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Open: How Compaq Ended IBM’s PC Domination and Helped Invent Modern Computing

Authors: Rod Canion, Rod Canion

Overview

In “Open,” I share the inside story of how Compaq, a small startup in Texas, took on IBM and helped shape the future of the PC industry. This book is aimed at entrepreneurs, business leaders, and anyone interested in the history of technology, particularly how open standards can drive innovation and competition.

My central argument is that the PC’s success wasn’t solely due to IBM’s entry, but rather our unwavering commitment to compatibility with IBM PC software. This seemingly simple decision had profound consequences. It not only enabled our initial success but also laid the groundwork for a true open industry standard, which ultimately benefited consumers by accelerating the pace of innovation and driving down prices. This book is relevant to current discussions about the role of open standards in emerging technologies, such as artificial intelligence, as it offers lessons on how embracing compatibility can create powerful network effects.

“Open” provides a unique, first-hand account of a critical period in the history of computing. It details the challenges we faced, the strategies we employed, and the pivotal decisions that ultimately led to our success, including our focus on high performance and quality, our commitment to the dealer channel, and our ability to adapt and innovate. It also reveals the internal debates, the near-disastrous moments, and the surprising twists and turns that defined our journey.

This book isn’t just a historical account; it also offers practical lessons for competitive strategy. It shows how a small, nimble company can disrupt a powerful incumbent by focusing on a few key principles, such as customer focus, adaptability, and long-term vision. It also demonstrates the importance of building a strong team and fostering a culture of innovation. In a broader context, the book illustrates the power of open systems and their ability to transform entire industries. Just as the PC industry’s shift to an open standard fueled an explosion of innovation and growth, so too could similar approaches unlock transformative potential in other fields, including artificial intelligence.

Book Outline

1. An Unlikely Beginning

The foundation of our company wasn’t just about products; it was about building the right environment, one based on fairness and making sense.

Key concept: The core discussions centered on what kind of environment we wanted to create and work in–one that would be fair and make sense.

2. The Road Less Traveled

Total compatibility with IBM PC software was paramount, it was our lifeline.

Key concept: From the beginning, the company’s founders were absolutely certain that we had to be able to run IBM PC software straight out of the shrink-wrapped box.

3. The Best Defense Is a Good Offense

Securing key dealers was crucial for our success, and we prioritized them over direct sales.

Key concept: If we succeed in getting most of the key dealers, the resulting demand should absorb all our manufacturing capacity for a long time.

4. Opportunity Knocks

Maintaining our commitment to ruggedness and reliability was crucial, especially with the introduction of hard drives in portables.

Key concept: Since a core feature of Compaq’s market positioning was the exceptional ruggedness and reliability of our portable, meeting the high standards we had set was going to be a serious challenge.

5. IBM Fires the First Shot

The looming threat of IBM’s portable forced us to make a critical decision: to continue full production despite uncertain demand.

Key concept: Now only five weeks remained in the first quarter; it would take a super effort to manufacture and ship enough units to avoid a bad comparison financially with the previous quarter.

6. Back at You, IBM

Entering the desktop market meant taking on IBM directly, so differentiation was key.

Key concept: One thing was very clear: Any desktop product we introduced would have to be significantly different from IBM’s.

7. Patience Pays Off

Patience and long-term vision were essential; we chose to wait for a faster processor to maintain performance leadership rather than rush a “me too” product.

Key concept: In making the decision to wait for a faster chip, we were sacrificing short-term sales for the long-term benefits of strengthening our upscale, high-performance brand image.

8. You’re Going to Do What?!

The decision to launch a 386 PC before IBM was incredibly risky, and unknown to us at the time, could have backfired if IBM had launched its PS/2 with a 386 chip. But IBM had other plans–they were preparing their ‘Death Star’.

Key concept: The key piece of information missing was the real reason IBM decided to delay introduction of its 386 PC.

9. The “Death Star” Arrives

Reverse-engineering the PS/2 was a huge undertaking, requiring significant resources, but necessary to maintain our competitive edge and protect us from an uncertain future.

Key concept: We were stunned by an estimate of the people and money it would take to complete the process and design a product we could take to market.

10. Compaq’s Most Unexpected Decision

The decision to create EISA and rally the industry around it was a turning point–a bold move to wrest control of the industry standard away from IBM.

Key concept: Compaq will create the specification for an advanced 32-bit bus and slot.

11. Compaq Leads the Revolt

The key to beating IBM wasn’t just having a better technology, but getting the whole industry to support it. Realizing this was a key breakthrough.

Key concept: ‘Is there any possible way the Micro Channel can be beat?’ ‘Sure, if the whole industry supported a better alternative.’

12. Intel Begins to Drift

Convincing Intel to prioritize the 486 chip over its RISC project was crucial for maintaining the momentum of the industry standard.

Key concept: I realized the meeting with Grove would be pivotal for the future of Compaq and the open industry standard.

13. Exceeding Expectations

With the SystemPro, we didn’t just launch another PC; we launched a whole new category of computer that could compete with minicomputers.

Key concept: We had gone beyond the obvious.

14. The Open Industry Standard Wins

The SystemPro marked a decisive victory for EISA and the open industry standard, demonstrating that performance and compatibility could go hand-in-hand.

Key concept: After the SystemPro announcement in late 1989, the outcome of the Micro Channel versus EISA war finally became clear.

Essential Questions

1. Why was Compaq’s unwavering commitment to IBM compatibility so crucial to its success?

Compaq’s commitment to full IBM compatibility was the cornerstone of our strategy. It allowed us to tap into the existing software library, which was crucial for a startup. This compatibility also became a differentiator, as we eventually became known for being more compatible than IBM itself. This, in turn, helped us secure key dealer relationships, which was another critical factor in our early success.

2. How did Compaq manage to compete with a giant like IBM?

IBM’s immense size and market dominance made it seem invincible. To compete, we couldn’t just build another PC; we had to innovate within the industry standard. We focused on areas where we could differentiate, such as portability, ruggedness, performance, and eventually backward compatibility. This approach allowed us to offer a superior product without sacrificing the benefits of the industry standard.

3. What was the strategic rationale behind the creation of the EISA coalition, and why was it such a risky but ultimately successful move?

The decision to build an industry coalition around EISA was perhaps our most unexpected and daring move. Faced with IBM’s attempt to control the industry with its proprietary Micro Channel architecture, we decided to develop our own superior 32-bit bus, EISA, and then give the technology away to the rest of the PC industry. This was a calculated risk, but we knew it was the only way to prevent IBM from taking control of the PC’s future and allow us to continue innovating within a standard controlled by us. By empowering our competitors, we ultimately strengthened our position and ensured the future of the open standard.

4. How did Compaq respond to the threat posed by IBM’s PS/2 and its Micro Channel Architecture?

The PS/2 was IBM’s attempt to regain control of the PC market with proprietary technology. Our response was twofold. First, we highlighted the PS/2’s incompatibility with existing software and peripherals, urging customers to think before migrating. Second, we secretly began reverse-engineering the PS/2, understanding that if it gained traction, we would need to offer a compatible product. This two-pronged approach allowed us to both defend our position and prepare for any scenario.

5. What was the broader impact of the open industry standard on the PC market and the technology landscape?

The success of the open industry standard transformed the PC market from one dominated by proprietary systems to one characterized by rapid innovation, intense competition, and lower prices. This resulted in an explosion of new products and applications, making PCs more accessible and useful to a wider audience. The standard also empowered smaller companies like Compaq to challenge established giants, demonstrating the power of collaborative innovation.

1. Why was Compaq’s unwavering commitment to IBM compatibility so crucial to its success?

Compaq’s commitment to full IBM compatibility was the cornerstone of our strategy. It allowed us to tap into the existing software library, which was crucial for a startup. This compatibility also became a differentiator, as we eventually became known for being more compatible than IBM itself. This, in turn, helped us secure key dealer relationships, which was another critical factor in our early success.

2. How did Compaq manage to compete with a giant like IBM?

IBM’s immense size and market dominance made it seem invincible. To compete, we couldn’t just build another PC; we had to innovate within the industry standard. We focused on areas where we could differentiate, such as portability, ruggedness, performance, and eventually backward compatibility. This approach allowed us to offer a superior product without sacrificing the benefits of the industry standard.

3. What was the strategic rationale behind the creation of the EISA coalition, and why was it such a risky but ultimately successful move?

The decision to build an industry coalition around EISA was perhaps our most unexpected and daring move. Faced with IBM’s attempt to control the industry with its proprietary Micro Channel architecture, we decided to develop our own superior 32-bit bus, EISA, and then give the technology away to the rest of the PC industry. This was a calculated risk, but we knew it was the only way to prevent IBM from taking control of the PC’s future and allow us to continue innovating within a standard controlled by us. By empowering our competitors, we ultimately strengthened our position and ensured the future of the open standard.

4. How did Compaq respond to the threat posed by IBM’s PS/2 and its Micro Channel Architecture?

The PS/2 was IBM’s attempt to regain control of the PC market with proprietary technology. Our response was twofold. First, we highlighted the PS/2’s incompatibility with existing software and peripherals, urging customers to think before migrating. Second, we secretly began reverse-engineering the PS/2, understanding that if it gained traction, we would need to offer a compatible product. This two-pronged approach allowed us to both defend our position and prepare for any scenario.

5. What was the broader impact of the open industry standard on the PC market and the technology landscape?

The success of the open industry standard transformed the PC market from one dominated by proprietary systems to one characterized by rapid innovation, intense competition, and lower prices. This resulted in an explosion of new products and applications, making PCs more accessible and useful to a wider audience. The standard also empowered smaller companies like Compaq to challenge established giants, demonstrating the power of collaborative innovation.

Key Takeaways

1. Embrace Compatibility

In the early days of the PC industry, software availability was a major bottleneck. By committing to full compatibility with IBM PC software, we ensured that our computers had access to the largest software library, which was critical for attracting both customers and developers. This decision enabled us to quickly gain market share and establish ourselves as a viable alternative to IBM.

Practical Application:

An AI company could similarly commit to compatibility with a popular machine learning framework, such as TensorFlow or PyTorch. This would allow them to tap into the existing ecosystem of tools, libraries, and trained models, accelerating their development process and attracting a wider user base.

2. Focus on Differentiation

We recognized that we couldn’t compete with IBM on every front. Instead, we focused on key areas of differentiation, such as portability, ruggedness, and performance. This allowed us to carve out a unique position in the market and appeal to specific customer segments. This allowed us to also focus on other areas where we did want to differentiate but couldn’t because of constraints from being a new company with many limitations.

Practical Application:

When developing a new AI product, it is essential to focus on a few key areas of differentiation. Rather than trying to be everything to everyone, identify specific user needs that are not being met by existing products and design your product to excel in those areas. This could be achieving superior performance on a specific task, offering a more user-friendly interface, or providing enhanced security features.

3. Balance Adaptation with Innovation

When IBM introduced the PS/2 with its proprietary Micro Channel Architecture, we faced a critical decision. Rather than abandoning the industry standard, we chose to embrace it even more fully by creating EISA, an advanced, backward-compatible bus. This allowed us to continue innovating within the existing ecosystem while also preparing for a potential shift in the industry.

Practical Application:

When faced with a potential threat from a new technology (like quantum computing), an AI company could choose to invest in developing expertise in that area while also continuing to innovate within the existing paradigm of classical computing. This would allow them to hedge their bets and be prepared for any scenario.

4. Prioritize Distribution

We understood that our success depended on our ability to reach customers. By securing key dealer relationships, including making the bold decision not to sell directly to end users, we ensured that our products had prominent shelf space and a strong sales force behind them. This was a key differentiator that set us apart from many of our competitors.

Practical Application:

In the AI industry, data is often the key differentiator. By building strong relationships with data providers and ensuring access to large, high-quality datasets, an AI company can gain a significant advantage over its competitors.

5. Take Calculated Risks

We didn’t always know for certain that our innovations would be successful. When we introduced the first 386 PC, there was skepticism that the market would accept a computer based on a new chip before IBM blessed it. We also didn’t know for certain that EISA would beat IBM’s Micro Channel. However, our early success with the SystemPro gave us the confidence to move forward. The SystemPro showed what was possible with the new bus and demonstrated our technology leadership. This leap of faith was rewarded with the SystemPro’s eventual success, exceeding everyone’s expectations, and solidifying our leadership position.

Practical Application:

An AI company developing a new language model could release early versions to a select group of users and developers to gather feedback and identify potential problems before the full product launch. Just as the SystemPro provided early proof of concept for EISA and uncovered an Intel chip bug, the Compaq Portable proved the value of 100% compatibility.

1. Embrace Compatibility

In the early days of the PC industry, software availability was a major bottleneck. By committing to full compatibility with IBM PC software, we ensured that our computers had access to the largest software library, which was critical for attracting both customers and developers. This decision enabled us to quickly gain market share and establish ourselves as a viable alternative to IBM.

Practical Application:

An AI company could similarly commit to compatibility with a popular machine learning framework, such as TensorFlow or PyTorch. This would allow them to tap into the existing ecosystem of tools, libraries, and trained models, accelerating their development process and attracting a wider user base.

2. Focus on Differentiation

We recognized that we couldn’t compete with IBM on every front. Instead, we focused on key areas of differentiation, such as portability, ruggedness, and performance. This allowed us to carve out a unique position in the market and appeal to specific customer segments. This allowed us to also focus on other areas where we did want to differentiate but couldn’t because of constraints from being a new company with many limitations.

Practical Application:

When developing a new AI product, it is essential to focus on a few key areas of differentiation. Rather than trying to be everything to everyone, identify specific user needs that are not being met by existing products and design your product to excel in those areas. This could be achieving superior performance on a specific task, offering a more user-friendly interface, or providing enhanced security features.

3. Balance Adaptation with Innovation

When IBM introduced the PS/2 with its proprietary Micro Channel Architecture, we faced a critical decision. Rather than abandoning the industry standard, we chose to embrace it even more fully by creating EISA, an advanced, backward-compatible bus. This allowed us to continue innovating within the existing ecosystem while also preparing for a potential shift in the industry.

Practical Application:

When faced with a potential threat from a new technology (like quantum computing), an AI company could choose to invest in developing expertise in that area while also continuing to innovate within the existing paradigm of classical computing. This would allow them to hedge their bets and be prepared for any scenario.

4. Prioritize Distribution

We understood that our success depended on our ability to reach customers. By securing key dealer relationships, including making the bold decision not to sell directly to end users, we ensured that our products had prominent shelf space and a strong sales force behind them. This was a key differentiator that set us apart from many of our competitors.

Practical Application:

In the AI industry, data is often the key differentiator. By building strong relationships with data providers and ensuring access to large, high-quality datasets, an AI company can gain a significant advantage over its competitors.

5. Take Calculated Risks

We didn’t always know for certain that our innovations would be successful. When we introduced the first 386 PC, there was skepticism that the market would accept a computer based on a new chip before IBM blessed it. We also didn’t know for certain that EISA would beat IBM’s Micro Channel. However, our early success with the SystemPro gave us the confidence to move forward. The SystemPro showed what was possible with the new bus and demonstrated our technology leadership. This leap of faith was rewarded with the SystemPro’s eventual success, exceeding everyone’s expectations, and solidifying our leadership position.

Practical Application:

An AI company developing a new language model could release early versions to a select group of users and developers to gather feedback and identify potential problems before the full product launch. Just as the SystemPro provided early proof of concept for EISA and uncovered an Intel chip bug, the Compaq Portable proved the value of 100% compatibility.

Suggested Deep Dive

Chapter: Chapter Ten

This chapter details the decision to create EISA and the formation of the “Gang of Nine.” It highlights the strategic thinking, the risks involved, and the surprising way in which Compaq rallied the industry to its cause, which has many parallels to similar movements happening today with the goal of assuring AI safety.

Memorable Quotes

Prologue. 17

IBM’s executives liked the status quo. It had become the world’s largest and most powerful computer company playing by the old rules.

Prologue. 20

In IBM’s rush to get its PC to market, it had not taken the time to incorporate any major barriers to cloning…from that, the IBM PC-compatible market was born.

Chapter One. 26

Suddenly, I was struck by a remarkable idea that was so simple and obvious it sent a chill down my spine. What if we could make a portable computer run the software written for the IBM PC?

Chapter Three. 49

It’s amazing to me that no other company at that time exhibited the same level of commitment to total compatibility.

Chapter Ten. 131

“Compaq will create the specification for an advanced 32-bit bus and slot.”

Prologue. 17

IBM’s executives liked the status quo. It had become the world’s largest and most powerful computer company playing by the old rules.

Prologue. 20

In IBM’s rush to get its PC to market, it had not taken the time to incorporate any major barriers to cloning…from that, the IBM PC-compatible market was born.

Chapter One. 26

Suddenly, I was struck by a remarkable idea that was so simple and obvious it sent a chill down my spine. What if we could make a portable computer run the software written for the IBM PC?

Chapter Three. 49

It’s amazing to me that no other company at that time exhibited the same level of commitment to total compatibility.

Chapter Ten. 131

“Compaq will create the specification for an advanced 32-bit bus and slot.”

Comparative Analysis

While “Open” focuses specifically on Compaq’s role in the PC industry’s shift to open standards, it shares similarities with other notable works in business and technology history. Like “Accidental Empires” by Robert X. Cringely, it captures the chaotic and often unpredictable nature of the early PC industry. However, “Open” provides a more focused, insider perspective on the specific decisions and strategies that enabled Compaq’s success. Similarly, “The Innovator’s Dilemma” by Clayton M. Christensen explores how disruptive technologies can overturn established markets. While Christensen’s work offers a broader theoretical framework, “Open” provides a real-world case study of how a disruptive company (Compaq) can successfully challenge a dominant player (IBM). It adds a dimension of competitive dynamics absent from Christensen’s more generalized perspective by analyzing how Compaq built a coalition to overcome a larger rival. “Only the Paranoid Survive” by Andy Grove also resonates with “Open,” as both books emphasize the importance of adapting to rapid changes in the technology landscape. “Open,” however, provides a more specific example of how a company can turn a potential crisis (the introduction of the PS/2) into an opportunity for growth by focusing on backward compatibility.

Reflection

Looking back, the story of Compaq and the open industry standard is a complex one, filled with both triumphs and near disasters. It’s easy to view the victory of the open standard as inevitable, but that overlooks the significant power IBM wielded at the time. Had certain events unfolded differently—had IBM introduced its PS/2 with a 386 or been more open to collaboration—the outcome could have been very different. One could argue that IBM’s eventual exit from the PC business was a strategic blunder, a failure to recognize the power of open systems. However, from IBM’s perspective at the time, clinging to proprietary control likely seemed like the most rational course of action. Our story underscores the inherent risks of predicting the future in the fast-paced world of technology. While my account in “Open” focuses on our perspective, it’s important to remember that IBM had its own motivations and internal dynamics. I tried to understand and anticipate IBM’s moves, but I am limited to my own observations. It might seem like we were always one step ahead, but the reality was much more chaotic and uncertain. Despite these limitations, “Open” offers a valuable lesson on how a small company, with a clear vision and a relentless focus on execution, can disrupt an entire industry and change the course of technology history. The rise of the PC and the triumph of the open industry standard are powerful examples of how collaborative innovation can unleash transformative potential and benefit consumers worldwide.

Flashcards

What was Compaq’s initial core strategy?

Compatibility with IBM PC software

What does EISA stand for?

Extended Industry Standard Architecture

Why did Compaq develop EISA?

To counter IBM’s Micro Channel

What key advantage did EISA promote over Micro Channel?

Openness, allowing third-party innovation

What was Compaq’s first desktop computer?

The Deskpro

Which Compaq portable featured triple-shock mounted hard drives?

The Portable Plus

What was Compaq’s first product using EISA?

The SystemPro

What key advantages did the Deskpro 386 have over IBM’s AT?

Faster processor, backward compatibility

What was Compaq’s initial core strategy?

Compatibility with IBM PC software

What does EISA stand for?

Extended Industry Standard Architecture

Why did Compaq develop EISA?

To counter IBM’s Micro Channel

What key advantage did EISA promote over Micro Channel?

Openness, allowing third-party innovation

What was Compaq’s first desktop computer?

The Deskpro

Which Compaq portable featured triple-shock mounted hard drives?

The Portable Plus

What was Compaq’s first product using EISA?

The SystemPro

What key advantages did the Deskpro 386 have over IBM’s AT?

Faster processor, backward compatibility