IBM vs. Microsoft for Software Championship

OS/2 is the software champion that never won anything.

International Business Machines Corporation has spent more than $1 billion and years of expertise to make it the best-built, most robust operating system for desktop computers. But every time OS/2 has gone out into the marketplace, the competition has scored a technical knockout.

The chief competitor, Microsoft Corporation, is about to climb in the ring again. Its Windows 95 operating system, set to be unveiled next month, already has analysts predicting a tidal wave of sales. So IBM is having to face a question that's simmered a long time at its Armonk, N.Y., headquarters: What should it do with OS/2?

Many analysts suggest dumping it. Companies that make software for OS/2 want IBM to increase its commitment. A third possibility is to give up the consumer market and target the software for the corporate user.

''They're going to stick with OS/2 for awhile,'' says Scott Vouri, chief executive of Binar Graphics Inc., a San Rafael, Calif., developer of Windows and OS/2 software. ''There are thousands of very large companies out there that depend on it.''

Pursuing a niche strategy or dropping OS/2 altogether would be humble pie for IBM. The company originally expected its software would outsell Microsoft Windows. Technically, OS/2 is better than Windows. It doesn't crash as often, and it does a better job of running programs simultaneously.

''In terms of multitasking and power ... it blows Windows away,'' says Mark Macgillivray, managing director of H&M Consulting in Sunnyvale, Calif. ''I don't blame IBM for not wanting to throw that away.''

But missteps and delays have made OS/2 a backwater of the software world. Many users report problems installing the software. And IBM twice delayed the release of its new desktop computer - the PowerPC - so it could introduce the machine with its own version of OS/2. But the software is still not ready, so the company has belatedly introduced the PowerPC by itself and, thus, ceded the consumer market to competitors.

The result is that sales of Windows have soared while OS/2's have not. By the end of 1994, Microsoft Windows had 70 million users, estimates market researcher Dataquest, while OS/2 had 5.5 million. Even that figure may be too high for OS/2. Dataquest is in the process of revising its estimate downward. That makes IBM's entry a distant third in desktop operating systems. Apple Computer's Macintosh operating system had 13 million users last year.

While some analysts believe two operating systems might coexist in the desktop world, virtually no one holds there's room for three. Software firms don't have the money to develop programs for all of them, so they're likely to aim for markets bigger than OS/2. And if software companies don't write OS/2 programs, then there's little incentive for consumers to buy OS/2. While the system can run the same programs that run on today's Windows, it won't be able to run software designed for Windows 95.

According to published reports, IBM is using financial incentives - sometimes outright cash - to entice companies to develop programs for OS/2. Some analysts doubt the company will keep that up indefinitely. ''IBM will come to the conclusion that they no longer need an OS/2 operating system at the end of the fourth quarter or the first quarter'' of next year, says Rob Enderle, a Dataquest analyst.

A new wrinkle is IBM's proposed purchase of Lotus Development Corporation. As a major developer of business software, Lotus could assure a continued supply of OS/2 software. But analysts say the purchase could force the opposite reaction. IBM may drop OS/2 and concentrate its software dollars instead on Lotus's promising Notes software.

None of these concerns have caused many OS/2 software firms to give up on IBM. ''There's a very strong following for OS/2, and it's increasing,'' says Matt Gray, president of Hilgraeve Inc. in Monroe, Mich. The company plans to have a Windows 95 version of its communications software later this year but is now concentrating on the OS/2 version.

''OS/2 has got a new lease on life, at least for another year, while Microsoft fixes all the bugs and limitations that are going to have to come out,'' Mr. Vouri adds.