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IBM fighting the Plug-Compatible Manufacturers

IBM System 360/40b, from IBM archives

IBM System 360/40b

The Marketing Story of the IBM Series 360, 1967-1972

In the beginning of the 1960s IBM was universally recognized as the world's leading computer company. IBM had 2.591.000.000$ in sales 1962 and in 1964 a 74% market share. The market increased by 14% per year.

The marketing method was a system-selling concept where IBM sought to solve the customers' problems, not to sell specific computers. IBM preferred to let the customers lease rather than purchase. That was convenient to IBM as it made upgrading with new products easier. The standard terms were monthly rental and 30-days cancellation.

IBM 2311 disk Storage Drive, from IBM archives

The IBM 360 Series and the Plug-Compatible Products

In 1964 IBM introduced the 360 Series. This series offered a standard interface and a wide choice of standard peripheral devices. The standard interface made it easy to change the peripherals when the customer's needs changed.

The 360 Series was a huge success. By 1967 it covered 50% of IBM's US sales, and by 1969 70% of the sales. IBM dominated the market and had established a large user base.

IBM's success with the 360 Series and its standard interface opened a new market for plug-compatible products - a market that IBM had intended should be an internal IBM market. But other computer manufacturers soon offered their own makes. These competing tape drives were 25-50% cheaper and of equivalent performance:

2311 Disk Storage Drives and 2400 series Magnetic Tape Units, from IBM archives

In front 2311 Disk Storage Drives, rear 2400 series Magnetic Tape Units

IBM's Answer to the External Competition in 1970

By February 1970, an internal IBM report noted that competitors had little difficulty in matching the IBM tape drive technology. The report estimated that the non-IBM shares were:

The report forecasted that the competitors would have a 22% market share of the tape drive market and a 25-30% profit margin by 1973.

In the autumn of 1970 IBM answered with a series of IBM price cuts on disks and tape drives. However, the competing manufacturers cut their prices, too. In December 1970 IBM announced the repackaged disk unit with 30% discount.

IBM's Fixed Term Plan June 1971

In May 1971 IBM's Management Review Committee rejected a price-cut proposal. Instead, IBM offered an 8% discount for 1-year leases and 16% discount for 2-years leases. Another part of this offer was to cancel payment for 3-shift use. This was the end of IBM's standard terms with monthly rental, 30-days cancellation and the easy upgrading procedure.

In July 1971 IBM increased prices for other products and for maintenance. Most customers ended up in paying IBM the same amount as before - paying less for products where IBM met competition and paying more for other products and services.

In the short run the customers stopped buying computers. They wanted to wait and see what would happen. An IBM report in January 1972 estimated that the competitors had a 62% decrease in the sales of tape drives and 48% decrease in the sales of disk drives. In this way the Fixed Term Plan was successful to meet the short-term problem with the competitors' low prices.

In the long run the competitors continued to announce new products and improvements as automatic tape threatening and double-density disks. In this way the Fixed Term Plan was not a long-run solution to the competitors' apparent technological superiority.

An IBM 370/168 System, from IBM archives

An IBM 370/168 System

The 370 Series: IBM's Technical Advancement 1971

In 1971 IBM introduced the new 370 Series computers. They were fast and reliable and offered random-access memory. The performance was improved by 100%-300%. The competitors tried to penetrate the 370 Series market in several ways.

An IBM report in January 1972 showed that IBM was technically advanced in two products, equal in four products and behind the competitors in seven products. For example, IBM announced a new high-speed disk drive for the 370 Series in 1971. IBM expected the competitors to follow up 12-18 months later - but they announced their double-density disks in August 1971 already

Some competitors even offered disk drives for the 360 Series with a performance that IBM only offered with the 370 Series. Customers could now consider upgrading their 360 computers with non-IBM disk drives. That was a threat to the entire 370 program.

The 2401 Tape Stations, from IBM archives

The 2401 Tape Stations

Competition in IBM 370 Memory Systems

An internal IBM report February 1971 stated that "We will lose customers on the memory market because of customer acceptance, the memory interface is easy to handle, the competitors' products are highly reliable, minimum need for servicing, large installed market to penetrate, and it is highly profitable"

An internal IBM report October 1971 on Series 370 memory stated that the memory was inside the central processing unit and shared the power source of the central processing unit. If another vendor tried to attach a memory box, he would have to make changes in IBM's central processing unit logic. The cabinet layout was designed to reduce the space available for interface components. Conclusion: "The difficulty for competition to add on to our minimum memory was very large, and maybe even an impossible task".

IBM needed protection for its disk drives and memory systems. For this reason IBM's SMASH Program in July 1972 changed the whole technical set-up of the 370 computers. The disk drive controllers were moved to the central processing unit, and some control functions were changed. IBM hoped that it would be difficult for the competitors to bypass the new set-up. Some industry experts meant that the change would downgrade the performance of the central processing unit. Internally in IBM some feared that by placing the memory inside the CPU, IBM would invite the competitors to explore the main memory and the CPU itself and open new markets.

The competitors continued to announce new memory products during first half of 1972. They announced products that were competing with IBM's own announcements.

The Computer Market and IBM's Market Share

During 1962-1971, the market increased by 14% per year. IBM's total market share fell from an estimated 74% in 1964 to 70% in 1971. IBM's sales were 2,591 million $ in 1962 and 8,273 million $ in 1971:

Computer Sales by IBM and Others, in million dollars

Sources

The sources for this description stem from the court record from Telex v. IBM, filed January 21, 1972. It is described in Joseph R. d'Cruz, "PCM (A)" and "PCM (B)", Harvard Business School, and in Derek F. Abell: "Defining the Business", Prentice-Hall, N.J., 1980. All photos stem from IBM archives.

Appendix

System 360 model 25, from IBM archives

System 360 set-up, from Abell

System 360 set-up, here from Abell