Chapter 2 - Background
2.19 Second Generation Computing -- 1959-1963
The Second Generation of computing differed from the First in a number of important ways. First, computer companies still relied on government money to fund innovation, but with the Second Generation, they also tried to sell the computers commercially. Second, efforts to sell computers stimulated both new demand as well as new competition. Third, the sales of computers entered a period of astounding growth, going from approximately $600 million in 1960 to $7 billion by 1968. (See Appendix 1 Computers and Terminals.)70 Government purchases of computers and funding of research and development no longer dominated the economics of computers.
In November 1959, IBM introduced the IBM 7090. In shipping it before the 7070, the 7090 became IBM’s first Second Generation computer – and a very successful one. The 7090 benefited immensely from the STRETCH project (to become the IBM 7030 computer), most importantly in the use of transistors, not vacuum tubes; although other STRETCH influenced componentry included transmission circuits, new printed circuit board designs, frames, power supplies and memories.71 In designing the 7090 to be used with its other computers, especially transistorized 1620’s and 1401’s, IBM gave birth to the “family” concept. Quickly, IBM pushed its competitive advantage, introducing a series of models: (except the 7070, 7080, and 1410), the 7040, and 7044, all able to function easily with each other.72 IBM overwhelmed the competition with market-targeted computers.
STRETCH, however, looked like a failure at the time. When delivered in 1961, it allegedly lost IBM more than $40 million.73 Watson Jr. writes:
Looking back, I think STRETCH was so ambitious that it is a wonder we got it built at all. But when it came out in 1961, behind schedule and only 60 percent as powerful as planned, I was disappointed and irate. I thought our engineers needed to be taught a lesson about not letting customers down. So, in the course of a press conference at an industry convention, I announced that the new computer had failed to meet specifications, and that I was hereby cutting the price on the machine from $13.5 million to $8 million to reflect its performance. We couldn’t make any money at that price, and before long the project got shelved.
Making an example out of STRETCH shook up the engineers all right, but it turned out to be a grievous mistake. The engineers understood me to be saying, “No more of those big machines around here,” and it was true that I would have snapped at anybody who brought up the subject. So for two years IBM did almost nothing in supercomputing, leaving the field wide open for Norris and his men [Control Data Corporation]74
Even though a financial loss, and unwittingly creating the conditions for a future problem with the family concept, STRETCH resulted in many new technological developments within IBM, including: new architectural concepts and designs, better transistors, a way to assemble transistors into standardized modules called Micro Module Integrated Circuits or MMIC’s, the use of an eight bit byte, and a shared way of using peripheral devices.75 IBM also enhanced organizational competencies, such as managing large development projects, and continued to assemble assets to mass produce computers.
The Second Generation mainframe computer market-structure consisted of sixteen companies. All seven first generation companies were joined by a diversified group of new entrants, including Philco, Control Data Corporation, Digital Equipment Corporation, Sylvania, Bendix, TRW, Scientific Data Systems, General Precision, Hughes Aircraft and, yes, General Mills! Forty eight different computer models were introduced by the major players. IBM, the dominant firm, accounted for eleven of them, or nearly 25%. Sperry Rand introduced eight new models. Every serious competitor introduced at least two models.
As for the nature of market competition, an article titled “Can IBM keep up the pace?” in Fortune, February 2, 1963 said:
IBM is making a lot of money in the computer business. Its competitors, on the other hand, are having a hard time. It has something like 70% to 80% of the market – only the company itself knows for sure. IBM got into trouble before on charges of dominating the punch card tabulating business. Will antitrust history repeat itself?76
The article goes on to say, however, that important differences exist between the conditions of the tabulating equipment market and that of computers.
For one thing, its competitors now are a lot stronger, and two of them – General Electric Co. and Ford Motor Co., which owns Philco Corp. – are much bigger. Highly diversified and only slightly smaller competitors, such as RCA, Sperry Rand Corp., and Litton have exceptional staying power. Both National Cash Register Co. and Burroughs Corp. have good marketing positions to work from and are increasing their sales. Control Data Corp., one of the few independents in the field, is a profitable company. Without the collapse of several of these competitors – which no one in or out of IBM thinks very likely – it is hard to imagine an antitrust action against IBM alone that would not be extremely punitive.77
The performance improvement of the computer trajectory from First to Second Generation computers was tenfold. As measured in thousands of commercial transactions per second,78 the IBM 7094 (1962), the best Second Generation computer performed one hundred thousand whereas the IBM 709 (1958), best First Generation computer, did ten thousand. By way of comparison, the STRETCH computer did six hundred and thirty thousand transactions.
History will prove that computers had hardly begun their performance ascent. And as for the balance of market power, the next technological discontinuity, the integrated circuit, would bring about the total domination by IBM.
- [70]:
The difference in sales between $7 billion and the $5 billion in the Exhibit can be explained, but is not important.
- [71]:
Ibid.
- [72]:
Ibid.
- [73]:
Nelson, p. 189
- [74]:
Watson Jr., p. 408
- [75]:
Nelson, p. 189
- [76]:
Business Week, Feb 2, 1963, p. 98
- [77]:
Business Week, Feb 2, 1963, p. 98
- [78]:
Need accurate definition TBD