Quick Thoughts: Déjà Vu All Over Again – Reliving the ‘80’s
“Route 128 Turns Into Rocky Road” Charles Stein, Boston Globe, August 6, 1989
According to Egyptian myth, the Phoenix was a beautiful bird that would periodically build a nest of twigs that would then burst into flames, burning both nest and bird to ashes. From the dust, the phoenix rises anew, once again beautiful to thrive until the next conflagration. The tech industry is something like that. The linked article above paints a fairly bleak picture of Boston’s “technology highway” in 1989, when tech headquarters still filled the glass-fronted office parks along Route 128.
Let’s consider the roster of computer companies that were thriving in the early ‘80’s before self-immolating by the ‘90’s. Digital Equipment Company (DEC) peaked at more than $14B in sales for 1990 before accepting a ’98 acquisition by Compaq for $9.6B. Wang Laboratories peaked at $3B in sales before declaring bankruptcy in ’92. Sperry and Burroughs combined to form Unisys in 1986 with sales of $10.4B and more than 120,000 worldwide employees, then survived the flames by shifting to IT services and is now generating $4B with less than 23,000 employees. Fault tolerant systems leader Tandem peaked at $2B in sales and 11,000 employees before agreeing to acquisition by Compaq for $3B in 1997. A year later, Tandem’s chief competitor Stratus was acquired for $822M by Ascend Communications which was subsequently bought by Lucent. Prime merged with its engineering system rival Computervision in 1988, but subsequently shuttered its hardware business entirely in 1992. Data General, immortalized in Tracy Kidder’s Pulitzer Prize winning “The Soul of a New Machine”, eventually de-emphasized its computer business in favor of storage before being bought out by EMC in 1999. IBM mainframe clone maker Amdahl followed its mini-computer brethren, accepting a $910M buyout from Fujitsu in 1997.
These were all Fortune 500 companies in the 1980s. None of them were good long term investments once the PC had taken hold in 1986, with occasional quarters of growth and earnings surprises offset by increasingly frequent and egregious misses. All of them were out of the computer business by 2000. Out of the top ten computer makers of 1980, only two survived to thrive. IBM diversified into a heavier emphasis on services, while HP enjoyed a PC-triggered explosion in the printer market and played industry consolidator in the Wintel clone market.
The carnage was not exclusive to computers. Imaging companies Kodak, Xerox and Poloroid were pummeled by the shift to digital. AT&T was cut apart by its antitrust settlement and its once proud long distance unit started down the long road to commodity status. The Lucent equipment spin off, and its traditional rivals, Nortel, Siemens and Alcatel, enjoyed rock-star status during the height of the Internet bubble, but eventually, the obsolescence of bread-and-butter telephone switches left them exposed to withering competition from packet-based alternative suppliers. The ‘80’s TMT sea change also left major casualties amongst newspapers and broadcast station owners, victims of the internet and the rise of cable television service.
Of course this era also set the stage for the companies that would establish dominance during the subsequent decade. The rise of the PC carried Microsoft, Intel, Dell, and HP to prominence. The subsequent emergence of client-server architecture allowed Oracle, IBM, SAP and EMC to consolidate the enterprise. PC networking opened the door for Cisco. The global cell phone phenomenon allowed Nokia and Ericsson to wrest telecom leadership. The transition to cable TV made fortunes for the founders of Comcast and Cox, and created a huge new opportunity for Viacom, News Corporation, Time Warner, and others. These were the brightest plumes in the new phoenix that rose from the ashes of the ‘80’s.
What lessons can investors take from the ‘80’s? First, change can happen far more quickly than most companies expect. Cable television penetration went from 15 million households to over 50 million, with a tripling in the number of cable networks. 12 years after its break-up, AT&T had lost half of its long distance market share amidst a 60% drop in average monthly long distance bills. The list of the top 10 technology companies by revenue changed 7 members over the course of the decade. Second, companies that miss the boat can’t easily get on at the next stop. Almost all of the failed mini-computer vendors mentioned in the second paragraph of this post eventually decided that it was better to switch than fight, bringing out x86/Windows based products that had no differentiation or market place momentum. A few, notably Wang and DEC, tried to beat the x86 PC with hardware of their own devising, but failed spectacularly. Similarly, waiting for HP, Dell, or Levono to build a winning smartphone or tablet could be a very long wait.
Third, economies of scale and ecosystem compatibility really matter for companies competing to be the next big thing. Intel was dreadfully late to upgrade its processor line from 16 bit computing to 32 bit computing in the ‘80’s and suffered a substantial performance gap vs. its primary rival, Motorola, but no matter, the x86 line was simply cheaper because of the volume of PC sales and each subsequent offering was fully backward compatible. Computer products based on alternative architectures, including the fabled 1984 MacIntosh, faced profound cost and compatibility issues, and either found niche markets or died. With the rise of smart portable devices, Intel now finds itself at a disadvantage versus processors with ARM cores, which are cheaper, more energy efficient, and more widely adopted than its Atom line.
History suggests that the incumbent vendors of the past decade – Microsoft, Intel, HP, Dell, IBM, EMC, Cisco, Sony, Nokia, Research in Motion, Comcast, et al. – will be unable to stop or even slow the market changes that threaten their core franchises. Rather, the best course of action is maximize the profitability of your declining business and invest to assure relevance in the world to be. A handful of leading companies lived through the 1980’s by doing just that – IBM shifted its focus to services, HP attacked the printing opportunity created by the rise of the PC, Texas Instrument recognized the opportunity in DSPs for mobile phones. Apple may be the best example of a company that reinvented itself – at the turn of the millennium, MacIntosh was a dying platform, but the next decade changed everything. Of the list of endangered species, we have written about Microsoft, Cisco and Nokia as, perhaps, having the right stuff to engineer a rebirth. Of course, only time will tell.