Commoditization and the IT industry

The computer industry managed to escape the forces of commoditization for the first twenty years or so of its life—a natural occurrence given the industry was young enough and small enough that standards had not yet had the opportunity to emerge. In the first two decades of the industry, computer manufacturers delivered an end-to-end solution to the customer, from the hardware on up through the operating system software that ran the hardware to the applications that ran on top of the operating system. Every layer of the stack—and, most importantly, the interfaces between them—was proprietary to the computer vendor. As a result, every computer spoke a different “language,” and it was difficult to get different types of computers to “talk to each other” and interoperate.

Because of these incompatibilities, the initial choice of hardware implicitly tied the buyer to an operating system; in turn, the operating system dictated what applications the buyer would be able to use. Over time, the high cost of computing technology made it financially impractical for the buyer to move away from the incumbent vendor because previous investments in that vendor’s technology would have to be discarded. The combination caused users to become “locked in” to a single vendor.

However, as the industry matured, the dynamic changed. Entrant firms such as Apple, Apollo and Sun saw the opportunity to create products that targeted an entirely new class of computing consumer—the individual user—that could not afford the mainframes and minicomputers sold by established firms IBM, DEC, Data General and others.

By focusing on “good enough” quality and lower prices, and by tapping into years of frustration among consumers caused by batch processing, timesharing, and incompatibility between proprietary stacks, these new “personal computing” products were received enthusiastically and began to appear in offices and dens everywhere.

The strategies employed by one entrant firm in particular and one established firm in particular would forever change the computer industry. The latter, ironically, would lead directly to the commoditization of the hardware industry, and the former would lead directly to the ongoing commoditization of the software industry.

On the hardware side, IBM sought to stem the rising tide of Apple by introducing its own personal computing product, the IBM PC. Because of internal cost structures designed around multi-million dollar mainframe products as well as an aggressive product launch timeline, IBM decided to use off-the-shelf parts for the IBM PC rather than following its traditional approach of developing proprietary components in-house.

On the software side, Sun sought to attain a competitive advantage against the proprietary stacks of the mainframe and minicomputer vendors by basing its workstation products on the UNIX operating system. UNIX was already hugely popular in academia and corporate research labs, so this approach gave Sun instant access to a large portfolio of compatible applications as well as an enormous user base already familiar with the operating system that shipped on its products.

In other words, UNIX was an open system, that is, a system based on open standards. UNIX variants from different groups (for example, AT&T UNIX and BSD UNIX, the two variants in widespread use in the early 1980s) were largely based on the same APIs (application programming interfaces). Because of this, applications could be easily ported from one version of UNIX to another, and users familiar with one version of UNIX could easily learn to operate a different version.