IBM Personal Computer Division
Customer Profile
| Field | Value |
|---|---|
| Company | International Business Machines (IBM) |
| Division | Entry Systems Division / PC Division |
| Location | Boca Raton, Florida |
| Project Codename | Project Chess |
| Key Contact | Jack Sams (initial), Don Estridge (project lead) |
Strategic Importance
IBM was the most valuable company in the world (~$34B market cap in 1980). Their entry into personal computing validated the entire industry.
For Microsoft, the IBM partnership was:
- Market validation — "Nobody gets fired for buying IBM"
- Distribution — IBM's sales force reached every enterprise
- Foundation — Template for all future OEM deals
Relationship Timeline
| Date | Event |
|---|---|
| Jul 1980 | Jack Sams visits Microsoft seeking languages |
| Aug 1980 | Microsoft commits to providing OS (DEC-005) |
| Aug 1980 | Microsoft acquires QDOS (DEC-006) |
| Aug 1981 | IBM PC launches with MS-DOS |
| 1983-1987 | OS/2 joint development |
| 1990 | "Divorce" — IBM goes alone with OS/2 |
The Deal Structure
What Microsoft Provided
- MS-DOS operating system
- BASIC interpreter
- Other languages (COBOL, Fortran, Pascal)
What Microsoft Received
- Flat fee payments (~$80,000 initially)
- Non-exclusive license to DOS (POL-001)
- IBM's stamp of approval
- Template for OEM licensing model
What IBM Got Wrong
IBM, accustomed to controlling every component, made a strategic error:
- Non-exclusive license — Microsoft could sell DOS to IBM's competitors
- Open architecture — PC could be cloned (Compaq, Dell, etc.)
- Underestimated software — Treated OS as commodity component
"IBM thought they were getting a cheap subcontractor. They got a strategic partner who understood the value of the platform better than they did." — Industry analyst
Revenue Impact
| Year | IBM Revenue to MSFT | Notes |
|---|---|---|
| 1981 | ~$500K | Initial DOS + languages |
| 1982 | ~$2M | Growing PC sales |
| 1983 | ~$5M | PC AT, PC Jr |
| 1984-1989 | ~$10-15M/year | OS/2 development fees |
| 1990 | Relationship ends |
While direct IBM revenue was modest, the indirect value was incalculable:
- Clone makers (Compaq, Dell, HP) became much larger customers
- IBM's imprimatur opened enterprise doors
- Established Microsoft as the standard
The OS/2 Era (1985-1990)
Joint Development
IBM and Microsoft collaborated on OS/2:
- IBM controlled UI/marketing
- Microsoft contributed kernel work
- Meant to replace DOS/Windows
Why It Failed
- IBM bureaucracy — Development too slow
- Hardware requirements — OS/2 needed expensive RAM
- Microsoft's hedge — Windows 3.0 development continued
- Cultural clash — IBM's mainframe mindset vs Microsoft's speed
The Divorce (1990)
Bill Gates chose Windows over OS/2. IBM went alone with OS/2, which eventually failed.
"There was a year where they [Gates and Ballmer] didn't speak" — Steve Ballmer, on the OS/2 tensions
Lessons Learned
For Microsoft
- Never give up control of the platform
- Non-exclusive licensing is the key to scale
- Big customers can be leveraged, then outgrown
- Speed beats bureaucracy
For IBM
- Software is strategic, not commodity
- Open standards can backfire
- Partnerships can create competitors
- "Not invented here" is expensive
Legacy
The IBM deal transformed Microsoft from a programming languages company to the dominant platform company of the PC era. Every subsequent OEM deal used IBM as the template.
IBM eventually sold its PC division to Lenovo (2005) for $1.75B—a fraction of the value Microsoft extracted from the partnership.