Computer Industry Case Study

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Chapter 17

USING THE TOOLS: A CASE STUDY OF THE COMPUTER INDUSTRY*

A

lthough we have emphasized the theoretical aspects of the field of industrial organization up to this point, we hope you have gained an appreciation of the close relationship between the topics we have been studying and real-world markets. Knowledge of industrial organization is essential for policymakers in the areas of antitrust and regulatory policy. The remainder of this book emphasizes public policy in these areas. Making rational public policy decisions requires the ability to incorporate the tools of industrial organization into studies of how real-world markets work. When the Federal Trade Commission or the Department of Justice reviews the antitrust implications of a merger or the monopoly power of a particular firm, the agency begins with a detailed industrial organization study of the industry. Few industries have been under closer government scrutiny over the past 30 years than the computer industry. In 1969 the Department of Justice filed a major monopolization case against IBM, and throughout the 1990s Microsoft has been under the sword of various antitrust actions. To help you recognize the importance of an understanding of industrial organization in the context of public policy, this chapter presents a detailed study of the computer industry. By the end of the chapter, we hope you will appreciate how closely linked industrial organization is to public policy.

HISTORY 1
The history of the computer industry is in part the history of two firms: International Business Machines (IBM) and Microsoft. Although the two firms compete in different sectors of the market, their intertwined histories suggest how quickly 527

*“Computers” by Waldman, Don in Structure of American Industry 10/e edited by Adams/Brock, © 2000. Adapted by permission of Prentice-Hall, Inc., Upper Saddle River, NJ.

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Chapter 17 Using the Tools: A Case Study of the Computer Industry

economic conditions can change in this technologically advanced industry. IBM, the firm that stood for high technology and computers for decades, is no longer the leading manufacturer of personal computers in the United States based on units shipped. IBM’s one-time dominance of the entire computer industry has been lost in part to a software manufacturer, Microsoft, and in part to a microprocessor manufacturer, Intel. A decade ago IBM produced over 60 percent of the mainframe computers sold in the world; its annual gross revenues increased every year, peaking at $68.9 billion in 1990; and it employed over 400,000 people around the world.2 By 1993 IBM’s total world employment had declined 36.8 percent to 256,000 and the company sustained an $8.1 billion loss! How did this turn of events happen? And what lessons can be learned about the relationship of market structure, conduct, and performance by analyzing this rapidly changing industry? Thomas J. Watson, Sr. built IBM by emphasizing to its sales force the importance of an understanding and commitment to its customers’ needs and a dedication to both quality and on-time delivery.3 Watson Sr. was a salesman, not a technological genius, and IBM’s CEOs for decades to come followed in his footsteps. Watson Sr. had taken a small firm, The Computing Tabulating Recording Company (name changed to IBM in 1924), that specialized in scales and measuring devices and, by focusing its attention on solving the accounting problems of large corporations, had built up a highly profitable business. Watson Sr. trained his sales representatives to have one overriding objective: to solve each customer’s problems with an individual solution. He was convinced that as long as IBM’s machines helped its customers’ businesses operate more efficiently, IBM would remain the industry’s dominant force.4 IBM did not start out as the leader in the computer industry. Remington Rand produced the world’s first important commercial computer, the UNIVAC. While Rand was...
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