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Chapter 2 - Background

2.27 Personal Computers -- 1973-1988

The first three decades (1945-1975) of computer innovation and economics were motivated and financed first by government and then corporate interests. Although computers had come a long way from being measured by the ton and thenumber of rooms they occupied, they remained expensive, hard to use, and without any practical value to individuals. With over one hundred thousand computers in use, individuals were becoming increasingly informed about computers and their use at work. As importantly, young people, teenagers and college students, began to view computers not as technological marvels to be mastered by only a few, but as the new jalopies, to be torn apart, re-built and even improved upon. This then begins the story of how computers became products for individuals, not just organizations, and in so doing expanded the market potential to hundreds of millions not hundreds of thousands of units. In the process, the personal computer dislodged both mainframes and minicomputers from their hallowed role as the centerpieces of corporate information systems.

The trajectory of personal computers began in the same MIT Lincoln Labs so important to mainframe and minicomputers. In the development of SAGE, those writing computer code began interacting directly with the computer, not by batch-processing. As they quickly learned, real time computing held significant benefits for individuals as users not just large applications such as SAGE. Among the first to recognize and write about computers designed for use by humans was Dr. J.C.R. Licklider. As noted earlier, the TX-2 computer was the first instantiation of a computer used by a person, not simply embedded in a larger application (although neither its original design nor long-term use was as a personal computer). The first computer designed as a personal computer was the Alto of Xerox PARC – a design influenced by the TX-2. As important as many of the design concepts of the Alto would become to future personal computers, it was not the Alto that most influenced the early years of competition. That role was assumed by the unlikely candidate of an inexpensive hobby kit microcomputer – the Altair.

The January 1975 cover of Popular Electronics displayed the Altair 8800 and proclaimed: “The most powerful minicomputer project ever presented – can be built for under $400.” Intended to be sold to individuals, not organizations, the Altair 8800 by MITS (Micro Instrumentation Telemetry Systems) of Albuquerque, New Mexico266 was not the result of a well planned strategy. Rather it represented a last ditch effort by a failing calculator company to avoid bankruptcy. Years earlier, in 1969, when Ed Roberts, the founder and president of MITS, decided to innovate calculators for sale, it made sense. But by early 1974, small firms like MITS couldn’t buy components for what others were selling finished product. Prices had dropped from $150 in 1973 to an average price of $26.25 in 1974 due to aggressive pricing by semiconductor entrants like Texas Instruments and National Semiconductors. MITS, whose calculator sold for $99.95, faced sure bankruptcy. But Roberts had been having thoughts of a new product, and not another calculator.

Motivated more by technological challenge than business success, Roberts toyed with the idea of designing a computer around a microprocessor. Now facing certain disaster, yet also aware that the magazine Popular Electronics wanted to highlight a computer as a cover story, Roberts decided to go for broke and design a computer to be assembled by users. But what microprocessor? He decided to use the 8080 because it would execute the programming language BASIC.267 He then negotiated a volume purchase agreement with Intel calling for a price of $75 for each 8080 compared to the list price of $360.268

Roberts next reached an agreement with Popular Electronics. If he delivered his computer by a certain date, it would appear on the cover. Roberts then had to convince his bankers to loan him the $65,000 needed to invest in a prototype – he already owed them $300,000. Probably because they assessed the bleak prospects of repayment if they did not loan him the additional money, he got his loan.269 The bankers hoped for sales of 200 units; Roberts had illusions of 800 units. Just prior to the deadline with Popular Electronics, Roberts shipped his only prototype by Railway Express which lost it. Popular Electronics went to press with a cover photo of the computer’s front and top panels. Then they waited. Would they get as many as two hundred orders? After just two weeks, they had their answer. They needed help just to open the mail. Their bank account went from a $400,000 loan to a cash balance of $250,000.270 At a Homebrew Computer Club meeting in April 1975, members were told MITS had orders for 4,000 computers.271

For those individuals interested in computers, the cover of Popular Electronics was a call to action. Some like Bill Gates and Paul Allen, desperate for any way to get in on what they saw as the coming growth in microcomputers, immediately contacted Roberts to see if he would be interested in selling their BASIC software. With so many offers, he told them all that he would do a deal with the first one to have BASIC working on the Altair. Six weeks later, Allen demonstrated their code to Roberts and a deal was struck. Newly named Micro-Soft (the future Microsoft) had made its first sale of microcomputer software.272

Although the success of the MITS/Altair was brief, its impact was long lasting. MITS and Altair made computers cheap, made them open, catalyzed third-party microcomputer software and set in motion institutional processes essential to the emerging personal computer market-structure. First, the Altair was cheap. The designers of the Alto viewed ten thousand dollars as a minimum, bare-bones, hardware cost. The Altair sold for $395. With its success, the Altair proved that individuals, not just organizations, would buy computers. And if it had not been the Altair, it would have been another microprocessor computer, Popular Electronics planned to run a cover story on computers and, as events proved, buying demand existed.

A crucial contribution of the Altair was its open architecture. It had 18 slots in which additional computer-cards (printed circuit boards or PC boards or cards) could be inserted and made to interconnect to all the other boards by means of a bus – the electrical and physical characteristics of the board interconnecting all the slots. Others quickly realized that they could innovate computer-cards to both complement the Altair, although they might very well compete with MITS, as well as compete directly with the Altair. In 1976 alone, fifty hardware companies entered the market.273

By making the Altair open, MITS unintentionally benefited from as well as incented the creation of “external economies.”274 External economies sprang up as other products and firms – the market – made available what MITS did not, or could not, offer for sale. MITS had to let users insert PC boards at a later date because initially they were unable to supply all the PC boards promised or needed. These empty slots made it possible for others to begin supplying competitive memory and input/output boards, or boards with entirely novel functionality. As a struggling small company, MITS was in no position to command the “internal economies” of doing everything within its organization as had IBM with the System/360 or DEC with the VAX-11/780.

Also, the Altair created a necessary condition for the emergence of third-party software firms, such as Microsoft. MITS did not develop user application software. Yet software that made the Altair useful. In one sense, software defined subsequent microcomputer dynamics just as the microprocessor had – although very little will be said about these important issues here.

Lastly, MITS and Altair set in motion processes and conditions which created essential institutions of personal computers. For example, computer clubs, newsletters, trade shows, and trade magazines developed. Computer clubs and newsletters sprang up, initially with a MITS/Altair focus, but soon without vendor preference. These informal institutions made it easy and non-threatening for interested individuals to learn and share information and knowledge – information and knowledge not forthcoming from the small vendors. The most influential club was the Homebrew Computer Club of Palo Alto, CA. It became a veritable beehive of entrepreneurial activity. Trade shows also went from Altair specific to vendor independent – MITS held the first in March 1976, and by August a vendor independent one was held.275 Soon the clubs and trade shows were complemented by new trade magazines. These were all mechanisms of information and knowledge diffusion that facilitated the rapid spread of microprocessor technologies to the economic sector as had government actions in the earlier trajectories of transistors and integrated circuits.

Almost overnight, competition to MITS and Altair emerged. And no wonder – from the verge of bankruptcy at the beginning of 1975, MITS’s revenues soared to $13 million in 1976.276 IMSAI Manufacturing fought the battle of imitation first by selling kits in 1975 and then assembled computers in 1976. It soon dominated the sales of ‘Altair’ microcomputers, selling 13,000 units through 1978277 before collapsing into bankruptcy in the spring of 1979.278 Then there were those who tried alternative microprocessors: such as Southwest Technical Products using Motorola’s 6800; or created their own microprocessors as had MOS Technology, a start-up founded by Chuck Peddle selling the KIM-1 computer built using its own, inexpensive, 6502 microprocessor. (Peddle previously worked at Motorola and helped design the 6800. As might be expected the 6502 resembled the 6800.) Then came existing firms. In October 1976, Commodore bought MOS Technology, a serious threat because Commodore believed to have the resources to dominate the market. Others created their own computers. Tandy Corporation with its Radio Shack stores as distribution system introduced a Z-80 based microcomputer, the TRS-80 Model I, in August 1977. Texas Instruments would be second to only Commodore in market share in 1981.279 MITS, however, would not participate in the growth of the market-structure it helped launch. Countless organizational problems forced its sale to Pertec in May 1977 and operations ceased only two years later.

Apple Computer was the most important early computer start-up. The story of Steve Jobs and Stephen Wozniak is well known. They were “phone phreaks,” Silicon Valley teenagers undaunted by new technologies, who attended Homebrew Club meetings, then couldn’t get their employers – Hewlett Packard or Atari – interested in their vision of personal computers. Frustrated, yet confident that the market for personal computers was large and growing, they founded Apple Computer in 1976 and introduced the Apple II at a trade show in 1977. The Apple II continued in the vein of the Altair: it was open, encouraged and benefited from third-party software, and made use of external economies. Empty slots made the Apple II open. And while Apple supplied the proprietary operating system, software developers were encouraged to supply application software. The most important software was Visicalc – the first spreadsheet. Visicalc, along with word processing software, made the Apple II attractive to professionals and individuals. By outsourcing everything they could, Apple relied on market availability, not internal development or operations, for the components and manufacturing resources needed to build the Apple II.

The Apple II was an immediate success; revenues in 1978 reached almost $8 million. Jobs began designing their next computer: the Apple III. In a clash of vision with Wozniak, Jobs made it a closed system with no empty slots. At first the Apple III proved unreliable –a reputation it would never overcome. Only 65,000 were ever sold; less than the number of Apple II’s sold in 1980, the year the Apple III was introduced. It reportedly cost Apple $100 million.280

In the spring of 1979, Xerox’s venture capital arm, considering an investment in Apple, arranged a tour of Xerox PARC for Jobs. There he saw the Alto with bit-mapped display, graphical objects, fonts, windows and all controlled by a mouse. He also saw Ethernet, a way for personal computers to share resources and interconnect. “I was blown away,”281 Jobs said later. Shortly afterwards he recruited Larry Tessler from PARC and charged him with the design of the Lisa computer –heavily influenced by the architecture of the Alto. But it was painfully slow and way too expensive – $10,000.282 It too cost Apple, maybe as much as the Apple III did. Without newly competitive product in a product category experiencing rapid new product introduction, the Apple’s market share plummeted from 13.5% in 1981 to 6.9% in 1983.

The Lisa set Apple on a new course of computer design, however, strongly influencing their next computer, the Macintosh, introduced in January 1984. The Macintosh set the standard for the graphical user interface (GUI) of the personal computer. Even so, Apple never captured the glory once theirs. A new personal computer architecture had arrived – one even more open than was Apple’s.

By mid-1980, executives at IBM had reason to be worried. It had become very clear to them that IBM needed to sell a personal computer. Their customers asked about them and clearly planned to buy desktop computers, even if only for spreadsheet use. Competitors were entering the market like Xerox, which had introduced a Z-80-based Xerox 820. IBM also knew of the Alto and was shocked to see television advertisements extolling the promises of their Star computer. Then there was Exxon buying up companies to make an assault on the office market. And there could be no doubting the demand for personal computers was growing rapidly – Apple’s IPO of December 1980 was widely anticipated. The Corporate Management Committee (CMC) and President John Opel assigned William Lowe the task of recommending a course of action. In July he reported: “The only way we can get into the personal computer business is to go out and buy part of a computer company, or buy both the CPU and software from people like Apple or Atari – because we can’t do this within the culture of IBM.”

Concurring but strongly preferring to sell their own computer, not one of another manufacturer, Lowe and a dozen engineers he assembled were given a month to come up with a prototype design. They first contacted a number of potential suppliers, including Intel and Microsoft. They decided to use the Intel 8088 over the Motorola and Zilog chips. Originally they saw Microsoft as a vendor for BASIC, but they asked Microsoft to write a report on how the two firms could interact. Knowing IBM was going to use the 16-bit 8088 and that the dominant operating system, CP/M of DIgital Research, would have to be re-written, Microsoft succeeded in selling IBM on a new operating system, MS-DOS or PC-DOS – one Microsoft would buy from Seattle Computer Products and up-grade as needed. In addition to supplying both operating system and BASIC, Microsoft, and in particular, Bill Gates, strongly influenced IBM to make their design open. IBM entered the personal computer market-structure leveraging external economies rather than doing everything internally as it had so successfully with the System/360.

1981 proved critical in the history of the personal computer. In March, Osborne Corporation introduced the Osborne I, a complete computer with application software bundled into the base price of $1,795, and it was portable, or as described then – “luggable.” It was Z-80 based and came with word processing, spreadsheet and data base software. It was an immediate hit. Osborne sales were $6 million in 1981, $70 million in 1982, $93 million in 1983, before declaring bankruptcy in 1984. In the spring of 1981, Xerox introduced the Star for $16,595. Then IBM introduced the IBM Personal Computer, or PC, on August 12. Before the end of the year, 13,000 PC’s were shipped.283 IBM had captured the dominant design.

It took but a couple of years for the trajectory of personal computers to go from competitive to one of a dominant design. 1982 was the year everyone grew. It was confusing – most of all to corporate customers. According to Business Week of August 2, 1982: “at least 140 new companies have sprung up since 1977.” Well over fifty companies competed in selling microcomputers.284 In the midst of the confusion, buying demand, especially corporate buying demand, sought vendors such as IBM who were more stable and would survive. In 1983, IBM rocketed to a 26% market share. Michele S. Preston, an industry analyst with L. F. Rothschild, Unterberg, Towbin, an investment bank, was quoted in the October 3, 1983 issue of Business Week: “The biggest surprise has been how quickly, and to what extent, IBM has become so dominant.”

The IBM PC became the dominant design for many reasons: it captured the transition to 16-bit processers, was an open system, made best advantage of external economies, and carried the IBM name. Most competitors used 8-bit processors, so IBM was first to capture the benefits of 16-bit processers. (This opportunity was the same as the jumps from 8 to 16 and then to 32-bit processers in minicomputers.) The PC’s openness encouraged both feature and price competition – all to the benefit of the user. (Companies making “clones” of the PC emerged. Compaq became the first company ever to do $100 million in sales in its very first year.) Buying, not making, enabled IBM to take every advantage of existing external economies. And, of course, there was the market and financial power of IBM and its control of corporate computing. Interestingly, the growth of the PC threatened IBM’s traditional customers – the Management Information Systems departments. Much more will be said in the coming history of computer communications on this transition.

Jumping ahead to the end of 1988, a comparison of costs between the three systems of computer use – personal computers, minicomputers or mainframe computers – displayed how compelling the economics were for personal computers. In data reported in the June 5, 1989 Business Week for a sample costs of a network of 20 workstations using personal computers versus terminals connected to either a minicomputer or mainframe:

Exhibit 2.27 Comparative Cost of Computer Networks 285

Network Cost
PC network $95,000
Terminals tied to a minicomputer $30,0000
Terminals tied to a mainframe $6 million

Corporate computing rapidly adopted the architecture first advanced with the Alto: personal workstations, communications networks, and specialized servers. It became known as client/server computing and clashed with the host-centric computing that had prevailed for nearly two decades. In the process, corporations began wanting all their computers to be interconnected to form corporate-wide information networks. But to do so required interconnecting computers over telephone networks as well as constructing networks not controlled by the telecommunication firms, especially the giant AT&T. None of which was possible in 1968, when telecommunications was a regulated monopoly extant AT&T. How the freedoms of attachment and interconnection were won will be told next – in Chapter 2. Changing Rules of Competition - AT&T and the FCC.

  • [266]

    The early history of computers on which much of this account depends is to be found in: either “Fire in the Valley” by Paul Freiberger and Michael Swaine. Osborne/McGraw-Hill, 1984, or Richard N. Langlois, “External Economies and Economic Progress: The Case of the Microcomputer Industry,” Business History Review, Spring 1992, pp. 1-50

  • [267]

    BASIC was developed at Dartmouth College under the direction of John… an experiment to create a timesharing system for undergraduates. It was never patented.

  • [268]

    Richard N. Langlois, “External Economies and Economic Progress: The Case of the Microcomputer Industry,” Business History Review, Spring 1992, p. 9

  • [269]

    Paul Freiberger and Michael Swaine, “Fire in the Valley,” Osborne/McGraw-Hill 1984, p. 33

  • [270]

    Ibid., p. 37

  • [271]

    Ibid., p. 39

  • [272]

    Ibid., p. 40

  • [273]

    Paul Freiberger and Michael Swaine, “Fire in the Valley,” Osborne/McGraw-Hill 1984, p. 51

  • [274]

    See Langlois for a thorough discussion.

  • [275]

    Freiberger, pp. 46 and 48

  • [276]

    Ibid., p. 51

  • [277]

    Richard N. Langlois, “External Economies and Economic Progress: The Case of the Microcomputer Industry,” Business History Review 66 , p. 14

  • [278]

    Freiberger, p. 59

  • [279]

    Langlois, Ibid., p. 36

  • [280]

    Langlois, Ibid., p. 44

  • [281]

    Freiberger, p. 239

  • [282]

    Langlois, Ibid., p. 31

  • [283]

    Freiberger, p. 279

  • [284]

    Langlois, pp. 34-35

  • [285]

    “The Personal Computer Finds Its Missing Link,” Business Week June 5, 1989, p. 120