Today is the first class in the new September study period. We will start class with a casual conversation. Our material today is about the history of IBM. Please listen and follow the transcript.
: [POST-BROADCAST CORRECTION: In a previous version of this episode, we stated that Thomas Watson Jr. fought on the side of the United States in World War II while IBM, under his father's leadership, was doing business with the Nazi regime. As a World War II pilot, Watson didn't fight in combat missions, but some of his missions did take him through combat zones where he faced enemy fire. And while IBM did sell technology to the Nazi government in the years leading up to the U.S.'s involvement in World War II, by the time the U.S. entered the war and Watson was serving in the war, the German government had seized the assets of American companies, curtailing IBM's control over its German operations.]
SYLVIE DOUGLIS, BYLINE: NPR.
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ADRIAN MA, HOST:
If it ain't broke, don't fix it. Everybody knows this expression, right? In other words, why mess with success?
WAILIN WONG, HOST:
But if you look at the world of big tech, you often see companies rejecting this philosophy. Think about how Facebook for a couple years now has been trying to reinvent itself as the Metaverse company or Microsoft pivoting to AI or Twitter turning into X and trying to be the everything app.
MA: If you flipped through the pages of tech industry folklore, you'd see this philosophy actually goes back decades to the early years of the computer industry and a company called International Business Machines, or just IBM. Now, maybe you've seen this name stuck to a dusty, ancient-looking computer stuffed somewhere in the back of a relative's attic. Well, IBM was founded over a century ago in New York.
MARC WORTMAN: Everything that we take for granted as part of our digital world started there.
WONG: Marc Wortman is a journalist and the co-author of a new book called "The Greatest Capitalist Who Ever Lived: Tom Watson Jr. And The Epic Story Of How IBM Created The Digital Age."
WORTMAN: IBM laid the rails for the information technology industry and the future that we now live in.
MA: And Marc argues that those rails can be traced directly to a time about 60 years ago, when IBM's CEO essentially scrapped its existing business and bet the company's future on a new kind of technology that did not even exist yet.
This is THE INDICATOR FROM PLANET MONEY. I'm Adrian Ma.
WONG: And I'm Wailin Wong. Long before Apple, Alphabet and Amazon, there was IBM. Today on the show, the story of that massive gamble and what it reveals about the dicey relationship between business innovation and creative destruction.
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MA: In the early 1900s, IBM had a pretty successful business selling machines called tabulators, these electromechanical contraptions that read data off these paper punch cards.
WONG: Yeah, if you look at a picture of one, it kind of looks like a steampunk piano.
MA: Bingo. At the time, IBM's CEO was this guy Thomas Watson, and he had a son also named Thomas.
WORTMAN: This was a guy who was a risk-taker.
MA: That's journalist Marc Wortman again.
WORTMAN: You know, that was kind of the philosophy he lived by. But he could be reckless at times. He was a kind of a Playboy, a ne'er-do-well. He got kicked out of multiple schools and then he joined the company, hated it, wanted to quit. All he wanted to do was to be a pilot.
MA: And in fact, Thomas Jr. during World War II did become a pilot. He flew for the Army. Interesting historical side note here - under his dad's leadership, IBM during World War II actually supplied the Nazi government with technology like tabulators and punch cards.
WONG: Think about that. The son is fighting on the side of the U.S. in the war, while his dad is selling technology to the Nazi regime.
MA: Yeah, in a way, this really underscores just how different the father and the son were. But even so, after the war, Thomas changes his mind about the family business, and he takes a job at IBM.
WORTMAN: And the young Watson, often against his father's resistance, starts pushing IBM, which is a mid-size industrial company, into electronic computing. And lo and behold, the world wants these machines.
WONG: Picture these hulking metal cabinets adorned with flashing lights and magnetic spinning disks. Before long, a lot of businesses wanted to get their hands on one of these newfangled computers.
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UNIDENTIFIED NARRATOR: Customers who have already received these giant computers include insurance companies, airlines, banks, railroads and utilities.
WONG: So by the 1960s, IBM has about 70% of the global computer market. It is printing money.
MA: But Marc says, you know, computers at the time, they had some pretty major limitations.
WORTMAN: They're basically tailored to the specific industry that the computer is serving. So if you're a banking firm, you're going to have one kind of computer. And if you're a scientific lab or an engineering firm, you're going to have another type of computer. And if your company grows and you want to have a new computer, you're going to have to get all new components.
MA: That's like every time you wanted to get a new outfit, you had to go back to the tailor, and they would have to...
WORTMAN: Exactly.
MA: ...Design you one from scratch. That - I can imagine that's a good business for the tailor.
WORTMAN: That's a good business for the tailor. And IBM was the tailor for the computer industry.
WONG: So IBM is on top. It's raking in the cash. But by this time, Thomas Watson Jr. has succeeded his dad as CEO of IBM. And he has an idea that risks throwing all that away, which, if you remember the story thus far, is kind of his M.O.
MA: So the idea is this - instead of selling these bespoke custom computers - you know, one for accountants and another for scientists and so on - what if you made one universal computer that could be modified to serve all kinds of needs? I mean, this is something we kind of take for granted today.
WORTMAN: The idea of doing that was an extraordinary one because basically IBM was saying, we're going to make all of our products obsolete.
WONG: This is a moment in IBM's history that represents a conundrum that countless entrepreneurs face. It's what's called the innovator's dilemma - that point when a company becomes so big and successful that new innovations could actually jeopardize the existing business.
MA: And there were people inside IBM who told Thomas, like, hey, business is good. Like, why are we going to go mess with that? But Thomas went ahead and pivoted the company towards this new universal computer idea anyway. And in April 1964...
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THOMAS WATSON JR: Here to share with us the most important product announcement that this corporation has ever made in its history.
MA: He held a televised event to debut this new line of computers to the world. It was called System/360.
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WATSON: Ladies and gentlemen, that's our new baby, and we're awfully proud of it. I'll just say that the 360 is going to accelerate what some of you have named the computer age.
WONG: And the 360 looked cool by 1960s standards, anyway. There were these sleek, colorful boxes with gleaming knobs and shiny buttons. There was just one little problem.
WORTMAN: A lot of the 360 computer components that were on display were actually made out of plywood, painted to look like the 360 computer. They didn't have the product yet.
WONG: I'm picturing all these engineers at IBM just doing arts and crafts in the back...
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WONG: ...Painting plywood.
MA: Lots of Elmer's glue was expended in the research and development of this computer.
WONG: Oh, yes. And, you know, this wouldn't have been such a problem, these plywood stand-ins, if orders for the 360 computers had an immediately started to flood in.
MA: To make 360 real, they had to invent new chips and software, a process that would stretch over 2 1/2 tumultuous years.
WORTMAN: They're hemorrhaging cash, and IBM invested more than two times their revenue to carry this out, which the equivalent of that today for a company like IBM would be about, you know, $150 billion on one product. And in the meanwhile, they're bleeding customers.
MA: Because think about it - IBM just kind of told the world that its current computers are soon going to be obsolete garbage. So potential customers who might have bought those old computers are like, OK, we'll just wait for the better thing.
WONG: And adding to the chaos during this time was some family drama. Thomas had a younger brother named Arthur, who he appointed to oversee the development of System/360. But as the project dragged on, Thomas effectively fired his own brother.
MA: Ooh, this is like something straight out of "Succession," like, definitely Kendall and Roman Roy vibes here.
WONG: Oh, yeah. They're giving each other the cold shoulder on the private jet.
MA: But eventually 360 comes out, and Thomas Jr.'s gamble pays off.
WORTMAN: By the end of 1966, the computers are going out. It's a huge, huge success. In 1967, IBM became the most valuable company in history.
WONG: IBM's tech dominance would last for decades, but going into the 1990s, that dominance would fade as smaller rivals like Apple and Microsoft moved in on its turf. In fact, the company almost went bust, and today IBM is kind of a shadow of its former self.
MA: Though worth saying, it is still a decent size shadow. For instance, its computers still process the majority of the country's bank transactions and credit card payments. But arguably, IBM's historical high point remains the 360 gamble. In the book of corporate folklore, it is this prime example of just how far a big company will go to try and stay on top.
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MA: This episode is produced by Julia Ritchey with engineering by Cena Loffredo. It was fact-checked by Sierra Juarez. Dave Blanchard edited this episode. Our show's editor is Kate Concannon. And THE INDICATOR's of production of NPR.