Just like the PC, they didn't realize it was important until it was too late. In my experience, mainframes are a superior way to develop and run every kind of software. The PC is a crippled, stupid stepchild by any reasonable comparison. Just the idea that you need to setup and manage 1,000 of them to come close to a small mainframe is ludicrous. Who needs the overhead and maintenance? Sure, you can swap machines and distribute loads between them, but who wants to? Yuck. It's a lot nicer to have that stuff handled automatically.

Also like the PC, IBM didn't realize that their boxes could be used for this new funky thing called the internet. Talk about blind-sighted. Their first web product was an abomination they inherited from their purchase of Lotus. It didn't work and produced unusable websites, boding poorly for IBM's entry into that market which was already taking off with Active Server Pages and XMLHTTP.

If IBM had loudly (and correctly) proclaimed that mainframes were the place to run web services, everyone and their mother would be running mainframes right now instead of Linux boxes. IBM's eventual realization of this led to their purchase of Red Hat!