IBM opened the PC. The machine it released on August 12, 1981 used entirely off-the-shelf parts from third parties, and IBM published complete specifications of its system bus and memory map on release, intending to foster a market of compatible hardware and software. [1] The processor was Intel's 8088. The operating system came from Microsoft, and IBM's agreement let Microsoft sell its own version, MS-DOS, to other manufacturers. [1][2]
The one part that stayed IBM's alone was the BIOS, the code that lets software talk to the hardware. [2] Compaq announced a portable in November 1982 with a BIOS written from scratch in a clean room, and IBM is not recorded as challenging it. Two other makers, Eagle and Corona, were threatened by IBM over BIOS copyright and settled by rewriting theirs. [3] Once the BIOS could be reproduced, any maker could sell a machine that ran the same software. In 1987 IBM tried to take control back with a proprietary bus in its PS/2 line, and competitors built an open alternative instead. [2]
So who was paid? Microsoft's fiscal 1995, ended June 30, 1995: revenue of $5.937 billion, net income of $1.453 billion, 24.5 percent of revenue. [4] Dell's fiscal 1996, ended January 28, 1996: net sales of $5.296 billion, net income of $272 million, a gross margin of 20.2 percent. [5] Similar revenue, and by my arithmetic about five times the profit. Intel's gross margins ran 50 to 60 percent through the 1990s and early 2000s, while most chipmakers' ran 3 to 22 percent. [6] These are single companies in adjacent years, not the whole industry, but they point the same way.
In my reading, the value of a standard does not go to whoever opens it, and it does not go to whoever builds the most boxes. It goes to the layer that is costly to leave. The compatible machine made the hardware a layer a customer could change without giving up the software. The operating system and the processor were the layers the software was written for. "Open versus closed" is the wrong axis. The better question is which layer a company controls.
Nikon is the same lesson from the other side. It kept the mount, the layer behind the larger lifetime spend on lenses, and let others sell into it. [7] An earlier piece here, "The Standard That Kept Faith," looks at that choice.
An investor looking at any platform can ask two things: which layer does this company own, and what does it cost a customer to leave it?
Related: Lifeline and Lever looks at the other side: how the company that held the standard document tool kept a rival's platform alive and used the same tool to set terms.
Sources
- IBM Personal Computer, Wikipedia
- IBM PC compatible, Wikipedia
- Compaq Portable, Wikipedia
- Microsoft Corp., Form 10-K, fiscal year ended June 30, 1995, SEC
- Dell Computer Corp., Form 10-K405, fiscal year ended January 28, 1996, SEC
- Intel's Fall From Grace, Richard Rumelt
- Should You Spend More On A Camera Or Spend More On Lenses?, KEH
In my own account, while in college I worked for a small computer company in Manhattan that sold luggable computers like the Compaq, and my job was to build them from the motherboard up; that account cannot be independently sourced. The comparison of Microsoft's June 1995 fiscal year with Dell's January 1996 fiscal year is the author's, and the two years do not line up exactly. The reading of why the value went where it did is the author's interpretation. This is not investment advice.