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November 1999

"Doh! IBM's Sibling Rivalry Does It Again"

By: Tom Nadeau os2headquarters@mindspring.com

If people ever wondered how a company with IBM's collection of money, experience, and intellect could miss out on great opportunities, the recent reshuffling of the PC division (Personal Systems Group) is a perfect example.

For years, IBM was the leader in desktop PCs -- if not always in terms of market share, certainly so in terms of standards, innovations, and name recognition. The term "IBM-compatible" has become synonymous with desktop PCs based on Intel, AMD, or Cyrix CPUs. IBM made numerous marketing errors on the PC side, of course. Remember the excellent MCA (Micro Channel Architecture), an expansion bus design that even today is a match for Intel's PCI bus? IBM tried to collect royalties on every system board from every PC vendor, even for motherboards previously sold before MCA was invented! (This reminds us of Microsoft's "per-CPU licensing", doesn't it?) But the overall presence of IBM PCs continued to be a standard fixture in stores and in the workplace.

However, PC hardware has now reached a new equilibrium at lower price points than ever before. IBM's PC division lost over one billion dollars last year, as many people began shopping based on price instead of brand history. Newer brands such as Dell and e-Machines began to sell in large quantities, and older companies like Packard Bell and Compaq fell into disrepute (except for Compaq's server offerings). The IBM PC Company realized that their infrastructure was not geared toward a price-oriented battle; neither was it suited for direct sales such as the Dell approach. IBM PCs needed something else....

The IBM PS Group now calls this "product differentiation". They are claiming that they just cannot find a way to make IBM desktop PCs somehow "different" from what other people are selling. And yet the irony of ironies is that what makes a PC truly different is not in the hardware at all; it's in the software. Two identical pieces of PC hardware can have totally different characteristics and functions based solely on what software is preloaded or bundled. That means that the solution to IBM PS Group's product differentiation woes are right across the boardroom table.... the solution known as OS/2 Warp 4.0.

Yes, if IBM truly wants a cheap, in-house way to differentiate its PCs from the cheap clones and boring Wintel machines that fill the store shelves, all they need to do is offer a line of reliable, powerful IBM PCs with OS/2 Warp 4.0 preinstalled, bundled with Lotus Smartsuite for OS/2, and combined with a dozen other smaller native OS/2 applications. This package would not necessarily need to be found on *every* IBM PC, just on certain lines. By offering a PC geared toward high-end, intelligent users, IBM could keep margins higher and avoid paying royalties to the Microsoft machine. By the way, HALF of IBM PS Group's billion-dollar losses was money paid to Microsoft in royalty fees for Windows.

Yet IBM's internal rivalries between its sibling divisions prevent this obvious solution from being implemented. Without having to pay money to Microsoft for *every* IBM PC, IBM could cut its losses on PCs by hundreds of millions of dollars per year. But the OS/2 group and the PC group don't communicate very well. The OS/2 group sure does not want to send "free" copies of OS/2 to the IBM PC group; the PC people don't want to pay heavy royalties to the OS/2 group (which would remove the inherent cost savings of removing the Microsoft royalties).

Therefore, we have a perfect example of product synergy that cannot be implemented. The OS/2 group would be able to spark increased sales of OS/2 and OS/2-native applications; the PC group would be able to have the "product differentiation" that they claim they desperately need. But the fault line running between these two divisions is almost as bad -- or maybe worse -- than the chasm that separates IBM and Microsoft. Like two all-star players who can't seem to cooperate for the good of the team, IBM's OS/2 and PC groups are making Microsoft rich while impoverishing themselves as well as the high-end PC consumer.

Tom Nadeau is the author of: Are You Ready for SEVEN LEAN YEARS?
OS/2 Headquarters -- http://www.os2hq.com/

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