Compaq

IBM did not invent personal computing but their "PC" became synonymous with the category. Having entered the market in 1981, the IBM PC quickly became the top selling brand. From 1984 to 1993 IBM sold more PCs than any other vendor, conceding the spot to Compaq which remained on top only until 2000. No PC vendor remained at the top of the sales leagues longer than IBM. HP had the second longest run but that run was broken last year as Lenovo (who acquired IBM's PC business) surged.

As the graph above shows, the period of time when IBM was dominant was characterized by far lower volumes. In 2004, the year IBM exited, they sold about 10 million units. ((as the graph shows, if we consider Lenovo as taking over from there, they did a very good job extending the legacy.)) It was a decent performance but one that did not keep up with the Dell and HP/Compaq race to the bottom in pricing and subsequent rise in volumes.

However, throughout its position of strength, IBM was a reluctant PC maker. IBM never controlled the PC platform the way they had controlled their mainframe and mini-computer businesses. Their falling out with Microsoft over OS/2 and their attempts at differentiating with the PS/2 architecture show how uncomfortable the situation was. Their exit in 2004 must have come as a relief and, in retrospect, they should be congratulated for having exited the market well before it began deteriorating. First came pricing and margin collapse and later total volumes began to decline. Most of the remaining vendors are today in various states of distress. Lenovo is growing but incumbents like Dell, HP and entrants have come and gone (Fujitsu, Sony, NEC, Toshiba). Potential disruptors  like Asus and Acer have found no long-term success with PCs.

This is because without control over the platform, PC hardware is nothing more than a commodity, with negligible margins, intense competition and an inability to control one's destiny.

One company making computers did manage to control its destiny. By continuous refinement, the Macintosh survived and even thrived as the market pivoted toward mobility (and hence requiring integration that values design).  Indeed, Apple now ships over 17 million Macs a year. More than either IBM or Compaq did at their peaks. It's not in the top five globally but has a very profitable niche. ((It's very likely that it captures more operating profit than the top five vendors combined.))

As a matter of fact, through 2013 Apple shipped a total of 156.5 million Macs,  50% more than all IBM PCs ever shipped. Apple also shipped more than twice as many iPads and five times more iPhones. And it's not just popular with consumers. With iOS Apple manages to reach 98% of Fortune 500 companies and 92% of Global 500.

At the same time, even though IBM exited the hardware business, it remained a powerful force in computing. IBM pivoted to primarily being a service company with a vast client base and increasing global reach. It essentially moved up the value chain to become an integrated services provider to business customers. IBM's reach in breadth and depth of services is extraordinary.

This dramatic turnaround–Apple moving to a device leadership position and IBM moving to a service leadership position–created the conditions for today's announcement of a strategic partnership--an event which is astounding to those who witnessed the 1980s and 1990s. Were it not for the tenacious independence of Apple and the business model agility of IBM, neither company would be around today to leverage one another.

There is drama in this industry and this latest chapter has a plot twist which any poet would envy.

HP's sudden departure from a business model that has sustained the company since inception is symptomatic of the passing of an era. Yesterday HP announced that it would exit the PC and tablet computer business, focusing on higher-margin "strategic priorities of cloud, solutions and software with an emphasis on enterprise, commercial and government markets." In other words, HP is fleeing upmarket, away from a core that it will abandon to device makers.

HP management conceded that the disruptive impact of the iPad forced their hand but that hand was already quite weak from a decade of over-serving the market. The last decade offered plenty of opportunities for incumbent PC companies to adjust to the realities of mobility. However only one computer maker made the transition.

Why is that?

Consider how HP and Apple faced the changes in the PC market almost exactly a decade ago.

• On September 3, 2001, HP announced that they would acquire Compaq.
• On October 23, 2001, Apple announced the iPod.

The rest, as they say, is history.

But what would any reasonable person have done? The PC industry was no longer young but still thriving, why not consolidate? Consolidation is a natural and well-reasoned practice for maturing industries. You get rid of over-capacity, you consolidate overhead, "leverage synergies" and boost margins.

And it's not like they were ignoring innovation. Compaq had a growing line of PDAs, so there were plenty of diversification opportunities. Microsoft was offering Pocket PC and the Phone edition was on the roadmap. HP was clearly watching mobility carefully.

Contrast that with Apple's predicament. Which aspiring manager would want to deal with the disaster that was Apple at the time? Apple was struggling with a declining Mac business and had just re-booted it with OS X but it seemed a quixotic effort. Moving to music players seemed desperate (and late). Margins were low, commodity vendors were lining up, record labels offered resistance, they did not have any IP or any DRM and nothing but Mac users as target audience.

As it turns out, the path of sustaining and the path of disruption diverged that moment in time a decade ago. Companies like HTC, Apple and RIM were embryonic in their device businesses vs. Goliaths like Microsoft, HP and Dell. But they grew, at first slowly, but at all times profitably.

By the time their success was worth noticing, in 2004, HP and Dell decided to dabble in devices. But all their efforts were half-hearted. They did not crave profits but growth and share. HP's PDAs and phones never received management attention. How do I know? Because they relied on off-the-shelf components for everything including software. It indicated that the value to be offered was in "leveraging" (there's that word again) their brand and distribution. The value of HP was not to build something great--something that required blood, sweat and tears.

The result was a set of mediocre experiences while the (now incumbent) Apple was iterating rapidly into new directions. By the time the future was self-evident, it was too late to build foundations. HP did the right thing to acquire Palm, but they did it far too late. In 2010 the game was over.

How cruel.

But that's the nature of unforeseeable growth: you cannot foresee what will happen and plans never work out. Data and planning don't help. The lesson is that you need to plan for that which cannot be planned. When you are at your peak you must assume failure is imminent and when you are at the trough you must assume success is inevitable.

All failures of strategy are rooted in the assumption that outcomes are predictable.

This is why I expect Apple is now working on shaping the post-iPhone world.

--

Update: This article has also been published in the Harvard Business Review blog: HP's Decade-Long Departure - Horace Dediu - Harvard Business Review