IBM Changes Its Name and Product Line

Date February, 1924

The conglomerate Computing-Tabulating-Recording signaled a new corporate direction when it discarded its old name and became International Business Machines.

Locale New York, New York

Key Figures

• Thomas J. Watson, Sr. (1874-1956), general manager of the company that became IBM
• Thomas J. Watson, Jr. (1914-1993), general manager who took over from his father and led IBM into the computer age
• Charles Ranlett Flint (1850-1934), promoter who organized CTR and selected Watson to be its leader
• Herman Hollerith (1860-1929), inventor of census tabulating machines, which became CTR’s most important product
• George Fairchild (1854-1924), first chairman of CTR, who left most of the real work to Watson

Summary of Event

In 1910, Charles Ranlett Flint created Computing-Tabulating-Recording (CTR). Flint was a colorful promoter who had earlier created American Woolen, United States Rubber, and American Chicle; he was also a founder of the Automobile Club of America. Today CTR would be called a conglomerate, given that its divisions were largely unrelated to one another. International Time Recording manufactured workplace time clocks and time cards onto which workers punched their hours of arrival and departure. The Computing Scale Company of America’s primary product was a scale that came equipped with a chart enabling a clerk to calculate the price of an item from its weight and price per pound. Tabulating Machine Company produced machines used to tabulate results from the 1890 census and the cards on which information was punched.

The last of these companies was to prove the key element of CTR’s success. Its founder, inventor Herman Hollerith, worked at the U.S. Census Bureau, where difficulties had developed in the tabulation of the 1880 census. It seemed clear that unless some mechanical way could be invented to speed calculations, the 1890 counting would take more than ten years to complete and would thus continue into the 1900 census year. Hollerith developed a machine that punched census information such as race, sex, age, and address onto cards. The cards could be fed into a sorter that would group them according to any desired set of data that had been punched. An operator could then count them, thus completing the task. The machines were a huge success, but the government insisted on leasing them rather than buying them outright. Hollerith agreed to this arrangement, noting later that although the machines eventually turned a profit, the real returns came from the sale of the punch cards on which data were recorded.

Flint considered International Time to be the most promising of the CTR divisions, so that division’s executives dominated the first CTR board of directors. Hollerith was given the job of chief engineer and was not consulted when the company’s officers were chosen. Flint arranged for a $7 million loan to get the company started. The loan had a term of thirty years at an interest rate of 6 percent, high by the standards of the time. Lenders apparently considered the company a relatively high-risk venture. As the former president of International Time, George Fairchild was a logical choice for CTR’s first chairman. Fairchild had been elected to the House of Representatives in 1906 and had just been named by President William Howard Taft to a ministerial post in Mexico. Fairchild thus became the firm’s nominal leader, but Frank Kondolf, the former chief operating officer at International Time, performed the day-to-day management. Kondolf did not impress Flint, who embarked on a search for another leader.

Flint discovered Thomas J. Watson, today considered to be one of America’s premier businessmen. Watson came from the small town of Painted Post, near Corning, in Upper New York. After holding several jobs in sales, in 1895 Watson accepted a trainee position at National Cash Register (NCR), where the chief executive officer, John Patterson, was a pioneering figure in the fledgling business-machine industry. Patterson extolled the role of salesperson, which he considered to be the key role in the firm. At a time when salespeople were considered to be somewhat disreputable, NCR trained its sales force to be straightforward, prompt, and solicitous of customers’ interests. Watson learned well and quickly rose through the ranks to become NCR’s star salesman in upper New York.

In 1903, Watson was summoned to NCR’s Dayton, Ohio, headquarters and told of a plan to smash the company’s competition. He would establish a company, to be known as Watson’s Cash Register & Second-Hand Exchange, that would undersell competitors and force them out of the business. He began operating in New York City and then went on to Philadelphia and Chicago. The company was quite successful, but its secret ties with NCR constituted a violation of antitrust laws.

In 1910, American Cash Register filed antitrust complaints against NCR. Two years later, the federal government joined in the case, charging Patterson, Watson, and others with criminal violations. They were found guilty in 1913 and sentenced to fines and prison terms. Appeals followed, and in 1915 the courts found deficiencies and unfairness in the original trial, ordering a new one. The matter was eventually dropped, but in the process Patterson and Watson had quarreled. Patterson had fired Watson, who now was available to Flint and CTR.

Flint offered Watson the post of general manager at a salary of $25,000 per year until the criminal charges were settled. He accepted and began work in May, 1914. After an examination of the CTR businesses, Watson decided that Tabulating Machine Company had the most promising line of products. In addition to the general managership of CTR, he assumed the presidency of that company. After the antitrust suit against him was dropped, he became president of CTR as well.

Watson placed his own men in positions of leadership and devised new markets for tabulating machines. The Hollerith model was employed by corporations to keep inventories and by railroads to maintain schedules. The machines were leased, and the cards used to operate them were sold outright. As with the census machines, the leases provided a steady cash flow and sales of the cards supplied large profits. By 1918, CTR was producing thirty million cards monthly for the Midwest alone. All the while, sales of time clocks and scales stagnated.

Fairchild died in December, 1924, and Watson assumed the title of chairman along with the position of chief executive officer. Earlier in the year, he had decided to change the company’s name to reflect its new business concentration. In 1917, he had christened the company’s Canadian subsidiary International Business Machines. In February, 1924, he replaced CTR’s corporate designation with the same name.

Significance

The alteration of a company’s name is hardly a major event in itself, but CTR’s change signaled a change in corporate direction. In time, scales and clocks would be discarded from the company’s product lines, and Watson would concentrate on business machines.

Under Watson’s leadership, IBM’s engineers designed accounting and other machines, breaking through into new areas. IBM purchased a small company that manufactured electric typewriters and made it the leader in a growing field. Columbia University professors conceived a plan to develop multiple-choice tests that could be taken on standard forms and graded by machine. Watson provided the researchers with materials and machines, and out of this came standardized tests graded by machines—IBM machines. The company also produced millions of forms to be used with various machines.

IBM produced large calculators capable of performing computations in minutes that previously had taken hours. It developed machines to process payrolls, with the payroll checks created on IBM cards. During World War II, IBM created machines for the military. By the war’s end, IBM had annual revenues of $142 million and earnings of $10.9 million. Remington Rand, a competitor in some fields, had sales of $133 million but earnings of only $5.3 million.

Remington Rand then purchased UNIVAC, a small entity attempting to develop the first computer, from American Totalizator. Remington Rand and its large electromechanical computers won the contract for the 1950 census from a stunned IBM. Thomas J. Watson, Jr., who had come into contact with military computers during the war, urged his father to develop an interest in them. The elder Watson demurred. Research indicated that at best only a dozen or so computers might be sold. Besides, IBM was the master in large calculators, which really were computers without programs or memories. He wondered about the wisdom of giving up a leadership position to devote more energy to an untested technology. The younger Watson persisted, and IBM entered the computer arena. With superior research and salesmanship, IBM drew close to UNIVAC and then surpassed it. In 1953, UNIVAC had most of the computer market; by 1955, IBM had the greatest share of placements.

Other firms soon entered the field, including Burroughs, NCR, Honeywell, General Electric, and RCA. There were also some new companies to contend with, led by Control Data, Digital Equipment, and Scientific Data Systems (soon to be acquired by Xerox).

In the mid-1960’s, IBM created a new line of data-processing equipment known as the 360 series. Based on integrated circuits, these machines would make obsolete many highly successful machines then in production. Tom Watson, Jr., was taking the same kind of gamble as general manager of IBM that he had when entering the computer market. The line was a success, and it increased IBM’s lead over its rivals. Several left the field or sold off their computer operations, but this prompted the appearance of new companies that attempted to emulate IBM machines and sell them at lower prices. In response, IBM accelerated the introduction of new mainframe computers, and the upstarts faltered. They could not copy the IBM products quickly enough to earn a profit before IBM introduced a new product that made the old copies unsalable.

Watson retired in 1971 and was succeeded in turn by Vincent Learson, Frank Cary, John Opel, and John Akers. IBM remained the industry leader into the 1970’s. Although rivals complained that their machines delivered more power for the buyer’s dollar, IBM’s support system was such that users of equipment still preferred IBM, which was affectionately called “Big Blue.” Change was coming, however, and this time IBM faltered. In the mid-1970’s, few people had heard of the small desktop computers fashioned from parts by enthusiasts. Soon, however, desktop computers were on sale to office managers. Sales to individuals followed shortly thereafter. The first buyers used their word-processing capacities as replacements for typewriters. As more programs were written and marketed, the small machines were used for other functions, many of which had previously required much larger computers. Each company had its own software, and these programs rarely worked on competitors’ machines.

IBM entered the personal computer market in 1981 and announced that its architecture—the basic structure of its machines—would be available to competitors. Programs could be written to be compatible with machines produced by more than one company. This move was hailed by the industry but may have been an error. Using basic operating software from Microsoft and computer chips from Intel, IBM made it possible for many rivals to enter the field by purchasing components rather than seeking permission to use IBM patents.

Small computers became increasingly powerful, cutting into IBM’s sales and leases of larger units. They became “commodity” products, ones for which brand name was relatively unimportant to buyers. They knew what a personal computer was supposed to do, and almost all the machines on the market performed those tasks with approximately the same proficiency and speed. IBM had a difficult time marketing its products as superior. The company responded by purchasing ROLM, a manufacturer of sophisticated telephonic equipment, and by taking an interest in MCI Communications, a rival to American Telephone and Telegraph (AT&T) in long-line telephonics. Clearly, IBM intended to branch out into areas related to data transmission. Both forays failed, and IBM abandoned the fields.

Although IBM made a promising start in the personal computer (PC) field, the company soon stumbled. Its small PC Jr. was a flop, and the company did not have a plausible entry in the laptop and notebook markets until the early 1990’s, far behind competitors. By then, Akers had embarked on a series of restructurings, and it was clear that the company was foundering. In late 1992, Akers announced further cutbacks and a $6 billion charge against restructuring, hinting that more was to come, including a dividend cut. In 1993, IBM hired its first chairman and CEO from the outside, Louis V. Gerstner, who quickly stabilized the company, resisted calls to split it, and aggressively exploited strategies and markets in the newly emerging Internet and network computing arenas. Acquisitions of profitable businesses, such as Lotus Development Corporation and Tivoli Systems, added to its growth. A major public relations event in 1997 was IBM’s unveiling of its Deep Blue supercomputer that defeated World Chess Champion Garry Kasparov. IBM was a major innovator in the development of e-business, but with the collapse of the dot-com industry in the late 1990’s, its fortunes waned. The economic downturn of 2002 saw a slight drop in revenue and net earnings, but IBM quickly recovered, and by 2006 the company employed about 329,000 people and earned $96 billion in revenue and $8.4 billion in net earnings.

Bibliography

Belden, Thomas. The Lengthening Shadow: The Life of Thomas J. Watson. Boston: Little, Brown, 1962. The first biography of Watson, written with IBM’s support. Unduly flattering but useful in showing the kind of image the company hoped establish.

Maisonrouge, Jacques. Inside IBM: A Personal Story. New York: McGraw-Hill, 1989. Maisonrouge was a senior officer at IBM who worked closely with both the Watsons.

Maney, Kevin. The Maverick and His Machine: Thomas Watson, Sr. and the Making of IBM. New York: John Wiley & Sons, 2003. Maney takes a penetrating look at Watson’s life: his ruthless business strategies, his self-absorption, and his inability to differentiate himself from his company. Highly recommended.

Pugh, Emerson W. Building IBM: Shaping an Industry and Its Technology. Cambridge, Mass.: MIT Press, 1995. Useful history, both as a case study of IBM and as an overview of the computer industry generally. Contains an extensive bibliography and an index.

Rodgers, William. Think: A Biography of the Watsons and IBM. New York: Stein & Day, 1969. An early history and biography. Valuable for its point of view on the company during the early years of the computer.

Sobel, Robert. I.B.M.: Colossus in Transition. New York: Times Books, 1981. A standard history of the company during its period of growth and power.

Watson, Thomas J., Jr. A Business and Its Beliefs: The Ideas That Helped Build IBM. Rev. ed. New York: McGraw-Hill, 2003. First published in 1963 and delivered as part of the McKinsey Foundation Lecture Series, sponsored by Columbia University. This is the clearest statement of the IBM philosophy available.

Watson, Thomas J., Jr., and Peter Petre. Father, Son, and Company: My Life at IBM and Beyond. New York: Bantam, 2000. Describes Watson’s relations with his father, with some material on the early history of IBM.

Watson, Thomas J., Sr. Men-Minutes-Money. New York: IBM, 1934. Watson’s interpretation of IBM’s philosophy and policies. Indicates how money was spent on research and production.