The fall of IBM

This article covers all things stock investing. We explore how IBM, once a jewel of American technology and innovation, fell from prominence to what is now considered a relatively stagnant and bloated IBM conglomerate.

International Business Machines was founded in New York more than 100 years ago, has five Nobel laureates, decades of successful innovation, including award winning, and some of the most impressive patents of any company. We are proud of our history. But by the late 20th century and early 21st century, many would say the company has lost its edge and is falling behind the likes of Google, Microsoft and Apple in the same industry it once dominated.

We'll take a look at how IBM rose to dominate in the 1900s and how it all came crumbling down.

IBM got its start as a combination of four different companies from the late 1800s that built things like computing scales dial recorders the electric tabulating machine and automated timing machines to keep track of employee shifts. In 1911 Charles flint combined all four companies into what was called the computing tabulating recording company or ctr and base it in Endicott New York. At the time the company still had plants and offices in its original constituent company locations including an Endicott in Birmingham, New York, Dayton, Ohio, Detroit, Washington dc and Toronto.

This company formed the roots of what would eventually turn into IBM. While under the corporate name of the computing tabulating recording company, the business mainly focused on building selling, and leasing scales and industrial time recording machines. But only three years later ctr and Charles flint made the defining move of hiring Thomas J Watson. This is the same Thomas Watson whom IBM's Watson Ai system is named after Watson had recently been fired by another industrial giant. At the time national cash register or NCR.

NCR was an industrial giant that manufactured you guessed it cash registers. Their products can still be found today, especially as self-checkout counters at grocery stores and pharmacies. In the early 1900s, Thomas Watson single-handedly built up NCR's dominant position in Rochester New York through his exceptional salesman skills. However he sometimes engaged in physical sabotage of competitors. To do so and in 1912 NCR was found guilty of violating antitrust laws. As a result Thomas Watson along with other NCR executives was convicted and sentenced to prison time. His prison time was eventually overturned on appeal and after that, he was hired as president of CTR. Hiring Watson proved to be a defining moment from the first day and Ctr's revenues skyrocketed after a decade. At CTR Watson renamed the company to IBM.

Throughout Watson's tenure as the head of IBM, the company's product offerings also expanded. They largely focused on tabulating equipment for companies. to keep track of all sorts of records from employee time cards to sales records to census data. Their machines were central to the newly formed social security program. During the great depression to keep track of the employment records of tens of millions of people that contract alone caused IBM's revenues to nearly double in the second half of the 1930s. During world War 2 IBM built its first modern-style computer called the automatic sequence-controlled calculator. It was useful for things like performing scientific calculations and was used in the Manhattan project to calculate the best way to detonate a nuclear bomb. In the 50's IBM came out with a multitude of modern-day technologies including the first hard drive. It was used in their highly successful 305 Ramak computer which was used extensively by the US Army and Navy as well as businesses. They continued their computing dominance with the 7000 series mainframe which was the first mainframe computer system for businesses that use transistors instead of vacuum tubes. This is the same type of basic electrical component used in computers today. Transistors offer the benefits of reduced power consumption faster computing times and much smaller size than previously used vacuum tubes. With their newly developed commercial computers, IBM's dominance and technology were solidified. Their systems were used by NASA to track orbital flights and guide astronauts. IBM engineers programmed the first ai systems on ibm machines in the late 50s and they developed the scientific programming language FORTRAN which is still used today. However, their success in this golden age also proved to be the seeds of their eventual weakness the 7000 series. IBM computer system was the most advanced computer system of the time but it suffered from major problems they were initially sold purely as computer hardware without any standard operating system or software to be shipped. With it this was the early days of computers and seemed like a reasonable setup. At the time ibm provided the actual computer with advanced hardware and electronics and consumers would be free to operate whatever software they want on their machines but with different hardware architectures. Among the 7000 series multiple completely separate sets of programs had to be developed. This was a huge undertaking. IBM tried to remedy the issue of software compatibility in its computers with the system 360 which came out in the 1960s. The system 360 had to deal with the problems left over from the 7000 series especially the issue that programs for the 7000 series machines had to be specifically made for the individual architecture of the hardware. The 360 introduced backward compatibility by being able to emulate the previous generation systems so the users would not have to reprogram all of their software from scratch. Just to use the new system the system 360 ended up being hugely popular with customers. They had a near monopoly on both the computer systems that businesses used and the software that ran on them. their dominance was perhaps too much for their good and in 1969 they were accused of violating antitrust laws. Although the case was eventually found to be without merit, that was only the case because IBM unbundled the software and services part of their business. This directly caused a competitive market for software in the 1980s.

Microsoft at the time a young company entered the operating market and came out with its operating system which it called Xenix. Soon after it developed Ms-dos which would come to bring Microsoft to the forefront of operating system software. The dominance of Ms-dos forced IBM to contact Microsoft in the early 1980s to provide the operating systems that IBM's own pcs would ship with by allowing other companies to create hardware compatible with Microsoft's operating systems. Microsoft easily became the leading operating system developer. Meanwhile, IBM lost control of the operating systems of its computers. To make matters worse with the rise of personal computers powerful enough for many basic business tasks IBM's core business of mainframe computers was rapidly dwindling. Throughout the 1980s IBM's revenues and earnings stagnated as Microsoft and Apple rose in 1993. IBM's lead had completely disappeared and they posted the biggest annual loss in American corporate history of 8 billion. The losses stemmed mainly from expenses that covered massive layoffs shutting down plants and restructuring costs associated with trying to streamline the bloated company.

IBM then brought in a fresh CEO Louis Grissner. At first glance Gerstner seemed a strange pick to lead IBM. He had no technological experience and had just finished serving as CEO of Nabisco, a packaged food company. However other candidates from the technology industry including Bill Gates and other leaders at competing firms were uninterested in joining the dying firm. Even if Gerstner did not know much about computers and microprocessors he had plenty of experience making profits and cash flows at Nabisco. When he came into the role of CEO at IBM he denied that IBM's biggest issue was the lack of the company's vision following the death of the mainframe as a viable market. Instead, he said that the last thing IBM needs is a vision and turned his attention to business execution. One of the most significant decisions that Gerstner made was the decision to keep IBM together rather than proceed with the plans of the previous CEO to split IBM into disparate business units for things like processors printers software, etc.

he realized that the one advantage that IBM still had was the fact that it owned the full stack of technologies used by many major companies from software to servers. from his experience at other companies, he knew that a major issue that companies faced was that their information technology suites were not integrated and compatibility issues plagued business operations. he decided to shift the company's focus towards providing services to clients rather than just producing hardware something that less diversified competitors could not offer. he also sold off many of the dying parts of the business including the pc business that it once dominated he laid off many employees and instilled discipline in management. in essence, he made the company much more streamlined and efficient cutting out underperforming units like processors instead of continuing the billions of dollars of investment in technology that his predecessors engaged in. By the time he left ibm in the early 2000s IBM's corporate profits had stabilized and the stock price had grown by more than 100 billion dollars. however, it all came at a very high price ibm had fallen behind the likes of Microsoft and pc software and Apple and Dell in hardware which constituted the entirety of what made ibm dominant throughout the previous 40 years. they also missed out on entirely new technological developments like internet search and social media which lets the formation of completely new competing business empires like Google and Facebook. instead, ibm pivoted towards focusing on service-based businesses in 2002 they acquired the consulting arm of pwc also in the 2000s they started focusing on developing supercomputing and artificial intelligence capabilities.

Their vision was to be able to offer supercomputing and server services to companies rather than sell products. These efforts eventually led to the development of IBM Watson named after the early CEO Thomas Watson. In 2011 Watson beat Jeopardy champions ken Jennings and Brad Rutter. Although winning in Jeopardy seems impressive it's not immediately clear how it would translate to business prospects for IBM besides the one million dollar prize for winning the game show IBM hoped that they would be able to build Watson into an intelligent question and answer bot.

They had some initial success, but a solution they developed with Watson specifically for Sloan-Kettering Cancer Center in New York allowed Watson to answer basic questions from nurses. You may also have seen his Watson commercials for businesses. "I've come to fix the elevator - there's nothing wrong with the elevator - who sent you, exactly?" I know it will fail within days. still have to pass. Attempts have been made to promote the use of Watson in business intelligence and proactive facility management solutions, but its practical use has been limited to far from business enhancement, but Watson has become a chef. There is something called Chef Watson. Website merged. Other uses include teaching basic children's textbooks, chatbots, advertising insights, and more. Billions of dollars have been invested in Watson's development over the years, but artificial intelligence technology is not yet advanced enough to replace certain human tasks. As the business results show, IBM has not yet been able to leverage Watson to its full potential. While IBM's AI efforts like Watson have not lived up to management's expectations and wishes, IBM's other research area of ​​quantum computing has yet to pay off. The company's IBM q System 1 is the first circuit-based quantum computer launched in 2019. This is a great milestone in the development of quantum computing, but it has not yet been put to practical use. Perhaps even more concerning is the fact that one of its competitors, former CEO Louis Gerstner, has allowed this to happen. Google appears to be overtaking IBM in the quantum computing arena. Google's quantum computer, called Sycamore, achieved so-called quantum supremacy at the end of 2019. This means that Google's quantum computer can complete tasks that ordinary supercomputers cannot do in a reasonable amount of time. Specifically, they claim that Sycamore can complete in 200 seconds a task that would take the world's fastest supercomputer 10,000 years to complete. IBM disputed this claim, arguing that its supercomputer could complete the same task in about 2.5 days instead of 10,000 years. But this counter-argument has been described by experts as if the masters ultimately lose at Go. Many efforts can be made during the transition years of new technologies, but we all know that sooner or later the primacy of quantum computing will be undeniable. Over the past two decades, IBM has survived but failed to regain its former glory as the undisputed leader in technology and innovation. High-margin companies were able to survive longer because they were primarily focused on services, especially consulting. With revenues steadily declining since the early 2010s, IBM is still looking for viable business directions. In 2020, the company welcomed the former CEO of Red Hat as its new CEO.