4 IBM Blunders That Gave Big Blue's Competition the Edge (NYSE: IBM)

NYSE IBM

NYSE IBMInternational Business Machines Corp. (NYSE: IBM) is no Apple. And it's no Google.

IBM is unexciting. It's often described as a "dinosaur" for its history of falling behind the hottest tech trends.

As the tech sector continues to unveil sleek new devices like smartphones and tablets, and begins making forays into wearable tech, IBM is nowhere to be found.

IBM is instead rolling out the same six-and-a-half-foot, three-ton mainframes it has been famous for since the 1950s. The rest of its business focuses on consulting and software.

Here's the thing - IBM has a notorious record for spotting the trends, but forfeiting any dominance due to a slow bureaucracy and a lack of zeal. This pattern often relegates IBM to a lesser role in the tech market - as a servicer not an innovator - while an Apple or a Google steal the spotlight.

And while Apple stock is up 61% in the past year, IBM stock has slipped 11% - with more losses likely ahead.

Perhaps if IBM had made just one of these four tech trends work in its favor, we'd be looking at a much different Big Blue...

IBM Blunder No. 1: IBM's First - and Last - Smartphone

In November 1993, in partnership with BellSouth Cellular Corp., IBM unveiled what USA Today then dubbed as a "super-phone." By any measure, it was the first smartphone.

The Simon, as it was called, had a touch-sensitive screen on the handle. It was eight inches long, weighed 18 ounces, and had one megabyte of memory. It had an on-screen touch pad, and allowed users to access contacts and a personal calendar. With a stylus, the Simon also allowed users to write notes and send faxes. It cost $1,000.

The companies planned to start shipping Simons in March 1994. But struggles with its faxing capabilities kept it from going to market on time.

And when reviewers got their hands on it, it was decimated. It was expensive at $1,000 (later knocked down to $599). The software was lacking. The battery life was short. And it was agonizingly sluggish.

After selling only 50,000 units, IBM abandoned the venture. The Simon was on the market from August 1994 to February 1995.

Right now, Simon is an exhibit in the London Science Museum. Conversely, Apple Inc. (Nasdaq: AAPL) recorded record smartphone sales last month.

Smartphones are one thing, but none of IBM's blunders can top this next one...

IBM Blunder No. 2: IBM Gift Wraps Operating Systems for Bill Gates

It's perhaps the best known of IBM's historical missteps... and the most important.

In the 1980s, IBM tapped then-24-year-old Bill Gates to help them create an operating system as they looked to unveil a PC.

This moment - when IBM ceded control of operating systems to Microsoft Corp. (Nasdaq: MSFT) - was well-documented in author Paul Carroll's 1994 book, Big Blues: The Unmaking of IBM.

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Gates licensed QDOS (the "quick and dirty operating system") from a Seattle-based computer programmer named Tim Paterson for $75,000, toyed with it, and made a deal with IBM. Gates met with Bill Lowe, then head of the PC division.

You see, IBM had two failed operating system ventures already under its belt: the Datamaster operating system and the AT ("advanced technology") operating system. Lowe merely wanted a piece of this emerging market, and didn't want to dirty IBM's hands in another failed attempt to create an operating system. Lowe was more concerned with getting DOS for a low price. He cared more for the hardware. So when Gates offered that low price he pounced.

Where Lowe made his mistake was in the Joint Development Agreement. Gates offered IBM DOS at a very low price. But he asked that Lowe afford him the right to collect the royalties for DOS sales to other PC manufacturers of the time like Compaq and Tandy. And that is where Microsoft's dominance began.

Gates went on to develop Windows, and essentially established an OS monopoly. Microsoft had at one point outfitted 90% of machines with their software and Gates became the richest man in the world.

IBM Blunder No. 3: IBM Microprocessors Were "Never Considered Seriously"

In an episode similar to the Microsoft operating system debacle, IBM handed off dominance in the market for microprocessors to Intel Corp. (Nasdaq: INTC).

As Carroll chronicles in his book, "IBM has plenty of technology of its own, so it could have done its own processor, but [then head of the PC division Don] Estridge never considered that seriously." What's more, development of chips in-house by an IBM scientist named Glenn Henry was ultimately derailed by a cumbersome IBM bureaucracy.

IBM instead approached Intel, and sought to buy chips from them. By 1984, they had a 20% stake in the company. But Intel had begun to double-down on chip technology and get out in front of the trends in that market. It had grown out of its dependence on IBM. Intel began to set the industry standard.

As former IBM CEO Louis Gerstner wrote in his book Who Says Elephants Can't Dance? Inside IBM's Historic Turnaround, "Because we did not think PCs would ever challenge IBM's core enterprise computing franchise, we surrendered control of the PC's highest-value components."

IBM Blunder No. 4: IBM Says "No Thank You" to Low-Margin Laser Printers

IBM's plant in Lexington, Ky., provided Big Blue's printer operations. And they planned for a while to become a real player in the burgeoning PC printer market. But as a low-margin business, IBM wasn't interested. When the laser printer entered the scene, IBM balked.

Canon jumped in on creating the standard for laser printers, and it was Hewlett-Packard Co. (NYSE: HPQ) that bought and built off the Canon model. Not IBM. From there, HP asserted its dominance of the PC printer business.

IBM sold off its Lexington, Ky., plant in March 1991 in a leveraged buyout deal authored by Clayton & Dubiler & Rice Inc. It became what is now known as Lexmark International Inc. (NYSE: LXK).

The Bottom Line: These blunders are just four of the reasons IBM is struggling today. For investors, there are much better tech stocks to buy now then the ailing Big Blue.

A Good Tech Stock for 2015: Microsoft, like IBM, has had its struggles and is in transition. But unlike Big Blue, Microsoft has much better prospects for its future. And it all starts with the new CEO, who's just finished his first year at the helm...

Follow me on Twitter @JimBach22

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