IBM’s First System Failure

Talk about outsourcing: The news that IBM is selling its personal-computer business to Lenovo, China’s biggest computer manufacturer, for $1.75 billion is a Christmas firecracker that is causing much wringing of hands as a signal that America is on the run. After all, IBM midwifed the personal-computer revolution in the first place nearly 25 years ago, translating Apple’s great idea into a cruder machine that the mass market could understand—and making many fortunes in the process. In fact, however, IBM’s exit from a business it pioneered is something of an anticlimax. The real story is how IBM cut the throat of its own baby at birth on August 12, 1981.

The PC, of course, is nothing without an operating system. When IBM was planning to launch its secret “Project Chess” in 1980, the dominant one was devised by the late Gary Kildall (1942–1994), the Mozart of code, who had enabled files to be read and written to and from an eight-inch floppy. His system freed programmers from matching software to a variety of hardware. On the basis of this, he founded Digital Research in Monterey, and the company took off: He was the father of today’s software industry.

Kildall’s code was much pirated, but Digital Research was the only place for IBM to go for its operating system. The legend is that when the IBM “chess” team called on DRI, Kildall snubbed them, taking off on his private plane and leaving his wife to negotiate. She refused to sign a confidentiality agreement, and the deal was off.

In reality however, it wasn’t Kildall who flaked. Rather, IBM balked at paying Kildall’s royalties, and instead went with a tiny, struggling, fly-by-night software company known as Microsoft, whose operating system, while less elegant (and based in part on Kildall’s pioneering work), was considerably cheaper.

The IBM managers of the day were so pleased to have outwitted Kildall that they signed a deal for Bill Gates’s QDOS to operate their secret PC, code-named Acorn. As a sweetener, they agreed to let Gates retain ownership of the operating system, which meant he was free to license QDOS to other hardware manufacturers eager to compete with IBM. He was also free to sell applications like word processing, accounting, and e-mail. Gates has said he believes his mother’s social contact with the IBM chief executive of the day may have helped smooth the deal.

Kildall was an idealist, so much so he refrained from suing either IBM or Microsoft over the misappropriation of his work, a case he would likely have won. Kildall also passionately believed that a dangerous monopoly would be created if the owner of the dominant operating system entered the applications business.

Gates had no such scruples. And with IBM’s imprimatur, little baby Microsoft took IBM’s place as the 900-pound gorilla. It came to control 90 percent of all personal computers—and dwarf Big Blue. And Lenovo’s computers still run Windows.

Harold Evans is the author of They Made America: Two Centuries of Innovators From the Steam Engine to the Search Engine, with David Lefer and Gail Buckland (Little, Brown).

IBM’s First System Failure