THEORY OF THE CREATION OF THE COMPUTER INDUSTRY
Presentation by George Snively to
GE Computer Department Reunion.
That was a mighty long recess!!
Over 35 years ago, many of you were captive in my sales training
classes about financing computers.
Some others of you were captive in my classes on Finance
for Non-financial People.
Now I’ve got you captive again.
You can relax. There
will be no term paper required or any quizzes
- and only one question.
WHO FOUNDED IBM?
Believe it or not, it was not Tom Watson, Sr.!!
Flint, of General Motor’s fame and the very wealthy George Fairchild
formed the company by combining three previously existing companies with a
total capitalization of $6.5 Million – a whole lot of money in 1911.
This was some years before Tom Watson, at age, 40, was hired for an
obscure marketing position where he remained for ten years before becoming
But I get ahead of my story.
The National Cash Register Corp. (NCR) was founded by John
Patterson, who owned the patents on the cash register.
One of his better salesmen was young Tom Watson who, working out of
Rochester, New York would load five cash registers on the back of his
horse drawn wagon and not come home until they were all sold.
Patterson believed that 100% of the cash register market was his by
divine right and he took umbrage with anyone who dared to try to compete
with him. If someone
had the audacity to try to compete for the cash register business, he
would make a “Chinese copy” of the competing machine and sell it below
cost. Selling these
machines, which were called “knock out” machines, readily assured him
of his desired market positioning!
Tom Watson was one of the best salesmen of “knock out” machines
and he had a rapid rise up through the ranks of NCR – assisted by
marrying Patterson’s daughter.
Ultimately, a more devilish competitor, in the form of people
selling used NCR cash registers arose.
Patterson was livid at the thought of someone making money off of
“his” machines and searched for means to quash them.
The plan that he adopted was to put $3 million into a
“sub-rosa” corporation, with Tom Watson as President, which would open
a store across from the offending store and sell new cash registers below
cost. This certainly
had the desired effect of discouraging such resellers and the rise of a
To John Patterson’s and Tom Watson’s surprise, the US Justice
Department took a dim view of these proceedings and indicted this pair of
outstanding citizens and charged them with a nefarious crime.
Not only were they indicted, they were tried.
Not only were they tried, they were convicted.
Not only were they convicted, they were sentenced and they, who
were used to a standard of living that many of us would envy, were being
offered somewhat less lavish, albeit free, accommodations in one of the
facilities of the Federal Government.
They were out on bail, during an appeal and while the government
was trying to decide where to house them, when the great flood of 1912,
triggered by a tornado, hit Dayton.
The campus-like NCR plant was the only high ground in Dayton and
the populace of Dayton was moved into the NCR plant.
Tom Watson and his wife and her sister were in New York where they
had gone shopping for clothes – obviously for the women as Tom was about
to be provided with free clothing. This
was fortunate as he, in New York, and Patterson, in Dayton, were able to
organize a relief train which was the last one to get through the flood.
THEY SAVED THE POPULACE OF DAYTON.
After the above incident, no Ohio judge was going to enforce their
jail sentences and Paterson and Watson were pardoned.
However, soon thereafter, Patterson fired his son-in-law for not
being the “fall guy” during their recent misadventure and providing
his father-in-law with what, in current parlance, we call “believable
Tom then found his way to the Card-Tabulating-Recording Company
(C-T-R), the company that I mentioned earlier, which had been founded by
Flint and Fairchild. Flint
wanted to hire him as VP of Marketing but Fairchild, who was the Chairman
of the Board, was opposed to hiring a character with such a nefarious
reached a compromise – Tom could be hired, but only for an obscure
position with little authority.
This obscure assignment, which lasted until Fairchild died ten
years later, provided Tom with ample time to contemplate his past sins and
to develop a scheme to prevent the future from repeating the past.
no one could acquire ownership of IBM equipment, he would never have to
face a secondary market.
devised what he called a “Machine Service Agreement” which provided
service on a listed number of machines which machines were included in the
agreement bundled the maintenance and hardware into one monthly equipment service –not equipment rental – charge,
and without an option to purchase.
He wanted to avoid any possible implication that the customer was
acquiring the equipment or accumulating any interest therein. He also
provided the personnel to operate the equipment (for after all he owned it
and reserved the right to determine who could operate it) – who were put
on the customer’s payroll – but beholden to IBM for their future
worst fears were later realized when “purchase options”, mandated by
the Justice Department, were exercised by “third parties” to acquire
ownership of IBM equipment and an extremely active secondary market
after 10 years he became President of C-T-R, he changed the name of the
company to the International Business Machine Corporation (IBM).
It is my thesis that it was this Machine Service Agreement which
created the data processing industry.
I maintain that the customers (for other than engineering or
scientific applications) would never have been able to justify the
“purchase” of these very expensive machines and that the “computer
data processing” industry would not have developed! Witness the relatively small process computer industry,
which being “one of a kind” systems could not be rented: - few of them
were sold even though their benefits were much more easily quantified.
Gerald Philippi in the late 1950’s, when he was GE’s
Comptroller, advised GE’s Managers of Finance to place computers on
order – then after cleaning up their procedures to get ready to install
them – cancel the order as they would have achieved 90% of the
contemplated savings and the computer acquisition would no longer be
Amazingly, very few people ever saw this Machine Service Agreement.
Wherever possible, IBM negotiated a “master” agreement at the
highest level of management in their customer.
GE had over 100 different locations using IBM equipment and the DP
managers merely executed “schedules” to add equipment to this Master
Machine Service Agreement. When
we were writing the “terms and conditions” to our “Use Agreement”,
I received contradictory information from Sales and Marketing concerning
IBM’s terms and conditions. When
I went looking for a copy of an IBM agreement all I found were these
schedules. I finally
tracked down GE’s “Master Machine Service Agreement” somewhere (I no
longer recall where) at 570 Lexington Avenue and only managed to get a
copy after demonstrating a “need to know”.
Not only was IBM in the enviable position of providing equipment to
“their” DP Managers under this Machine Service Agreement, by merely
adding schedules, they did some other things that made it possible for
these DP managers, who were beholden to IBM for their training and
professional progress, to add lots and lots of peripherals and upgrades to
these systems which, if purchased, could not have been justified in the
Machine Service Agreements made it easy for them to acquire the equipment
within their expense budgets by merely adding a schedule – avoiding
those nasty Appropriation Requests which would have required extensive
justification and been reviewed by all levels of management up to and
including the Board of Directors.
corporate managements that their Purchasing Agents were not capable of
evaluating the acquisition of data processing equipment and had them give
the DP Managers purchasing authority.
This bypassed the purchasing agents with their annoying and
time-honored practice of requiring three competitive quotes and
negotiating for better prices and terms.
IBM convinced many
of the corporate 500 to pass board resolutions prohibiting the
“purchase” of computers
– again negating the need for Appropriation Requests, and greatly
increasing the cost of entry for potential competitors who would need to
compete with the Machine Service Agreement by also providing equipment on
a monthly rental basis.
There was a
conspiracy of silence where the “IBM beholden” DP managers did not
readily acquaint their management with problems with IBM equipment and/or
software. This gave IBM
a huge number of “beta sites” to test and improve their offerings.
remarkable that competition was ever able to make any inroads into this
tightly controlled market.
Dr. Gale “Buck” Cleven finally broke IBM’s power in the Hughes
Aircraft Company, he returned over 30% of the IBM equipment to IBM as
conclusion, like the butterfly in the rain forest that effects the
ecological balance of the world, THE COMPUTER INDUSTRY IS A RESULT OF a
small Ohio tornado that caused a flood!