A transcription of High Density

The following is a loose transcription of Horace Dediu’s High Density podcast, a spinoff of his excellent Critical Path series. The conversation is between Horace and Tim Bajarin, a technology analyst of many years. Tim offers a compelling summary of the history of the PC industry, one which I find increasingly relevant, as Horace points out, for its parallels to the mobile OS landscape, especially the parallel between IBM and Google’s strategy for PCs and Android, respectively. Also crucial is the observation of a continual pattern in platform lifecycles: “hardware, software OS, SDK, innovative apps, and … explosion.” It was also news to me that Alan Kay ultimately had a lot of influence on John Sculley’s vision for computing, as Alan was a fellow at Apple during Sculley’s tenure.



Horace: I’m joined today by Tim Bajarin. Tim is someone that people in the technology industry have been following for a long time. He’s the head of Creative Strategies, although you do more than that. Can you give people some more background to your story?

Tim: I joined Creative Strategies as a PC analyst. When we started, there were no PC analysts. There were four people in a role similar to mine, and we picked up the PC as part of other work. I was able to literally watch it from day one: Don Estridge from IBM and his team, as well as Apple. I’ve been following them (Apple) since 1971, and have interacted with all of its top leaders over the last 35 years.

H: You’re a fountain of knowledge in this industry. I’ve been an analyst for a short time, but an engineer for a long time. I myself cut my teeth doing software development on the PC. Maybe you can share some stories about how these organizations evolve.

In particular, I’m curious about how technology organizations actually emerge. When I crossed over from technology to business, in a career sense, technology businesses were seen as another kind of normal business. I always thought that it requires a different kind of operating model, one that wasn’t dealing with commodities (well, eventually they do), but in the beginning no one knows how to create products, and things are extremely volatile.

How do you think about the history of Apple, etc. Did they know what they were doing? How did they come about creating these mechanisms of production? MS started a certain culture, etc. How did it happen?

Tim: PC industry was a happy accident. Eddie Roberts introduced the first PC in 1974, and it was on the cover of Popular Mechanics. Following this, Bill Gates wrote most of the OS and flew out to Albuquerque.

Steve Jobs and Wozniak saw this happening, and they wanted to buy this PC kit, but Woz didn’t have the money. So he figured out how to do it for himself. It started with the garage mentality that Silicon Valley is now famous for.

Jobs had the mentality: if we both wanted it, other people might want it too. So they go and order 400 kits right off the bat, which later become the Apple I, and they went bananas thinking it might be big. Jobs sold his Volkswagen to finance the purchases.

I’ve dealt with hundreds of entrepreneurs. It always starts with a mindset of people wanting something for themselves, and only later it happens to turn into something akin to market research.

Seasoned businessman took the gamble on financing them later (Mike Markkula). They had to hire engineers, Steve had to handle marketing, but even until ‘82, ‘83, it was still led by young people, and these people were not seasoned in business. That was one of the reasons they eventually tapped John Sculley, being a serious leader.

IBM’s foray into the PC market was spearheaded by Don Estridge. He went to top management, wrote a business plan, and convinced them of a business plan to back the PC. In the end, the whole endeavor would’ve failed if it weren’t for VisiCalc.

The original Apple II was a hobbyist machine. People used it for bulletin boards, etc., but there were really no significant apps. With the addition of the CP/M board, however, there was more interest. The thing that would change the potential of the PC in the minds of the lay public was VisiCalc. Dan Bricklin and Bob Frankston. I remember using it, and my mind was boggled. Now I can do rows and columns and sum them up. The computer could do it for you! It changed everything. This was first most useful for small businesses, but even corporate accounts were becoming fascinated with its role as a spreadsheet.

Estridge was thinking there was something to this PC.

The real catalyst for VisiCalc, in the end, was the possibility of developing 3rd party applications. The developer kit was what that allowed people to develop their own applications, and this was the same thing with DOS. IBM’s PC didn’t take off until there was an SDK to create apps. That pattern goes across everything that’s done today – it’s a continual pattern: hardware, software OS, SDK, innovative apps, and explosion.

From an IBM standpoint, they were lucky. It was a gamble. Difference was that IBM went at it with a lot of capital.

H: The notion of taking a huge gamble, without knowing necessarily where the product will find a job for itself… It wasn’t until the iPhone’s apps that the platform took off, and the use cases came with the apps. We’re still at an early phase with the iPad (not clear whether it has a natural set of functions about it).

Stepping back, it sounds like these organizations were chaotic; lots of activity to execute on basics. Having adult supervision, or the lack of. When Apple did try to structure themselves into a traditional, rigorous way, they lost that edge. Is there a correlation? IBM could execute better on some dimensions, but they were essentially following in the footsteps of Apple.

Does this mean that when you’re trying to optimize, develop a market, maybe the best approach is not to be structured?

T: Yes and no. Sculley did create more structure, and yet Apple continued to grow until 1992. Steve left after 1984. Sculley managed it relatively well, but he took it into a niche area instead of its full potential market. It was already focused on engineering / technical markets, but the introduction of PageMaker, combined with the laser printer, spawned desktop publishing, which also spawned a change as great as VisiCalc. This was also the first foothold in Hollywood from this change.

IBM’s design decision was very different: Apple had the vertical integration. In IBM’s case, they used off-the-shelf parts. They were forced to create an SDK. Even though they had structure, they didn’t have protection from a competitive position.

I’ve spoken with Rod Canion, who founded Compaq. I asked him, “what made you think about creating a PC clone?” Rod had been at TI, and said he learned one thing: whenever IBM did something, it became a standard, so it was a no-brainer.

Sculley introduced the concept of the CD-ROM to computers, and thought that was the future of computing. (ed: HyperCard too, it seems). He brought Negroponte, the CEO of Bell Labs, and a bunch of other people together based on the idea of the CD-ROM, which they all believed could create a new age of communication. Even though IBM left them less controlled, Apple had structure, but kept them in a niche market, Apple didn’t get the growth because of the path they took, even though they were structured.

H: They weren’t able to pivot to a structured mode that was successful, because they needed to maintain control over the pieces, so they couldn’t optimize to the licensing model.

T: Once IBM realized they had nothing proprietary, they tried to make one called PS/2. Rod Canion stood up to IBM, at that time a gnashing decision, and from the industry standpoint, their decision to not back this was the primary reason we have a free, open, PC clone architecture today.

H: So they didn’t necessarily want an open architecture in the end. They never had ownership of that market. It’s interesting to think about how Android works in a similar way – whether they have control over the destiny of that franchise.

What about the period of time between ‘92, when Apple was growing, until when Jobs came back? What happened in the meantime? Was there changing organizational behavior inside Apple: discussions about going back to its creative roots, etc. What did the organization look like between ‘92 and ‘97?

T: What was significant was after taking Sculley out, Apple was handed to Michael Spindler. It was curious in that they were largely where Apple is today. Apple did well in the niche market, and two years after having the lead in desktop publishing, the PC got caught up. Within two years of owning the multimedia technologies space, others were already catching up. Apple needed to go beyond a niche company, be better. They were concerned that they were losing so much ground over the PC, they began thinking that they needed to make it look like a PC. There was confusion over licensing and non-licensing; they did a deal with Motorola. In 3 years of Spindler, Apple was in serious decline, and then eventually brought in Gil Amelio. Mike’s a great guy, but wasn’t the right person for that period.

Then handed it to Gil, even though he was a board member at Fairchild at the same time. Realized that they had to control things better, and his position was that they couldn’t be all things to all people. By that time, they had lost control, and they weren’t growing their OS at the core. The OS didn’t have a growth pattern, and had the foresight to see that NeXT (UNIX) had the potential of leveraging that OS to move forward. Apple had gone down, was over 1 billion in the red, and we now know they were 6-7 weeks from bankruptcy.

This gets interesting, because when Jobs got back in ‘97, I asked how he would rescue Apple. He said, “In the last 5 years, we’ve taken the eyes off the ball. Fundamentally, I’m going to do the best I can for graphics people, engineers.” He wanted to go back to the graphics arts, publishing, TV, etc.: the original core customers of Apple’s business. The other thing he said is that I’m going to concentrate on industrial design, which I found totally confusing at the time.

And yet a year later came the iMac. 3 years later is the iPod. Eventually he brings out the iPhone. Steve brought back a vision, and luckily, through its board, they brought more structure to that vision, and with that level of structure and vision, Apple is where it is today.

H: People think that they primarily wanted Steve back, but it was more pragmatic than that: there was something very useful and timely about the NeXT offering at the time, not just the OS, but it had a great development environment. It had the Objective-C environment, the OO-orientation of the platform… Novel at the time, and powerful and seen as guiding the future. The NeXT acquisition was driven by the need to reboot and reconfigure the OS 9 franchise, and Steve Jobs provided that.

T: Once they started talking about that, Gil knew they were missing a vision. I dealt with all the leaders besides Steve, and Sculley was the only one who had a good vision. Sculley was highly influenced by Alan Kay, and Alan was extremely influential on his thinking on education, mobile computing, etc. Having said that, at the particular time, John was becoming much more visionary in the context of graphics arts (he was a former architect). John knew everything was going to go digital, and was fascinated with his vision. He said someday we were going to have billions of devices some day… He was the first CEO I dealt with who literally said we’re moving from an analog to a digital world, and nothing can stop that. He was becoming more visionary in that role, and the part of the business that needed to grow was they were stuck in these niches while the PC market was exploding.

H: Jobs had more vision, but was extremely pragmatic in how he would get out of that hole.

T: He also mellowed.

H: He also learned a lot with Pixar, and I’m fascinated with how much the Pixar experience influenced his management expertise: how you manage creative people, how you deal with the entertainment industry, etc. Do you find this to be true?

T: Pixar had a huge influence on him, but you have to believe his take on media in general had to change.

H: There’s the thought that companies are surfing this wave of technology, and you can’t optimize and control a product category. This is a crucial dilemma for a technology company: whether you grab an opportunity and optimize it, or you say perhaps optimization and creativity are orthogonal, and either you create a hybrid sustaining / disruptive, or you choose to be constantly sustaining.

T: There’s a couple things going on. Steve understood content was important, and controlling it was also important. Years before, when Akio Morita (Sony) bought a movie studio (Universal), I happened to be at an event with key analysts, and we asked him: why would Sony buy a movie studio? He said, “It’s just software.” Even then, he understood that what we had in the movies would eventually become digitized like software. Jobs at Pixar understood this as well. The message was clear. Content is king, and it was clear to him then. I believe Jobs was strategically thinking this through from ‘98 to ‘00, and eventually he realized he had to build hardware, software, and services together. With the iPod, he had this in mind, because he had to find a way to distinguish himself from the market. The Mac was still within the context of a commoditized market, but in the end, you had to have a certain level of vertical integration to control your destiny.

H: It’s hard to define success and failure. It’s always nuance and subtlety. We’re trying now to think of what went on in his mind. As he mellowed and aged, and saw what he built become corrupted, I wonder how much he thought about how to build an organization that will last in the midst of market forces: sometimes you get lucky, sometimes not, and how do you keep the creative spirit going. It comes back to anecdotes about why people work at Apple. Why do people stay in the organization even when failing? Some of it might be due to a fear of the unknown, but I wonder how the cultural aspects of Apple were shaped by Jobs before and afterwards.

T: You can see this in some of the predominant cultural aspects of Silicon Valley today: they all believe what they’re doing will change the world. The Yahoos, etc., all believed they were going to transform the way people enjoy something. There’s a tendency for it to be a cliché today, but you go to Apple, and they’ll tell you they’re there because they have a vision.

H: That’s a common theme of startups. What was unique about Apple in particular? Is it a track record, leadership, or was there an operating model where this was the place where stuff gets done?

T: You could look at Apple’s historical position: they didn’t invent the PC, they reinvented it. They didn’t invent publishing, but they reinvented it. They didn’t invent the phone, they reinvented it. The driving force is that we can reinvent the watch, the car… there’s enough understanding of Apple’s track record (which is highly unique – reinvent technology sectors over and over, and the people there still think there’s things to invent and disrupt.)

H: This exceptionalism about Apple divides people. Speaking of the future, how do you see Apple’s current structure / team / culture as it exists today? Is it built to last? Second question: what do you think they’re going to go with this structure in the future?

T: The current VPs were all schooled in the Jobsian vision. We have examples of this too. After Walt Disney died, people thought the company was going to lose its momentum. Look at Disney now! Of all the companies I track, I still think that Apple has the best chance to do this over the others.

H: What’s your take on what they might do with their organizational and cultural makeup; their resources and processes, and priorities? Do you think there’s a roadmap out there (watches, television)… How do you see that thinking going?

T: One thing that’s intriguing about Apple has always been the fact that they were always forward thinking on user interfaces. The mouse was brought to us by them (popularized); touch UIs; voice UIs. Other areas they continue to disrupt are in user interfaces – gestures, head tracking.

H: That’s an observation I’ve made as well.

T: They disrupt user interfaces by the nature of the product they deliver. We didn’t need touch on a desktop, but we sure did on a smartphone. On a TV, we don’t need touch, but we need to reinvent the user interface to make it smarter. I absolutely believe they’re going to make a watch. Years before, I highlighted explicitly the watch and car industry as industries they could reinvent. No question they’re going to get it right. I have a digital watch, which Seiko introduced in 1981. Automobiles: I want it to be much smarter than it is today. iOS 7 with its car integration is going to be even more important going forward. If we think Apple’s done innovating and disrupting, we need to stop and check ourselves.

There was an article about major leaders saying Apple is dead – Michael Dell, etc. How many times has someone said Apple will not die? If the company has a vision, and the employees believe in it, with a track record like they do, there’s something there. If I was going to bet on a big company disrupting markets, it would be Apple.

H: That’s a real endorsement. I wanted to make sure that folks can follow you…

T: Twitter is @bajarin. I do Techpinions with my son and three others.

H: For someone in it since the beginning, I’m heartened to hear affirmation that the pioneer is still there. It’s a testament to the power of their vision. What made Apple sustain itself, despite being disrupted, was moving forward and having the organization and resources to build the next thing, and the vision is the crucial element. It’s causal in the sense that if it didn’t exist, the vision would fail. Does this apply to other companies as well?

The presence of vision is crucial, and if you’re in the technology business, it’s primarily important.