cross-licensing agreement and IBM’s exclusive punch card design were anticompetitive. In 1936, after learning that IBM sold nearly 85% of all keypunch, tabulating, and accounting equipment in the United States, the Supreme Court ordered IBM to release its customers from all such card restrictions. The Court’s decision had little impact on the company’s growth, however. Even the Great Depression did not check IBM’s progress, as most cash-pressed companies needed more numerical information not less. In addition President Franklin D. Roosevelt’s New Deal created a vast federal bureaucracy in need of heavy-duty calculators made by IBM. In 1935, at the same time the Justice Department was pursuing its case against IBM, the newly formed Social Security Administration placed an order with the company for over 400 accounting machines and 1,200 keypunchers. The pattern was clear; modern society rested on massive organizations, which required machines capable of massive calculations, which were made by IBM. By the end of the 1930s Thomas Watson was enjoying praise for his enlightened employee relations as well as for his “thinking machines.”

During World War II both private and governmental demand for IBM tabulators increased. The machines were needed to monitor the manufacture and movement of vast resources. Sales boomed, more than tripling to $141.7 million in five years. The war offered IBM another opportunity, less immediately exciting but in the long run of far greater importance. The armed forces needed high-speed calculators to solve a number of military problems relating to ballistics and, later, the development of the atomic bomb. Partly as a result, IBM helped build what might be called the world’s first computer, the Mark I. This machine was similar to the first electromechanical calculators built a few years earlier, which used IBM punch cards to work out long arithmetic sums; the Mark I was also capable of retaining a set of rules which could be applied to any later input. Such a memory is one of the essential differences between the calculator and the computer, and the Mark I represented a great step forward. With 765,000 parts and 500 miles of wire, the Mark I still delivered less power than today’s hand-held calculator.

Computer design evolved rapidly during the war. IBM joined the partnership building the new Electronic Numerical Integrator and Calculator (ENIAC) at the University of Pennsylvania. ENIAC was useful to the military and gave IBM the experience it needed to proceed with its own electronic machine. When the war ended in 1945, interest in ultra-highspeed calculators died down quickly; few outside the army needed a room-sized machine designed to analyze howitzer trajectories. Only a handful of scientists continued refining the advances won by ENIAC, eventually creating a more salable machine called UNIVAC around 1948. When IBM’s old rival, Remington Rand, began to market UNIVAC in 1951, it took a significant lead in the new computer business. IBM continued its typically cautious approach. IBM waited until the new product proved its lasting appeal before leaping into the fray. Since it controlled 85% of the market for which computers were targeted, and because even electronic computers then still used IBM punch cards, Watson was not especially alarmed by Rand’s success.

Thomas Watson Jr., his father’s heir apparent, strongly favored an all-out push into the computer market. By the time Watson Jr. became president in 1952 he had won the struggle with his father and led IBM into an immense research program designed to surpass Rand. The new president staked his reputation, as well as a significant portion of IBM’s assets, on the computer campaign and by 1955 IBM’s new 705 general purpose business computer was a success. By the following year Remington Rand had already lost its lead. It was no surprise that IBM came to dominate in computers so quickly, since at that time the computer business was only a small segment of the office-products market, which IBM continued to control. The 85% of offices using IBM tabulating equipment simply switched over to IBM computers.

In 1949 Thomas Watson’s younger brother, Dick Watson, was also brought into the business. The 30-year-old Dick Watson was named president of IBM World Trade Corporation, the parent company’s new subsidiary for international sales. In 1949 World Trade had sales of only $6.3 million but operated in 58 countries. In the more important of these countries World Trade set up a subsidiary to market IBM products and even do additional research and development. Thus, as the world’s industrial powers awoke to the computer age, they found themselves greeted by IBM. It was not unusual for local IBM units to achieve market domination comparable to that of the parent company in the United States. Only in Japan and the United Kingdom were local competitors able to match IBM’s presence, forcing the latter to settle for around 33% of the market. Barely on the sales map in 1949, World Trade eventually surpassed IBM domestic in total revenue.

Meanwhile, the U.S. computer business filled up with potential rivals. Some of these, like RCA, General Electric, and the newly merged Sperry Rand, were as large as or larger than IBM and should have been able to mount a serious challenge. In every case, however, competitors either lacked an adequate sales organization or were not fully committed to the commercial computer business. RCA, for example, made important contributions to computer technology, but mainly with an eye toward possible applications in its growing television business. Sperry Rand, on the other hand, still controlled the successful UNIVAC machine but was hopelessly behind IBM in sales experience and customer loyalty.

In 1952 the government filed a second, more ambitious antitrust suit against IBM. In 1956 IBM entered into a consent decree which ordered it to divest many of its card-production facilities, sell its machines as well as lease them, submit to certain cross-licensing agreements, and create a subsidiary to compete with itself in the service end of the business. None of these injunctions limited IBM’s success, but the 1957 appearance of a small company called Control Data did.

Control Data Corporation (CDC) was a pioneer in niche specialization in the computer world. This tactic seemed to be the only way to compete successfully with IBM. The newcomer made very large, very fast computers for scientific and governmental users in need of maximum crunching power, and after a brief battle, IBM largely ceded the field to CDC. IBM’s bread and butter remained the medium to large business computer.

In 1958 Sperry Rand and Control Data brought out the first second-generation computers, which used transistors instead of vacuum tubes. No sooner had IBM met this challenge with its own line of transistorized machines, than it faced the arrival of the industry’s third generation—integrated circuitry. Once again IBM lagged in technological change as Honeywell and CDC brought out the first integrated circuit units in the early 1960s, but this time Big Blue’s response necessitated a companywide revolution. Integrated circuitry was clearly destined to become the industry standard, and IBM decided to bring out a complete line of such computers. After an unprecedented capital-spending program involving six new plants and many thousands of new workers, the company introduced its 360 line in April 1965. Small, fast, and accompanied by a new set of exclusive software, the 360s were an immediate and lasting success, remaining the worldwide computer leader for more than a decade.

Sperry Rand, GE, Burroughs, RCA, Honeywell, NCR, and Control Data were unable to close the gap between themselves and IBM, which now delivered 65% of all U.S. computers. Control Data filed yet another antitrust suit in 1968, charging that IBM had sold “phantom” computers to its customers to keep them from placing orders for superior CDC products. The government filed its own suit the following year, supporting CDC’s claims and alleging other monopolistic practices. Encouraged by these efforts, IBM’s competitors, big and small, filed 22 similar lawsuits in the next few years. IBM beat back every one of them, however, with one exception. The Justice Department continued its battle for 13 years, until President Ronald Reagan’s administration dropped the suit shortly before a ruling was expected.

Niche specialization was clearly the only way to survive in the face of IBM’s power. In 1960 Digital Equipment Corporation (DEC) brought out a relatively small, inexpensive computer designed for researchers, effectively creating the micro-computer business. Micros were only a further step in the evolution of the computer, but IBM chose not to enter the market. DEC was soon joined by a host of other micro manufacturers offering a wide range of computers for ever smaller tasks, culminating years later in Apple’s marketing of the personal computer for home use. IBM failed to join this race until 1980, at which late date it was unable to dominate the market, as it does mainframes and minicomputers.

In 1971 Tom Watson retired from IBM after suffering a heart attack. His successor, Frank Cary, remained in charge until 1981, at which time John Opel was named CEO. Under these men and IBM’s present Chairman, John Akers, the 360 line of computers grew into the 370. Sales continued to climb and corporate profit hit $3 billion by 1980. Yet many observers felt that IBM was drifting, and, in 1985, for the first time in 20 years the company’s earnings actually declined a bit.

The mid-1980s brought more steady but unspectacular growth. IBM began to lose sight of customer preferences, and the computer industry became increasingly competitive. In addition, the decade’s biggest opportunity seemed to fizzle before it got started: Integrated services data networks—or the merging of telecommunications and information technology—may result in intense competition between IBM and AT&T. IBM thus took a 16% stake in MCI, one of AT&T’s chief competitors, and in 1985 bought the California-based PBX-maker Rolm for $1.5 billion. Rolm’s PBX, or private branch exchange systems allow very large operations to process hundreds of calls at one time. Three years later, however, it had sold the MCI stock, bartered away much of its Rolm interests, and seemed to be withdrawing from integrated services. Results for the last five years of the 1980s were not encouraging: the firm reported disappointing earnings and cut 37,000 jobs.

IBM remains supreme in larger computers; its 370 mainframe holds about 70% of that market. Critics, however, note that the mainframe market is shrinking relative to other computer businesses, which will leave IBM vulnerable. New companies continue to chip away at Big Blue’s customers. Computers seem to be getting smaller, and are being tailored to customer needs, as more companies explore the advantages of distributed data networks. Furthermore, IBM’s business may be affected by the continued incursion of Japanese manufacturers.