How we got to now in enterprise software, and where we are headed — Part 2/6
The distant past — Early enterprise computing with Mainframes
The early Mainframes were designed to serve Cold War clients like the US Department of Defense during the 1950s. Since then, IBM did thriving business with Mainframes; initially for punched card processing and later electronic data processing. By 1965, IBM had 65% market share and in 1969, it attracted anti-trust regulation. The Mainframe’s core strength and focus was transaction processing. Therefore all big thriving businesses of the 50s, 60s and 70s invested heavily in mainframes and baked them into their business operations and processes. Since these systems handle such core business logic (so reliably), it has been hard for companies to peel them off easily. The Mainframes have been the most resilient platform of our times. Over the decades, they have continuously evolved, adapted and tried hard to stay relevant to date.
Business Model Dynamics:
The genius of IBM is that in addition to having a great Product-Market Fit with the Mainframe, they also came up with a highly sticky business model. They leased the computers and owned all aspects of it — including hardware, software, peripherals, services, and maintenance. They offered a bundled price to the customers. They charged the customer for hardware and peripheral lease, and other things (software and services) were free. This strategy allowed IBM to have high markups and offer steep incentives for volume purchases. Monthly prices started at $2,700 for a “basic” configuration and up to $115,000 for a “typical” large multi-system. IBM’s revenue swelled from $3.6 billion in 1965 to $8.3 billion by 1971.
IBM pursued the sales execution with rigor and aggression. They are known for introducing many of the enterprise sales concepts and best practices that are common today. Terms like sales funnel, pipeline and BATNA made it to sales managers’ daily lexicon. I heard anecdotes from ex-IBMers about how they would hire people that pursued competitive sports career seriously from young age (but could not make it to the major leagues). IBM would channel their competitive fire and hunger for victory, provide them with good sales training, and pursue sales with intense discipline. They have mastered the art and science of up-selling and cross-selling early on, and invested considerable effort in building strong relationships with senior customer executives.
In the 1970s, due to the anti-trust lawsuit, IBM chose to unbundle its software and services from hardware sales. With this move, the software industry was officially born. Software is now a separate ‘value add’ item that has monetary value, and can be licensed.
Investment and M&A Dynamics:
I am not aware of any dynamics in the Mainframe business that are influenced by the external investment climate. The impact of private equity investment on technology companies started with Fairchild Semiconductors — the first company that is known to have raised Venture Capital in 1959. The real impact of this style on investment on the tech industry and on innovation (as we know it today) would be felt many years later.
The legendary S/360 Mainframe was estimated to cost $675M and went $4b over-budget. Fortune magazine called S/360 the $5billion gamble in 1966.
The early version of the Mainframes (700s) were made with vacuum tubes and provided limited functionality. The subsequent S/360 was a game changer and a key influencer in the history of enterprise computing. Prior to the S/360, the hardware, OS and software were designed and built based on customer’s bespoke requirements. That approach was not easily scalable and error prone. The S/360 introduced the concept of separating architecture from implementation. This enabled IBM to have a common architecture that met the needs of a diverse customer base — from academic to corporate to defense. The top of the line S/360 was 40x more powerful than the base version. This ability to upgrade to bigger faster machines and still continue to use the same software libraries was a key value proposition for customers, and facilitated the rapid adoption of S/360. The first wave of customer business applications were mostly written in Assembler, COBOL, FORTRAN, or PL/1. Some of these older programs are still in use today.
The S/360 introduced several concepts and technologies that have become the foundation for the future of enterprise computing. These include the 8-bit byte, big-endian byte ordering, bootstrap process, microcoded CPUs, floating point architecture, magnetic tape, I/O mechanism, debugging, and many others.
In 1964, IBM introduced the first video display terminals with 2260. Due to the popularity of the punch cards at the time, the 2260 displayed up to 960 characters on the face of the CRT, arranged as 12 lines of 80 characters each. The influence of punch card’s 80 character width continued for several decades later. Microsoft Windows command prompt, some file formats such as FITS, continued the tradition of using the 80 character width. IBM 2260 was intended for transactional data entry, and it was widely speculated that this technology would pave the way for a paperless office.
Given the mission-critical nature and relevance of Mainframe in customer businesses, IBM has made great efforts to keep the Mainframe relevant and backward compatible over the years. The current generation is the Z Series. It has support for Linux, Java, XML, DB2 Database, WebSphere app server and others. Emulators that run on x86 are available to make mainframe development easier.
As we can see, the S/360 and many other products, concepts, technologies that came with it, continue to have a lasting impact for generations to come.
Mainframes provided companies with unprecedented productivity and business advantages (versus using alternative approaches of the time). Companies have relied on the Mainframes for various kinds of batch and large-scale transaction processing. As such, the Mainframes are deeply weaved into the business operations of most companies.
In the early days companies had small teams that worked with the Mainframes. In addition, they relied heavily on services from IBM or third party vendors for Mainframe programming and maintenance. Over the years, as IT organizations grew, the dynamics of Mainframe computing for customers has evolved as well. As other IT systems came into play, the need to integrate them with Mainframes became more prevalent, and created a cottage industry in itself. In all, customers understood the power of software driven automation and optimization with declarative programmable logic.
It is no secret that Mainframe market was tightly controlled, and IBM used the market power to its advantage for a long time. There were other vendors that tried to compete with IBM, but in reality they were not much of a match in the long run. These competitors from 60s and 70s were nucknamed the Seven Dwarfs and the BUNCH. However, IBM’s moat would begin to erode in the second half of 1970s.