Sunday, June 19, 2011

Congrats to IBM for Surviving 100 Years of Intense Market Competition.... and Government Lawsuits

IBM Stock Returns vs. Dow Jones Industrial Average, 1968-1985 (click to enlarge)

IBM is celebrating the 100th anniversary of its founding on June 16, 1911.  See a timeline here of "milestone events in one of the quintessential U.S. corporate success stories."  It would be impressive enough for any U.S. company to still be profitable and successful even a decade or two after it started, but it's truly rare and extraordinary for a company to be around for an entire century like IBM, and survive two world wars, 20 recessions including the Great Depression, strong "gales of Schumpeterian creative destruction" and still be one of the largest and most successful companies in the world 100 years later.  

As Steven Pearlstein wrote in today's Washington Post

"IBM, almost uniquely among technology companies, has managed to survive a series of technological sea changes and make it to its 100th anniversary, which was celebrated last week in New York. Since 1911, as the world has progressed from the calculator and typewriter to the mainframe to the personal computer and now to the Internet, this corporate centurion remains at the top of its game and near the top of the technology heap."

Successful companies like IBM (or Alcoa and Microsoft) that survive over many generations do so because of their extreme focus on innovation, bringing new products to the market, cost-cutting, productive efficiency, and engaging in super-competitive behavior.  Even when they inevitably capture a large market share and become industry leaders, companies like IBM, Alcoa and Microsoft still face extreme market discipline, both from existing firms and from the potential threat of new competitors who stand ready to enter the market and challenge the market leader under the right market conditions.

And to make it to its 100th anniversary, IBM not only had to survive intense market competition and "technological sea changes," but it also had to survive several antitrust cases brought by the U.S. government (like Alcoa and Microsoft), including one that lasted for more than a decade.  From Wikipedia

"IBM's dominant market share in the mid-1960s led to antitrust inquiries by the U.S. Department of Justice, which filed a complaint for the case U.S. v. IBM in the United States District Court on January 17, 1969. The suit alleged that IBM violated the Section 2 of the Sherman Act by monopolizing or attempting to monopolize the general purpose electronic digital computer system market, specifically computers designed primarily for business. The case dragged out for 13 years, turning into a resource-sapping war of attrition. In 1982, the Justice Department finally concluded that the case was “without merit” and dropped it. But having to operate under the pall of antitrust litigation significantly impacted IBM's business decisions and operations during all of the 1970s and a good portion of the 1980s."

MP: The chart above shows the history of IBM stock returns compared to the Dow Jones Industrial Average (DJIA) from 1968 to 1985.  Perhaps this is a case of correlation and not causation, but during the entire time that IBM was being sued by the Department of Justice for exercising monopoly power, the return on IBM was about the same as for the entire DJIA.  But as soon as the case was dropped, and IBM no longer had to divert resources to defend itself from government prosecution, the return on IBM stock rebounded.  In the three years following the end of the government's lawsuit, IBM shares increased by 120%, or more than twice the 50% return on the DJIA during that period.    

Of course by the 1980s the computer industry was going through a major "technological sea change" and moving from mainframe computers to personal computers, and the potential threat of competition from young upstarts like Microsoft (founded 1975), Apple (founded 1976), Sun (founded in 1982), Cisco (founded 1984) and Dell (founded 1984) was becoming a reality and providing IBM with so much market competition that the government's monopoly case against IBM was becoming irrelevant. 

One of the lessons from IBM's 100 anniversary is that intense market competition is the best and most effective regulator possible, making vigorous enforcement of antitrust laws unnecessary.  In the 13-year period from 1969-1982 that the government was harassing IBM, the twin forces of "technological sea changes" and market competition were much more successful and effective at challenging IBM's market dominance than the government's prosecution.  And we can't overlook the financial damage to IBM from fighting an expensive 13-year battle against the Department of Justice (and the cost to U.S. taxpayers) - imagine if instead of spending millions, maybe billions of dollars fighting the government, IBM had invested those resources in research and new product development at a critical period when the industry was shifting from mainframes to PCs.

Bottom Line: Congratulations to Big Blue for a major business milestone of surviving 100 years in the most competitive marketplace in the world, and for surviving several lawsuits brought by the most powerful government in the world.

21 Comments:

At 6/19/2011 8:40 PM, OpenID Sprewell said...

Not sure I'd laud them for surviving so long. Any time a company like this survives for so long, it's almost certainly for some combination of anti-competitive behavior and putting out a credible product, with Microsoft as the poster child. I haven't looked into the antitrust case against IBM, but I doubt there was nothing there. IBM is a strange mix these days: they make all their money through ridiculously expensive services that they sell to price-insensitive companies, much of it done by hosts of offshore workers, essentially labor arbitrage leveraged off the IBM brand name. They sold off their PC business, but still sell mainframes and do a surprising amount of basic research in semiconductors. It's an awkward mix, the vestiges of a classic 20th-century giant corporation that now does offshored services: I bet they won't survive the next 50 years and the massive waves of change that are coming.

 
At 6/19/2011 8:46 PM, Blogger Benjamin said...

-- It's impressive enough for a company to still be profitable and successful a decade after it started,

You mean "century."

 
At 6/19/2011 8:56 PM, Blogger Michael E. Marotta said...

I recently read William H Rodgers, THINK: A Biography of the Watsons and IBM. While it was an "expose" of sorts and not sanctioned by the corporation, the brilliance and correctness of thinking is hard to deny. No one road leads to success -- and many more lead to failure. I, too, was not a fan of the PC though I owned one and another for many years before buying a Mac. (Now I have both.) If one swallow does not make a spring, one frost does not make a winter.

IBM did many things right over many decades of change and uncertainty.

If there is any lesson, it is that ultimately, there are no "lessons" no formulas or recipes to guarantee success --even if the failure points are known. Entrepreneurship may be ineffable, but the Watsons had it.

Whether they last another 50 may be unclear - as why could it be clear at all? - but they did survive the first 100 and for that, as the non-corporeal entity standing in for myriads of individuals, the corporation deserves praise.

 
At 6/19/2011 10:09 PM, Blogger DL said...

The timing of that case (U.S. vs. IBM) is interesting… filed in U.S. District Court on January 17, 1969 (by the Justice Department).
That was just a few days before Nixon took office.

The legal case seems idiotic in retrospect, but probably not the cause of the poor stock performance.

 
At 6/19/2011 11:09 PM, Blogger Buddy R Pacifico said...

Sprewell comments on IBM:

"... I bet they won't survive the next 50 years and the massive waves of change that are coming."

IBM has averaged over $6 billion dollars a year on R&D spending the last three years. IBM received 5,896 patents in 2010.

IBM has been the #1 U.S. company in American patents for eighteen straight years..

If you affirm that patents are property, then intellectual property is to be strongly defended everywhere around the globe. Over $1 million dollars has been spent on R&D to create each patentable product.

 
At 6/20/2011 1:54 AM, OpenID Sprewell said...

Buddy, thanks for highlighting another reason why IBM won't survive: their ongoing abuse of the patent system perfectly highlights how worthless they are. Companies that actually do something worthwhile in online services don't bother patenting, because their stuff is hidden on their servers anyway. Microsoft spends more than that every year on R&D, yet nobody has ever heard of any innovative tech coming out of Redmond. All those bloated "research" budgets are is an excuse to throw money down the drain and trumpet it as an advantage to fools. Follow the money and you'll see it's gone down the drain, never to return.

 
At 6/20/2011 8:11 AM, Blogger morganovich said...

sprewell-

"Any time a company like this survives for so long, it's almost certainly for some combination of anti-competitive behavior and putting out a credible product, with Microsoft as the poster child."

that's an insane assertion. lots of companies have existed for centuries (mainly banks) simply by being stable and smart.

further, microsoft is the classic example of a great company destroyed by being made into a public whipping boy and for governmental favoritism.

their stock has NEVER recovered from the anti trust suit. this is because they are now forced to fight with one arm behind their back against favored forms that are allowed to do what they are not.

microsoft is not allowed to integrate the browser into the OS. google is. thus, andriod is killing windows 7 mobile.

google is integrating the browser with office like productivity packages and looks to release a cloud based OS. microsoft is legally prohibited fro competing.

"Companies that actually do something worthwhile in online services don't bother patenting, because their stuff is hidden on their servers anyway"

and this is just absurd. google doesn't patent? oracle? vm ware?

you have some very deluded ideas about the world spre.

IBM (along with corning a a handful of others) is one of the only companies in the US that funds large amounts of primary research that may not have obvious immediate use. they create far more true innovation than just about an company in the US.

IBM has successfully reinvented itself numerous times to adapt to the next wave of technology.

betting against it because they file patents and you do not understand the value of basic research for custom asics seems a terribly flawed idea.

"they make all their money through ridiculously expensive services that they sell to price-insensitive companies, much of it done by hosts of offshore workers,"

and this is pure nonsense. who are these "price insensitive" companies of which you speak? can you give me a list? that would be a valuable sales funnel.

there are still (and always will be) specific applications for which generally available computing systems are not well suited. the fact that IBM is a trusted brand to create such bespoke systems is precisely why they will succeed and command premium pricing. if you are betting your business on a system, be it a trading system of an airline reservation system, you need it to work and you need to know that it can be upgraded in the future (that your vendor will still be there) and that they will keep up with the technology curve.

no bet in technology is certain, but i'd be willing to wager that big blue will be here long after you are gone.

 
At 6/20/2011 8:31 AM, Blogger drozz said...

they are relentless in their approach to acquiring patents. trust me on this one.

 
At 6/20/2011 11:07 AM, Blogger morganovich said...

drozz-

which is intended to mean what?

if i did a great deal of fundamental research, i'd be assiduous about patenting what i created as well.

 
At 6/20/2011 11:19 AM, Blogger Jet Beagle said...

morganovich: "lots of companies have existed for centuries (mainly banks) simply by being stable and smart. "

Agreed. Some very smart and stable U.S. companies which have been profitable for over 100 years would include:

John Deere
Proctor and Gamble
Colgate
Brooks Brothers
DuPont
Kellogg

 
At 6/20/2011 12:06 PM, Blogger MaggotAtBroad&Wall said...

IBM was my first employer after getting my undergrad in the late 1980s. I worked there for 6 years before going to B-School to get my MBA. By 1992, IBM was on the ropes. The stock was under $20 and headed for $10 by 1993. I remember one quarter the PC division grossly over forecast demand and had to write off $1 billion of excess inventory the following quarter. (That's when a billion bucks was alot of money).
Morale stunk. Everybody knew somebody who had been laid off. I remember a story that some guy who had been told he was going to be laid off decided to take a whiz in one of the super sterile "clean rooms" where semiconductors are manufactured. Who knows how much lost revenue that act caused by disrupting the line.

John Akers was Chairman and CEO. He and the board decided every division was going to have to stand on it's own two feet. Enterprise Solutions (mainframe), PC, Federal Services (government contracting), Application Solutions (software), Microelectronics (semiconductors) etc would be spun off if they didn't meet objectives.

For whatever reason, the board lost confidence in Akers' plan, fired him, and hired Lou Gerstner. Gerstner took the exact opposite approach to Akers. I remember Gerstner saying in one of his first speeches broadcast over the corporate network that he believed "the whole was greater than the sum of the parts". He wanted to keep all the divisions and emphasis both cross selling across divisions but he especially liked the annuity like nature of service contracts. It was Gerstner who really pushed the company into consulting and services. The stock took off and has never looked back.

Prior to Gerster's arrival, the board was stacked with Akers cronies, but they ultimately made the right decision for stakeholders in pushing Akers out and hiring Gerstner. It ought to be an HBS case study in effective corporate governance.

 
At 6/20/2011 3:52 PM, OpenID Sprewell said...

Morganovich, funny how you assert that lots of companies exist for centuries and yet can't name a single one. :D There are exceptions to every rule, but they are exceptions for a reason: there's very few of them.

"further, microsoft is the classic example of a great company destroyed by being made into a public whipping boy and for governmental favoritism."

Haha, I can't wait to see where this goes.

"their stock has NEVER recovered from the anti trust suit. this is because they are now forced to fight with one arm behind their back against favored forms that are allowed to do what they are not."

Lol, I knew this would be good.

"microsoft is not allowed to integrate the browser into the OS. google is. thus, andriod is killing windows 7 mobile.

google is integrating the browser with office like productivity packages and looks to release a cloud based OS. microsoft is legally prohibited fro competing."

And we have the punchline, X) funny shit, Morganovich. I hope you aren't investing in tech, because you're obviously buying the company line that they feed you. I don't know if the past legal action against Microsoft disallows WP7 from doing things Android can, but I have not heard of a single restriction: please name something. I think you're actually thinking of ChromeOS, which is a fully browser-based OS from Google. Microsoft should be happy if they're not allowed to compete with ChromeOS, as it's a resoundingly dumb idea. It's always funny when non-techies like yourself try to sound smart on tech. :)

 
At 6/20/2011 3:53 PM, OpenID Sprewell said...

"and this is just absurd. google doesn't patent? oracle? vm ware?"
They all patent to some extent but Google's not running to patent all the search algorithms on their servers, their secret sauce, as that would just tip off their competitors to create similar stuff that works around the patents. IBM and Corning do some basic research, I wouldn't call it "large amounts." Basic research does not equal "true innovation" anyway. Amazon is actually the most innovative dot.com in customer-facing features, but that's very far from "basic research."

"IBM has successfully reinvented itself numerous times to adapt to the next wave of technology."
I wouldn't say "successfully reinvented" more like "somehow managed to survive with increasingly unsustainable measures."

"betting against it because they file patents and you do not understand the value of basic research for custom asics seems a terribly flawed idea."
Haha, your loony technical assertions only get funnier and funnier. XD Please explain how a single result of their "basic research" got into custom ASICS, this should be hilarious. Nobody puts "basic research" about semiconductors into custom ASICS, which are just about a different component layout.

 
At 6/20/2011 3:56 PM, OpenID Sprewell said...

"and this is pure nonsense. who are these "price insensitive" companies of which you speak? can you give me a list? that would be a valuable sales funnel."
Have you ever looked at the IBM sales list? Obviously you're either ignorant or incapable of judging whether it's nonsense or not.

"there are still (and always will be) specific applications for which generally available computing systems are not well suited. the fact that IBM is a trusted brand to create such bespoke systems is precisely why they will succeed and command premium pricing. if you are betting your business on a system, be it a trading system of an airline reservation system, you need it to work and you need to know that it can be upgraded in the future (that your vendor will still be there) and that they will keep up with the technology curve."
Yes, this is why IBM still manages to eke out a living, despite simply rebranding the same offshored services as anyone else, just with the IBM brand name now. If you think that can last, I have a bridge to sell you too. :)

"no bet in technology is certain, but i'd be willing to wager that big blue will be here long after you are gone."
Well, I don't know if I'll be here in 50 years, given the current lifespan of us puny humans, but I'd certainly take the bet that IBM won't be here much longer. If Intrade had a contract on whether IBM will have 1% of their current revenues in 50 years (you have to make it a fraction because these name brands often live on as worthless shells), I would certainly bet the house on the under. Perhaps you are currently betting on their stock that they do well, let's see who's proven right. :)

 
At 6/20/2011 4:03 PM, OpenID Sprewell said...

Jet, DuPont has also had to divest itself of acquisitions and stock because of anti-trust actions. I'm sure I could easily find similarly anti-competitive behavior for the others. While I don't believe in anti-trust as a legal remedy these days, though perhaps it made more sense a century ago when corruption was more widespread, companies do anti-competitive things all the time and one shouldn't applaud the victors just because they got away with it.

 
At 6/20/2011 5:22 PM, Blogger Jet Beagle said...

Sprewell,

That a company has been required to divest itself of parts is not an indication of wrong-doing or even anti-competitive behavior. Furthermore, the alleged "anticompetitive behavior" you asserted existed for only 10 of the 210 year history of the company.

Your initial assertion was really off-base, but I doubt you would ever admit it. My reply to your comment was made to influence other readers.

 
At 6/21/2011 2:19 PM, Blogger morganovich said...

"If Intrade had a contract on whether IBM will have 1% of their current revenues in 50 years (you have to make it a fraction because these name brands often live on as worthless shells), I would certainly bet the house on the under. "

and you would lose horribly.

stop and ponder just how stupid the statement you have just made is.

ibm has 100 billion in revenues.

they have individual teams that punch out $1bn.

you are betting that a company that has successfully reinvented itself for 100 years, has a 14%+ net operating margin and over $14 billion a year in profits is going to lose 99.8% of its revenues in real terms. (3% annualized inflation for 50 years is only $228 million in current dollars) $228 million is one good sized contract.

you seem to have some emotional response to their using offshore labor and it is clouding your judgment, leading you to make ridiculous bets.

i don't invest in companies the size of IBM (we only do microcaps), so i have no position nor axe to grind, but i would happily take your 1% bet in as big a size as you would be willing to put up.

the scenario you paint is awfully implausible.

remember: integrators benefit from complexity. systems are NOT getting simpler.

 
At 6/21/2011 2:35 PM, Blogger morganovich said...

"Yes, this is why IBM still manages to eke out a living, despite simply rebranding the same offshored services as anyone else, just with the IBM brand name now. If you think that can last, I have a bridge to sell you too. :)"

that's a ridiculous analysis. ever hear the phrase "you never get fired for buying IBM"? it's still true.

let's imagine you are goldman sachs. you plan to be around for another several hundred years, how long is irrelevant, what's relevant is that it's longer then the expected lifecycle of all the technology you are installing.

you want an integrator that A) will be there and can make anything that goes wrong right and B)will be there for your next upgrade and the one after than and after that.

"sprewell consulting" will never even get a look at a deal like that. you would not be well enough capitalized nor have the manpower and the reference accounts.

i had to rip out and replace a whole home audio system in the house i bought because the integrator who did all the crestron programming went out of business and no one could upgrade it.

that's a simple system. now imagine you have an airline reservation system. you gonna go with someone who could be gone in 5 years, or one of the big boys with proven staying power?

you seem to have some very strange ideas about how business decisions are made.

just being able to do the work is not enough.

 
At 6/21/2011 6:21 PM, OpenID Sprewell said...

Jet, I see, so the government forced DuPont to divest for no reason at all? We'd have to look into the merits of the case to decide that for sure, but I would certainly call that case "an indication." Their 210-year history is irrelevant as I bet they weren't that big for most of their history. My initial assertion was perfectly on-point, made even more so by your strange counter that the govt making them divest means nothing. I suspect it is you who will never admit it as I simply go where the evidence leads, which is why even though I'm a free market guy, I'm perfectly willing to talk about problems in the market, whereas you seem to want to create shining caricatures of these long-running companies that don't reflect reality.

Morganovich, like you, I have no bet on IBM; I don't even put money in the stock market. I have zero problem with offshoring either, I'm just noting the reality that it's tough to build a competitive advantage off that vast labor pool at the moment. SGI had $3.8 billion in revenues in 1997 and had to sell itself for $25 million in 2009: things move fast in tech. That IBM has "successfully reinvented" itself in the past means nothing for the future, you know that, particularly considering how I've noted that the latest reinvention is shaky at best.

 
At 6/21/2011 6:22 PM, OpenID Sprewell said...

You only consider their collapse implausible because you underestimate the giant changes that are coming. Integration is highly competitive and only going to get more so, as it's not as hard as building an actual product. You must be living in another decade if you think that old IBM trope still holds true. There are plenty of consulting firms that would be adequately capitalized and staffed to handle Goldman, you don't need IBM for that. You are spouting the received wisdom about how their brand matters, whereas I'm looking at underlying quality and competition, factors that don't bode well for IBM. I'm not worried about my prediction at all; I would be very surprised if IBM exists in any form other than a shell, like SGI, in 50 years. Let's see who's proven right. :)

 
At 6/22/2011 10:58 AM, Blogger Seth said...

It's been a long time since I've been able to explain succinctly what it is exactly that IBM does to make money.

 

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