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I worked at IBM, '91 - '93, in the PC Business, in the sales channel. We had a couple of problems that IBM's competitors didn't have. For one thing, we couldn'

I worked at IBM, '91 - '93, in the PC Business, in the sales channel. We had a couple of problems that IBM's competitors didn't have. For one thing, we couldn't make too powerful a PC that might cannibalize the minicomputer sales (AS/400). IBM made much more money on an AS/400 than a PS/2 model 95. Our cost structure was too high. How high? We lost $1 for every $100 we sold. Part of the reason the cost structure was high were the number of IBM'ers: I worked in an office of about 15 people supporting the NY/Long Island region. Four years later, it was down to 1 person. Another reason was our physical costs were high. For example, we couldn't buy RAM from Intel; we had to buy RAM from IBM (which was fabbed in Kingston, NY, not to be confused with the Kingston RAM mfr). Also, we were struggling to get the correct mix of sales channels. For example, we couldn't sell PCs directly through the IBM sales force (too expensive, IIRC it added 36% to the sales cost). Instead, the IBM sales force would partner with dealerships (which added 21% to the sales cost). The web didn't exist yet, not really, so we couldn't sell through there. We could have done direct-response (an 800 number, like Dell & Gateway were doing), but that took a while to spin up. And it was similar in cost to selling through dealerships. Also we didn't sell through distributors, which was the least-expensive channel (16% IIRC). I remember looking at the price list. We had two levels of dealers: those who bought large volumes, which typically purchased equipment at 30% off list, and those who worked in smaller quantities, which would get ~20% off list. As the PC Market became more competitive, we couldn't afford high list prices (we were too expensive), so one of the ways we brought down our list prices was to shrink the discount we gave to the dealers. The dealer was not allowed to sell online or via computer magazines: there had to be in-person contact. That helped prevent the Atlanta dealers from poaching the NYC dealers' business. It's easy to armchair-quarterback the decisions IBM made, but a lot of those decisions were nuanced. For example, you could say, "Why didn't IBM have an 800 number to buy PCs?". And the answer is that a lot of our biggest customers were corporations, not individual consumers, and they felt more comfortable purchasing through a dealer they trusted.

jandrese 5y ago
This is a classic case of a business losing a market because they didn't want to let go of a dying but profitable business. The market always wins in the long run. Don't feel sad. This market dynamic is how startups can get ahead. Otherwise everything would be dominated by the huge incumbents forever.
- mixmastamyk 5y ago
  The innovator’s dilemma.
- oblio 5y ago
  > Otherwise everything would be dominated by the huge incumbents forever. One thing to remember is that mainframes are still dominated by IBM, 60 years later. And mainframes are still a somewhat stable market worth billions of dollars. IT works primarily by accretion, new markets are created, and in those markets IT also seems to work by natural monopolies due to network effects, so once the market stabilizes the huge incumbents are there forever. IBM still dominates mainframes, minicomputers are gone so no one dominates those anymore, workstations are also gone so no domination there either, but PCs are dominated by Microsoft and have been for 40 years, smartphones are split between Android and iOS and both will probably be around as long as we use smartphones.
  - Phrodo_00 5y ago
    > PCs are dominated by Microsoft ?? PC (Desktop) OS are certainly dominated by Microsoft, but I don't see any one player dominating the PC Market. There's definitely companies that dominate different PC components (OS, CPU, audio, network, etc) Anyway, I know that the mainframe market is pretty healthy, but who are the clients?
    - oblio 5y ago
      PCs are commodities. The PC market has always been dominated by software vendors [1]. PC vendors are by and large disposable. Oh, and speaking of the rest of the PC market, another natural monopoly on the other side: servers are dominated by Linux. [1] And historically by Intel, ergo Wintel.
    - mschuster91 5y ago
      > Anyway, I know that the mainframe market is pretty healthy, but who are the clients? Banks, insurance companies and airlines. The amount of only-documented-in-code corner cases and custom business logic is immense (for the really old, up to 60 years!) which means rewrites are immensely difficult and expensive (and prone to failure), the amount of government regulation and the fines for when things go south (aka people lose money) is equally massive, and the companies are ruled by beancounters by definition which means they will, as long as IBM has mainframes and support for them, go with keeping their mainframe stuff to "never touch a running system". That is part of why fintech start-ups are eating the old banks and insurance companies alive... they can design proper systems from scratch without having to take care of decades of accumulated cruft that needs to be migrated and especially they don't have to retain horribly outdated and complex business logic, workflows and processes that would take old-school companies billions of dollars to re-train their staff - almost 2 million people in 2019, per https://www.statista.com/statistics/250220/ranking-of-united-states-banks-by-number-of-employees-in-2012/ https://www.statista.com/statistics/250220/ranking-of-united....
irjustin 5y ago
> we couldn't make too powerful a PC that might cannibalize the minicomputer sales (AS/400). Agreed, knowing when to cannibalize your own market is one of the key inflection points. Apple has done a fantastic job (up until now) of introducing something that basically makes a "current at the time" product obsolete. Classic version was the iPhone when iPod was a household name. A more conservative company would figure out how to keep the iPod market extremely healthy, but in the end losing out on the whole pie. A lot of smaller/other instances as well. > IBM made much more money on an AS/400 than a PS/2 model 95. I wonder if someone high up in IBM made the same mistake for personal computing that Ballmer did with the iPhone - "There's no chance that the iPhone is going to get any significant market share. No chance..." To be explicit, making the bet to cannibalize your own market is one of the toughest any company can make. High risk, high reward. It's so easy to point at the winners and forget the landscape that laid waste to the ones that lost. But, being able to do it consistently is what makes a company multi-generational.
- seltzered_ 5y ago
  >> we couldn't make too powerful a PC that might cannibalize the minicomputer sales (AS/400). > Apple has done a fantastic job (up until now) of introducing something that basically makes a "current at the time" product obsolete. An interesting analogue at this time will be the iPad and the Macbook lineup now that they both use the same processor. It'll be interesting if they make one or the other obsolete or keep both going. (Yes, I realize there's all sorts of design tradeoffs between direct & indirect manipulation environments) Personally I couldn't wait nor justify owning two devices - migrating to a Windows/Linux tablet after waiting so many years and invested into the mac platform for a decade.
  - jolux 5y ago
    The big problem is that they want people to be able to use iPads for 95% of what they use Macs for, but as developers we reside solidly in that 5% of critical functionality. It’s very hard to be productive as a developer on a system as locked down as an iPad. I want Emacs, Git, bash, and the Erlang runtime. That’s all I would need to be happy, but I think we’re a long way off from that on the iPad, if it ever happens at all. I’m not sure they can do it while maintaining their security model either, and they’re not going to give up their security model for anything less than antitrust action.
deleted 5y ago
[deleted]
AnimalMuppet 5y ago
> For one thing, we couldn't make too powerful a PC that might cannibalize the minicomputer sales (AS/400). IBM made much more money on an AS/400 than a PS/2 model 95. Sure, but it wouldn't be one-for-one. A lot more people can justify buying a PS/2 than can justify an AS/400. Did you make more on an AS/400 than on 100 PS/2s? 1000?
- tonyedgecombe 5y ago
  I suspect it's almost impossible for a business run on high margins to compete in a low margin sector. I can't remember an example.
  - qwytw 5y ago
    Apple is very successful in the laptop and smartphone markets (both are more or less commoditized and very low margin). Of course due to the openness of the platform IBM couldn't really differentiate their PCs enough to justify higher margins.
    - tonyedgecombe 5y ago
      True, although Apple does ignore sectors where they can't maintain their margins. They no longer make printers for instance and despite an obvious interest they have never sold a TV. I think what I'm saying is if you have a model where you make 30% to 50% margins then going after business that can only attain 3% to 5% margins is never going to work.
    - AnimalMuppet 5y ago
      I think that Apple smartphones and laptops have higher margins than most phones and laptops. Apple has done very well at making a brand, not just generic commodities.

jandrese 5y ago

This is a classic case of a business losing a market because they didn't want to let go of a dying but profitable business. The market always wins in the long run. Don't feel sad. This market dynamic is how startups can get ahead. Otherwise everything would be dominated by the huge incumbents forever.

mixmastamyk 5y ago
The innovator’s dilemma.
oblio 5y ago
> Otherwise everything would be dominated by the huge incumbents forever. One thing to remember is that mainframes are still dominated by IBM, 60 years later. And mainframes are still a somewhat stable market worth billions of dollars. IT works primarily by accretion, new markets are created, and in those markets IT also seems to work by natural monopolies due to network effects, so once the market stabilizes the huge incumbents are there forever. IBM still dominates mainframes, minicomputers are gone so no one dominates those anymore, workstations are also gone so no domination there either, but PCs are dominated by Microsoft and have been for 40 years, smartphones are split between Android and iOS and both will probably be around as long as we use smartphones.
- Phrodo_00 5y ago
  > PCs are dominated by Microsoft ?? PC (Desktop) OS are certainly dominated by Microsoft, but I don't see any one player dominating the PC Market. There's definitely companies that dominate different PC components (OS, CPU, audio, network, etc) Anyway, I know that the mainframe market is pretty healthy, but who are the clients?
  - oblio 5y ago
    PCs are commodities. The PC market has always been dominated by software vendors [1]. PC vendors are by and large disposable. Oh, and speaking of the rest of the PC market, another natural monopoly on the other side: servers are dominated by Linux. [1] And historically by Intel, ergo Wintel.
  - mschuster91 5y ago
    > Anyway, I know that the mainframe market is pretty healthy, but who are the clients? Banks, insurance companies and airlines. The amount of only-documented-in-code corner cases and custom business logic is immense (for the really old, up to 60 years!) which means rewrites are immensely difficult and expensive (and prone to failure), the amount of government regulation and the fines for when things go south (aka people lose money) is equally massive, and the companies are ruled by beancounters by definition which means they will, as long as IBM has mainframes and support for them, go with keeping their mainframe stuff to "never touch a running system". That is part of why fintech start-ups are eating the old banks and insurance companies alive... they can design proper systems from scratch without having to take care of decades of accumulated cruft that needs to be migrated and especially they don't have to retain horribly outdated and complex business logic, workflows and processes that would take old-school companies billions of dollars to re-train their staff - almost 2 million people in 2019, per https://www.statista.com/statistics/250220/ranking-of-united-states-banks-by-number-of-employees-in-2012/ https://www.statista.com/statistics/250220/ranking-of-united....

irjustin 5y ago

> we couldn't make too powerful a PC that might cannibalize the minicomputer sales (AS/400). Agreed, knowing when to cannibalize your own market is one of the key inflection points. Apple has done a fantastic job (up until now) of introducing something that basically makes a "current at the time" product obsolete. Classic version was the iPhone when iPod was a household name. A more conservative company would figure out how to keep the iPod market extremely healthy, but in the end losing out on the whole pie. A lot of smaller/other instances as well. > IBM made much more money on an AS/400 than a PS/2 model 95. I wonder if someone high up in IBM made the same mistake for personal computing that Ballmer did with the iPhone - "There's no chance that the iPhone is going to get any significant market share. No chance..." To be explicit, making the bet to cannibalize your own market is one of the toughest any company can make. High risk, high reward. It's so easy to point at the winners and forget the landscape that laid waste to the ones that lost. But, being able to do it consistently is what makes a company multi-generational.

seltzered_ 5y ago
>> we couldn't make too powerful a PC that might cannibalize the minicomputer sales (AS/400). > Apple has done a fantastic job (up until now) of introducing something that basically makes a "current at the time" product obsolete. An interesting analogue at this time will be the iPad and the Macbook lineup now that they both use the same processor. It'll be interesting if they make one or the other obsolete or keep both going. (Yes, I realize there's all sorts of design tradeoffs between direct & indirect manipulation environments) Personally I couldn't wait nor justify owning two devices - migrating to a Windows/Linux tablet after waiting so many years and invested into the mac platform for a decade.
- jolux 5y ago
  The big problem is that they want people to be able to use iPads for 95% of what they use Macs for, but as developers we reside solidly in that 5% of critical functionality. It’s very hard to be productive as a developer on a system as locked down as an iPad. I want Emacs, Git, bash, and the Erlang runtime. That’s all I would need to be happy, but I think we’re a long way off from that on the iPad, if it ever happens at all. I’m not sure they can do it while maintaining their security model either, and they’re not going to give up their security model for anything less than antitrust action.

deleted 5y ago

[deleted]

AnimalMuppet 5y ago

> For one thing, we couldn't make too powerful a PC that might cannibalize the minicomputer sales (AS/400). IBM made much more money on an AS/400 than a PS/2 model 95. Sure, but it wouldn't be one-for-one. A lot more people can justify buying a PS/2 than can justify an AS/400. Did you make more on an AS/400 than on 100 PS/2s? 1000?

tonyedgecombe 5y ago
I suspect it's almost impossible for a business run on high margins to compete in a low margin sector. I can't remember an example.
- qwytw 5y ago
  Apple is very successful in the laptop and smartphone markets (both are more or less commoditized and very low margin). Of course due to the openness of the platform IBM couldn't really differentiate their PCs enough to justify higher margins.
  - tonyedgecombe 5y ago
    True, although Apple does ignore sectors where they can't maintain their margins. They no longer make printers for instance and despite an obvious interest they have never sold a TV. I think what I'm saying is if you have a model where you make 30% to 50% margins then going after business that can only attain 3% to 5% margins is never going to work.
  - AnimalMuppet 5y ago
    I think that Apple smartphones and laptops have higher margins than most phones and laptops. Apple has done very well at making a brand, not just generic commodities.