Common Stocks and Common Sense

3 IBM

In 1914, Thomas Watson, a star salesman for the National Cash Resister Company, was hired by the Computing-Tabulating-Recording Company (CTR) to be its president. CTR had been founded three years earlier to produce electromechanical machines that could “read” the location of holes in punched cards and make calculations and tabulations based on the location of the holes. For the first time, machines were replacing pencils for accounting applications. Watson was a super salesman and leader, and soon CTR became the world leader in tabulating office machines. In 1924, Watson, with infinite wisdom, changed the name of Computing-Tabulating-Recording to International Business Machines.

IBM’s punched card equipment was a great success, and by the 1940s IBM was the world’s dominant producer of office business machines. The business leased the punched card equipment under full-service leases that included maintenance and technical advice as well as the equipment itself. IBM’s strong financial incentive was to keep each piece of equipment on lease for as long as possible. While IBM earned good profits during the early years of a lease, if the equipment remained on lease after it was fully depreciated, IBM’s profits became particularly large. Thus, IBM had incentives to delay the introduction of new, more efficient equipment that would obsolete and replace existing equipment on lease.

Over the decades, a number of inventors produced electromechanical machines that were at least somewhat ...