The cost was high because the 8086 needed a 16-bit data bus rather than a less expensive 8-bit bus. Systems available at that time were 8-bit, and slow sales of the 8086 indicated to Intel that people weren’t willing to pay for the extra performance of the full 16-bit design. In response, Intel introduced a kind of crippled version of the 8086, called the 8088, in June 1979.
The 8088 processor used the same internal core as the 8086, had the same 16-bit registers, and could address the same 1MB of memory, but the external data bus was reduced to 8 bits. This enabled support chips from the older 8-bit 8085 to be used, and far less expensive boards and systems could be made. However, because it retained the full 16-bit internal registers and the 20-bit address bus, the 8088 ran 16-bit software and was capable of addressing a full 1MB of RAM.
For these reasons, IBM selected the 8-bit 8088 chip (running at 4.77MHz, taking 12 cycles for the average instruction to complete) for the original IBM PC, which was introduced in August of 1981. That event dramatically changed the fate of both Intel and Microsoft, which provided Microsoft Disk Operating System (MS-DOS) version 1.0 for the new computer.
This decision would affect history in several ways. The 8088 was fully software compatible with the 8086, so it could run 16-bit software. Also, because the instruction set was similar to the previous 8085 and 8080, programs written for those older chips could quickly and easily be modified to run. This enabled a large library of programs to be quickly released for the IBM PC, thus helping it become a success. The overwhelming blockbuster success of the IBM PC left in its wake the legacy of requiring backward compatibility with it. To maintain the momentum, Intel has pretty much been forced to maintain backward compatibility with the 8088/8086 in most of the processors it has released since then. Since the fateful decision was made to use an Intel processor in the first PC, subsequent PC-compatible systems have used a series of Intel or Intel-compatible processors, with each new one capable of running the software of the processor before it.
Years later, IBM was criticized for using the 8-bit 8088 instead of the 16-bit 8086. In retrospect, it was a wise decision. IBM even covered up the physical design in its ads, which at the time indicated its new PC had a “high-speed 16-bit microprocessor.” IBM could say that because the 8088 still ran the same powerful 16-bit software the 8086 ran, just a little more slowly. In fact, programmers universally thought of the 8088 as a 16-bit chip because there was virtually no way a program could distinguish an 8088 from an 8086. This enabled IBM to deliver a PC capable of running a new generation of 16-bit software, while retaining a much less expensive 8-bit design for the hardware. Because of this, the IBM PC was actually priced less at its introduction than the most popular PC of the time, the Apple II. For the trivia buffs out there, the IBM PC listed for $1,265 and included only 16KB of RAM, whereas a similarly configured Apple II cost $1,355.
It took over two years between the introduction of the 8088 and the release of the IBM PC. Back then, a significant lag time often occurred between the introduction of a new processor and systems that incorporated it. That is unlike today, when new processors and systems using them often are released on the same day.
Computer users have sometimes wondered why a 640KB conventional-memory barrier exists if the 8088 chip can address 1MB of memory. The conventional-memory barrier exists because IBM reserved 384KB of the upper portion of the 1,024KB (1MB) address space of the 8088 for use by adapter cards and system BIOS. The lower 640KB is the conventional memory in which DOS and software applications execute. Windows and other modern operating systems use memory that is primarily above 1MB.