After WWI the demand for automobiles soared. This came in concert with an enormous growth in industrialization in general and with the advent of the assembly line in particular. Metal car bodies were the new standard. Until this point, Fisher had conducted itself in an acceptable way in its dealings with GM, but the unexpected increased automobile demand from 1924 to 1925 changed transaction costs. As GM relied more heavily on Fisher, they opportunistically kept prices consistent rather than passing on lower part prices. The contract relationship became too costly, leading to an acquisition in 1926 that eliminated the incentive for marginalization.
Although IBM was one of the larger first entrants into the PC industry with a recognizable brand, new companies like Apple were trying to democratize the PC. When Steve Jobs introduced the Apple II, he showed consumers that they neither had to be a corporation nor a tech prodigy to own a computer, thereby decisively expanding the market. On the other hand, IBM was known for its high quality accompanied by some very high prices. Although it originally boasted an 80% market share of the PC industry, it shrank to 20% ten years later (IEEE Spectrum, 2021, Cortada)'
There were several factors to blame for the falloff. In the PC market, IBM's massive size did not help it, prohibiting it from responding quickly to advantageous market conditions. For instance, around the turn of this century, smaller competitors started outsourcing the assembly and labor of PCs to China to cut costs. Because of their much smaller size, they enjoyed the advantages of specialization. Specifically, 1 because they produced just one product, PCs, they were much more agile to respond to favorable conditions. They had economies of scope and scale in which providing more of a single item substantially lowers its price. To illustrate further, Apple was completely vertically integrated, producing its own in-house design, software, and operating system, outsourcing only the labor for assembly. IBM was simply not nimble enough to compete.
For years, IBM contracted with Lenovo to manufacture PCs to extract any remaining profit. But their PC division continued to decline, burning money. Similar to the turn of the twentieth century, when increased market demand spurred GM to acquire Fisher and thus mitigate price disputes, the boom in PC popularity around 2005 highlighted IBM’s profit losses and forced them to pivot. Lenovo only paid $1.75 billion (Sale of I.B.M. PC Unit Is a Bridge Between Cultures, Lohr) for the division in which they gained branding rights and IBM management expertise to bolster their brand recognition and marketing. But in addition to ridding itself of a failing sector, I would argue that the much more valuable aspect of that vertical disintegration for IBM was increased entrée and relationships with China, gained from Lenovo, and the slow five-year period of gradual separation between the two entities.
IBM’s foresightedness for the importance of a presence in China can be seen way back in 2005, the year that IBM sold its PC Division to Lenovo. In fact, that was the first major merger between an American and a Chinese company. This vision goes back to IBM’s CEO at the time, Samuel Palmisano – who helmed this legendary deal. This was also the same deal in which he converted IBM from a company selling hardware to 2 a company selling software. Indeed, that vision has proven consistent. Ginni Rometty, CEO of IBM, said in 2015 that “IBM will work with Chinese companies as they build everything from servers to chips, all utilizing IBM architecture.” -(The Brilliance Behind IBM’s China Strategy, The Motley Fool) So today, IBM’s prescience pays off.
Despite IBM’s long innovation history, it failed to compete with other tech companies for a position in the cloud marketplace. Harkening back to its visionary reputation, IBM recognized an enormous opportunity. They predicted that hybrid cloud computing would become successively more prevalent, and they made a bold decision. Then they decided to pivot and convert Red Hat, its partner of twenty years that had merely sold them Linux software services, into something entirely different. They acquired them, enhancing both companies, the combined resources of which would be unprecedented. There was already a burgeoning potential marketplace as reported in the article: 80% of businesses had yet to take advantage and maximize the benefits of the cloud ( “IBM to Acquire Red Hat, Completely Changing the Cloud Landscape and Becoming World’s #1 Hybrid Cloud Provider”). And indeed, due to its acquisition of Red Hat, IBM has become the world’s largest hybrid cloud provider.
GM acquired Fisher and vertically integrated it to minimize contract costs and marginalization from not producing metal bodies in-house. When IBM sold its PC division to Lenovo, it vertically disintegrated away from an unprofitable, oversaturated market and entered the untapped Chinese market. However, IBM acquired Red Hat not to bypass transaction costs or hold-ups. Before the acquisition of Red Hat, its function was simply to sell Linux software services to the giant. But in acquiring them, IBM’s new focus was to shift its corporate identity and become a leader in hybrid cloud computing, correctly anticipating it would become the future of corporate data.
The PC market has expanded significantly over time, as costs have come down allowing more people access, broadband has become more ubiquitous, and the capabilities of the Internet have grown immensely over the years, thereby making it more attractive and increasing its demand. Still, there has also been a shift towards mobile devices, which increasingly have the same capabilities as PCs but are infinitely more accessible and affordable.
Regarding the change in the IT landscape over time, a mere 7% of the world was online in 2000, while today half of the global population has Internet access (World Economic Forum, 2020). As more and more people gain access, the Internet becomes increasingly complex and diversified, intertwining with our daily lives in countless significant ways. For example, with the advent of social media our lives have been affected intensely, up to and including its influence on political views.
The public cloud model that Amazon Web Services utilizes is completely owned, operated, and maintained by Amazon with little to no assurance that sensitive information is secure. Meanwhile, “This acquisition brings together the best-in-class hybrid cloud providers and will enable companies to securely move all business applications to the cloud.” (IBM To Acquire Red Hat, Completely Changing the Cloud Landscape and Becoming World’s #1 Hybrid Cloud Provider). The combined resources of both these firms have created a new dimension of technology, which is quickly becoming the industry standard.
As an addendum, I’d like to mention that I’ve observed an enormous auxiliary benefit of the Red Hat acquisition. In staying true to its DNA of vision made tangible through bold moves, I believe that IBM never really lost its passion for entering the AI market, and numerous points in the readings have referenced this. In fact, its resurrected version, Watsonx, has been facilitated largely through what Red Hat has brought into the fold.
Citations:
IBM Became the Biggest Software Supplier in China. http://www.china.org.cn/english/16191.htm#:~:text=A%20report%20by%20research%20 house,with%20Microsoft’s%20US%24130%20million. Accessed 7 Feb. 2024.
01, April, and The Motley Fool Founded in 1993 in Alexandria. “The Brilliance behind IBM’s China Strategy.”
Nasdaq, www.nasdaq.com/articles/brilliance-behind-ibms-china-strategy-2015-04-01. Accessed 7 Feb. 2024.
“Here’s How Technology Has Changed the World since 2000.” World Economic Forum, www.weforum.org/agenda/2020/11/heres-how-technology-has-changed-and-chan ged-us-over-the-past-20-years/. Accessed 7 Feb. 2024.
How the IBM PC Won, Then Lost, the Personal Computer Market - IEEE Spectrum. https://spectrum.ieee.org/how-the-ibm-pc-won-then-lost-the-personal-computer-market. Accessed 7 Feb. 2024.