January 1, 1970: IBM, Microsoft & The Unbundling of Software from Hardware
Antitrust action resulted in IBM being having to decouple hardware from software, creating a new American software industry that was then consolidated by Microsoft.
One of the last great antitrust breakups, apart from the breakup of AT&T, which was shamefully put back together again1, was the breakup of IBM. Because of the looming antitrust trial IBM unbundled its hardware from its software, leading to the beginning of the American software industry, the rise of Microsoft and today’s Big Tech monopolies.
From punchcards to computers
In the 1950s IBM, known colloquially as “Big Blue” owned, rented and produced the tabular punchcard business machines that were the state of the art of the American computer industry. IBM was the most important name in technology and had cornered the lucrative punchcard market. During World War II breaking the German code that required two million punchcards per week. By the 1950s data processing was indispensable to the military and most sizable American corporations. Punchcards were big business and IBM didn’t have much motivation to shake up this lucrative market.
However, scientists and engineers funded by the United States Army built the world’s first programmable electric computer in 1945, called ENIAC, that would soon make IBM’s whole manual tabular punchcard business obsolete. IBM by that point was already a bully on the scene, pushing out competitors, bundling products and squeezing suppliers. They also played both sides in World War II, selling punchcard software to the Nazis and the American military2. IBM wielded enormous political power through decades of lobbying connections, military contracts and bribes.
In the face of the technological shift that was electronic computing and the monopoly power of IBM the federal government stepped in and filed a lawsuit to break up the company in 1952. They won the case by 1956. At the time of the suit Graham Morison, head of the Truman Antitrust Division said:
“The advances of the future can be made to serve the common welfare by affording opportunities for initiative and enterprise. Or they can contribute increasingly to the growth of private monopoly.”
Back then, as they do today, government officials saw that new technologies can bring new opportunities for enterprising, free individuals or the new technologies can further cement the dominance of entrenched players, growing the power of financial engineers and monopolists.
The lawsuits of the 1950s forced IBM to license some of its patents and share its knowledge, opening up the electronics field and forcing IBM begrudgingly away from the punchcard industry and full on into electronic computers.
The unbundling of software from hardware
IBM used it’s resources to build a thriving electronics hardware business through the 1960s. Technological advancements in electronics hardware advanced a lot faster and was more expensive than the software that ran on those computers. IBM bundled its catalog of software products for free or far below cost with the purchase of IBM hardware. This made it nearly impossible for new or more sophisticated firms to compete because they had to compete with one of the largest companies on earth in both hardware and software. It wasn’t possible. No corporate buyer ever got fired for buying from IBM.
In 1969 the federal government stepped in again, alleging that IBM violated Section 2 of the Sherman Antitrust Act by monopolizing the general-purpose electronic digital computer system market, specifically monopolizing business computing.
The government filed an antitrust suit against the company in January 1969. In anticipation of and as a direct result of the government’s lawsuit IBM announced in June 1969 that soon they would be unbundling computer hardware from computer software. By the next month in 1969 they announced when the unbundling would take effect:
January 1, 1970
The Beginning of the Unix Epoch
If you’re not a computer programmer January 1, 1970 probably has no meaning to you. If you write code for a living though it probably looks familiar — it’s the unix epoch. If you head right now into the developer console of the web browser you’re reading this article on and paste in Date.now() you’ll get a seemingly random number that is the amount of milliseconds between you and January 1st, 1970.
The unix epoch was cobbled together and decided on by a bunch of hackers in the 70s, but as Josh Davis in
convincingly argues this date was the beginning of the American software industry:“While historically the Unix epoch is an arbitrary date, it just so happens to coincide with a momentous date for the computing industry. It’s an incredible coincidence given the importance the date had on the software industry. It's especially meaningful for software engineers everywhere because it was the date that the market and industry were legitimized.”
With unbundling, instead of IBM giving away computer software for free with the computer machine they put a price on the software. Software became a standalone product. A price created a market for software. People could build businesses selling software after the unbundling. Those businesses wouldn’t have been viable before the unbundling because software was free anytime you bought an IBM machine.
Unbundling of software from hardware was a crucial development for the American technology space, spurred on by government antitrust action3. The government’s lawsuit against IBM set the stage for the personal computer revolution of the 80s and 90s, releasing pent up innovation and ultimately driving crucial innovation in both computer hardware and computer software.
The Personal Computer Revolution
One of the most fascinating chapters for me while reading Malcom Gladwell’s book Outliers was the chapter on the dawn of the personal computer age. Gladwell asserts that the personal computer revolution began in January 1975 when Popular Electronics announced the Altair 8800: the first home minicomputer that rivaled commercial models was brought to market.
Gladwell asserts that those best positioned to take advantage of this technological advancement were people in a certain age range. If you were smart with computers but out of college you probably had a job at IBM building multimillion dollar mainframes. If you were in high school you’d be too young to be taken seriously and to take advantage of the market shift. You’d have to be about 21 or 22 on 1975, so born around 1954 or 1955. Gladwell then goes on to list when the titans of the personal computer industry were born:
Bill Gates, co-founder of Microsoft, born 1955
Paul Allen, co-founder of Microsoft, born 1953
Steve Ballmer, early Microsoft employee and later CEO, born 1956
Steve Jobs, founder of Apple, born 1955
Bill Joy, co-founder of Sun Microsystems, born 1954
Scott McNealy, co-founder of Sun Microsystems, born 1954
Vinod Khosla, co-founder of Sun Microsystems and founder of Khosla Ventures, born 1954
Andy Bechtolsheim, co-founder of Sun Microsystems, born 1955
Tim Berners-Lee, inventor of the internet, born 1955
Eric Schmidt, Google CEO, born 1955
The point here from Gladwell is that instead of looking too closely at the successful people themselves we should look at the world that surrounds successful people.
In the case of people who were successful with the personal computer revolution they were the perfect age to benefit from the unbundling of software from hardware and the development of the personal computer.
Microsoft’s Monopoly in the 80s and 90s
Microsoft was founded in 19754 and Gate’s Mom was on the national board for United Way with IBM’s CEO at the time5. Microsoft won the contract with IBM to build their software, DOS. This was something IBM could not do themselves because of the antitrust lawsuit they were currently fighting. IBM partnered with Microsoft, allowing them in to the market. The shift from advances in hardware to advances in software and ruthless business practices propelled Microsoft forward. They were ruled a monopoly in their own right by 2001 though the decision and breakup was neutered by the Bush administration’s Justice department.
Microsoft owned the dominant operating system, Windows, and the dominant browser, Internet Explorer, but because of antitrust scrutiny they had to forfeit the search bar to companies like Yahoo! and Google. Despite Bill Gates’ warnings about charging a vig for every transaction on the internet they forfeited that to Amazon.
Government action especially at technological inflection points drives innovation
Government action and intervention has defined and developed the American technology industry. Without the government’s case against IBM hardware and software would never have been unbundled. The government’s intervention created a new software industry, new competition, new companies and new freedoms for the rest of us. When the software industry became consolidated under Microsoft the government took action again, attempting to break up the company. That antitrust suit lead to the ascent of today’s internet companies Google and Amazon. Internet companies themselves have consolidated the market as we stare into a new AI revolution. The government is again taking action to create new markets and release innovation through their antitrust cases against Google for monopolizing search and Amazon for unfair business practices.
I hope this has been some helpful history about antitrust and the American computer industry! Don’t forget to like and subscribe ;)
AT&T was the sole provider of telephone services in the United States until the government required that AT&T be broken up into “baby bell” systems. If you live in San Francisco you may remember the Giants stadium being called “Pac Bell” park, short for Pacific Bell company one of the baby bells for California and Nevada. Via financial engineering and government regulators being asleep at the wheel all the baby bells were able to be gobbled back up again into the AT&T conglomerate. Hence the renaming of PacBell Park to AT&T Park which is now Oracle Park. If you’re really interested in the telephone systems you can read about the more recent fiasco of the T-Mobile and Sprint merger in the below article:
The great unbundling happened toward the beginning of the trial, the rest of the case against IBM was a bit of a clusterfuck though:
IBM produced 30 million pages of materials during discovery.
Trial began six years after the complaint was filed.
The trial itself lasted for another six years.
The trial transcript contains over 104,400 pages with thousands of documents placed in the record.
It ended in January 1982 when the Department of Justice dropped the case.
However as we’ll explore in the rest of the article the government’s Herculean case against IBM opened up room to breathe for new startup companies like Microsoft, Sun MicroSystems and Apple.
Apple was founded in 1977.
When IBM CEO John Opel heard Microsoft would get the contract for building DOS for IBM, he reportedly said "Oh, is that Mary Gates' boy's company?"