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Microsoft Corporation (MSFT), International Business Machines Corp. (IBM): Remember When Even IBM Couldn’t Compete With Microsoft?

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On this day in economic and financial history…

The PC wars were largely over by 1987. International Business Machines Corp. (NYSE:IBM) — or, more precisely, IBM-compatible machines — and Microsoft Corporation (NASDAQ:MSFT) had won, thanks to standardization, clones, and MS-DOS. But neither company was content to rest on its laurels. Time recounts the day that IBM tried to break free of DOS:

It was one of the most ambitious computer-product announcements in history. On April 2, 1987, at twin press conferences in New York and Miami, International Business Machines Corp. (NYSE:IBM) unveiled its plans to reinvent the PC industry, which it had jump-started less than six years earlier with the introduction of the first IBM PC. The company introduced four new computers dubbed the PS/2 line, including an $11,000 model that it said was seven times faster than current models. The new products were rife with advanced features, including 32-bit processors, fancy graphics, 3.5-in. hard-shell floppy-disk drives and optical storage.

And the new hardware was accompanied by a next-generation operating system, OS/2. Co-developed by IBM and Microsoft Corporation (NASDAQ:MSFT), it was intended to replace DOS, the aging software that then powered most of the planet’s microcomputers.

Microsoft Corporation (MSFT)

Of course, this didn’t actually happen. OS/2 became one of International Business Machines Corp. (NYSE:IBM)’s biggest computing failures. It was an ambitious new operating system that promised to avoid DOS’ shortcomings by not building atop it, as had Microsoft’s Windows (released a year earlier). But the April announcement gave way to waiting for an incomplete operating system to finally flesh itself out. The first version, 1.0, was DOS-like and had no graphical interface. The first graphical OS/2 didn’t arrive until the fall of 1988. A year after that, fewer than 200,000 copies had sold — OS/2 was simply too much of a system hog to run well on most of the day’s machines.

Microsoft, meanwhile, continued to develop Windows on its own. Version 3.0 came out in 1990, and by then it was beginning to catch on, giving Microsoft all the rationale it needed to cut off its co-development work on OS/2. By the time IBM pushed OS/2 2.0 out the door in 1992, Microsoft Corporation (NASDAQ:MSFT)’s operating-system lead on PCs was virtually insurmountable. Although version 2.0 sold nearly two million copies, it wasn’t enough to blunt the growth of Windows, and International Business Machines Corp. (NYSE:IBM)’s operating system remained a single-digit player in a market it had essentially created years earlier.

By the time Windows 95 came out, OS/2 was a sloppy, poorly built mess of a graphical operating system — it earned the lowest score of the four major operating systems available in a PC World test just after Windows 95 hit the market. OS/2 simply wasn’t built for the average user, and without the support of the average user, no consumer operating system can succeed.

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