Why IBM left the PC business in 2006

19 years ago this week, on December 8, 2006, IBM sold its PC business to Lenovo, ending a 25-year run. IBM did retain its server business, but ultimately sold that to Lenovo as well at a later date. In this blog post, we explore why IBM left the PC business.

Trouble in paradise for IBM’s PC business

The original IBM PC series had been a raging success, selling in large numbers and turning heavy profits from 1981 to 1987.

But three things happened in the mid-1980s that meant trouble in paradise for IBM.

The problem was the IBM PC was pretty easy to clone. All of the parts in it were standard off the shelf components except for the ROM BIOS. A few companies reverse engineered the ROM BIOS on their own, sometimes with varying degrees of legality. The Compaq BIOS was completely legal. The Eagle Computer BIOS was less so. But by 1984, legal and highly compatible PC ROM BIOSes were available for anyone to buy who wanted to build an IBM compatible computer.

The second problem happened in 1986. Intel released a new CPU called the 386. It was much more powerful than either of the chips IBM had used in previous PCs, but was fully compatible with them. IBM didn’t want to use the 386 because a 386-based PC would rival IBM’s cheapest mini computers in power and functionality, but it would cost less. Compaq called IBM’s bluff and built their own 386 based PC. And then they caught a lucky break and timed the release perfectly. The same week IBM released an underpowered 286-based PC that broke no new ground whatsoever, Compaq released its 386.

Enter the IBM PS/2

In 1987, IBM fought back, releasing its PS/2 series. This is generally seen as a turning point for IBM, but it is important to remember IBM remained in the PC business 19 1/2 more years after the release of the PS/2. The PS/2 didn’t flop. The problem with the PS/2 was that its sales figures didn’t keep up with the rest of the industry.

The problem for IBM was that PCs became a race to the bottom. A British television program called Troubleshooters illustrated this point. Apricot, a British PC maker, was in trouble in the early 1990s. Sir John Harvey-Jones visited Apricot on the TV show. One of the things an industry expert told him was that the PC business was tough. Customers would always find one program that ran fine on, say, an IBM PS/2 Model 50, but didn’t quite run right on a clone like an Apricot computer. The only way around the problem was to charge significantly less than IBM.

To decrease costs, PC manufacturers moved more and more production overseas, first to South Korea and Taiwan, and later, to China.

IBM PCs in the Windows era

IBM could continue to command a premium price as long as they maintained the standard of compatibility. But as Microsoft Windows gained popularity, Windows was able to abstract away the subtle differences in hardware. By the mid-1990s, there was much less reason to buy IBM over something else. All IBM could do was cut prices. And as prices got lower, profits became elusive. IBM’s problems culminated in 1992, when it lost $5 billion. The popular Thinkpad line of laptops was the rare bright spot in 1992 and continued to be for the rest of IBM’s time in the PC business. While the Thinkpad could sell at a premium price, IBM couldn’t replicate that magic with any of its desktop PCs.

For about a decade, IBM was willing to live with losing money on PCs because it funneled business into other activities. Starting in 1993, IBM transformed itself into more of a services business. But it was easier for IBM to sell services if it was also selling PCs to the same companies. Or at least IBM thought it was. So they tolerated losing money on PCs, or turning very slim profits on them.

By 2006, IBM was tired of it. So IBM sold the business to Lenovo, a Chinese company who thought they could take the IBM designs, manufacture them in China, and turn a profit. I wrote a blog post about it a few days before it happened, capturing my thoughts at the time. In addition to selling the business, IBM considered a joint venture. I figured they’d do a joint venture, but I guessed wrong. IBM sold the business to Lenovo, and licensed its name to Lenovo as well. Lenovo used it, but only briefly.

Lenovo seems to have gotten the economics right. It’s been 19 years, and Lenovo is still selling PCs, and although the IBM influence has faded a bit over nearly two decades, Lenovo does generally make a good quality PC at a competitive price.

Dave Farquhar

David Farquhar is a computer security professional, entrepreneur, and author. He has written professionally about computers since 1991, so he was writing about retro computers when they were still new. He has been working in IT professionally since 1994 and has specialized in vulnerability management since 2013. He holds Security+ and CISSP certifications. Today he blogs five times a week, mostly about retro computers and retro gaming covering the time period from 1975 to 2000.