44. The IBM 5150 – disruptive innovation
12 August 1981 – it was a Wednesday and the place to be was New York’s Waldorf-Astoria Hotel in mid-town Manhattan. That day, it was there that IBM, the US’s most staid corporate giant, launched the product that would turn itself and the world upside down: the IBM 5150, better known as simply ‘the IBM PC’.
Even as it was being launched, it was felt that the 5150 would be special; after all, IBM had ripped apart its product development manual to get it from design to production within 12 months. However, its long-term significance was not appreciated. Bill Gates, whose company, Microsoft, was almost certainly the greatest beneficiary of the 5150, was at the offices of Apple that day and later remarked that people at Steve Jobs’s company “didn’t seem to care. It took them a full year to realise what had happened” – that the computer was on the way to becoming a mass-market product whose importance would equal that of the motor car.
In a way, of course, the significance of the 5150 could not be understood in advance. If it had been, then another electronics company would have launched the first personal computer using open-source technology that simply invited software writers – and, to an extent, hardware manufacturers – to produce goods that would marry up to a desktop computer that operated on an all-embracing standard.
Within a year of the 5150’s launch, PC World, an industry magazine, counted 753 commercial software packages available to run on the machine. To put that blitzkrieg of innovation into context, one year after the launch of Apple’s much-heralded Apple Macintosh PC in 1984, there were still fewer than 200 dedicated software packages available for it.
The point is that the IBM 5150 was a great example of 'disruptive innovation', to use the phrase coined by a Harvard Business School professor, Clayton Christensen. Disruptive innovation is, as it were, the royal jelly of capitalism. It is the force that enables the system to renew itself and, therefore, enables the system to survive and to grow. Without it, in the long run there would be monopolies, sinecures, complacency, decline and decay.
However, it is important to grasp that the disruption – the renewing force – does not lie in technology itself, but in the application of the technology. In this case, personal computers had been around for years before IBM took a deep breath and planned its own; the term had even been coined back in 1972, referring to a machine made by Xerox. Although the market for ‘mini computers’ – to distinguish them from mainframes, with which IBM was synonymous – was growing smartly, it was still small; and, because it was confined to nerds, there was no certainty that it would become massive.
Besides, IBM ventured into PCs partly as a defensive move. It still dominated in mainframes, but its share of the overall market for computers was shrinking. In addition – and crucially – it went into the PC market very quickly; so fast that it abandoned its usual business model of vertical integration and used outside suppliers to provide key components of the 5150. The microprocessor – essentially the computer’s ‘engine’ – was Intel’s 8088 chip because that could be supplied quickly and in big numbers. The operating system – the software that told the engine what to do – was provided by Microsoft, which hastily bought a package called 86-DOS because it could run on the 8088 chip and renamed it MS-DOS.
In the long run, IBM’s decision to use outside suppliers was hugely beneficial to society because it enabled the growth of the PC industry and all that has gone with it. For IBM, however, it was almost fatal. The 5150 was a huge commercial success – despite selling for over £3,000 in today’s money, more than 750,000 machines had been sold within 18 months of its launch. That meant marvellous profits for IBM because costings had been worked on the assumption of much lower sales volumes. Yet this very success led to the rapid improvement in the performance of PCs and – from there – the development of the so-called ‘client-server’ computer model. This arrangement, in which ‘client’ PCs dotted around an organisation were linked to ‘server’ machines working in the background, substantially undermined demand for IBM’s mainframe computers. The disrupter was disrupted.
Then again, IBM was an unconventional carrier of disruptive innovation. Typically, disruption to an industry is brought by outsiders who don’t have established technologies or markets to defend. This is not to say that entrenched players are necessarily hostile to innovation. Rather, their efforts are directed towards what Clayton Christensen terms “sustaining innovation”, which is needed to fend off current competitors.
Meanwhile, outsiders have a different set of values. They don’t have profits to defend or customers to keep happy. They can go off and tweak their own set of products and – if they are lucky enough or clever enough – establish a new set of customers who will be peeled away from existing markets.
Thus, 70 years before the advent of the IBM 5150, Henry Ford took customers away from the market for horses and carts when he gave the world the Model ‘T’. It was not that the motor car was new. Ford’s innovation was in the production process that made the Model ‘T’ affordable to a mass market.
Fast forward to the 1980s and the PC peeled customers from, among other products, the market for electric typewriters. It did this because the rapid pace of innovation that followed the 5150 included the development of software that offered people a better way to type than using either typewriters or the clunky electronic word processors – computers that could do nothing except type – that had been developed in the days before open-source systems became the norm.
