Cycle of life, death sustains U.S. economy

Well, Steve did, with help from Bill Gates, Bill Joy, Michael Dell and others. Their innovations and business agility turned Digital Equipment Corp., once the second-largest computer company in the world, into a tiny sliver of Hewlett Packard.

That’s why I never worry very much about the American economy, no matter how awful things seem to be. The weak businesses are culled, the strong businesses thrive, capital and labor flow to the strong, and the economy keeps growing. It’s an ugly process, but it works.

At this very moment, somebody is finding a way to kill Apple as we know it. Maybe it’s happening in a garage in Socorro, and maybe it’s in a dorm room in Austin. Maybe it’s happening within Apple itself. That, after all, was Steve Jobs’ real genius: he found a way to destroy and rebuild Apple over and over again, growing the company time after time. Without that ability, his flair for design and sensitivity to what markets want would have amounted to nothing.

When that great new Apple-killing idea emerges, what ever it might be, Apple’s sector of the economy will surge.

Multiply that phenomenon across every industry — the innovations that will kill Pfizer, McDonald’s, Walmart, Alcoa and Dupont as we know them – and you have the next boom. That is the genius of the American economy.

It is not, however, much fun to be on the receiving end of the coup de grâce. Digital Equipment, which invented a small, easy-to-use alternative to IBM’s room-sized, complicated machines, in 1998 had to sell out to Compaq Computer, a personal computer company that in turn sold out to Hewlett Packard in 2002.

Jobs, Dell and the others beat us like a drum.

We were not alone. Does anyone remember Data General, Wang, Thinking Machines Corp., Osborne, Prime or Commodore?

DEC was founded to steal market share from IBM. It used to be said that IBM wasn’t the competition, IBM was the environment the rest of us lived in, so no one was foolish enough to think we could destroy IBM. But IBM machines were huge, they were locked away in climate-controlled rooms, and they were cared for by a priesthood of technicians. Engineers and scientists of the type who founded DEC in 1957 just hated IBM. They wanted small machines they could program and manage themselves, sitting in their own labs and offices.

DEC’s machines fit the bill beautifully, and by 1990 the company booked revenue of $14 billion and employed 120,000 people. Then it started losing money. It employed 53,000 people when it was sold to Compaq.

Just like IBM before it, DEC stopped meeting customers’ needs.

DEC manufactured almost everything it put into its machines by itself, thereby driving up costs and barring itself from innovations and economies of scale offered by companies that specialized in building components. At the same time, Michael Dell of Dell Computer was showing the world how supply chain management could bring the price of computers down to, relatively speaking, chump change.

DEC was proud of its proprietary operating system, VMS. It was robust and easy to use. It also had proprietary networking Software, called DECnet. Meanwhile, Bill Joy and Sun Microsystems were putting non-proprietary systems like UNIX and TCP/IP into their computers. Applications designers flocked to UNIX, even though it was, in DEC’s opinion, an inferior operating system, because they could integrate packages into UNIX without hitting the brick wall that DEC put in the way.

Meanwhile, personal computer makers like Apple were making small machines that even young children found easy to use. Everyone in the industry when I worked there said a really great computer had to be as easy to use as a telephone. Steve Jobs got us there first.

Before long, customers began to realize DEC was not adding enough value to their businesses. They went where they did get the value they were looking for. In economic terms, they were able to deploy their scarce capital more efficiently, which improved their returns on investment and helped their own companies prosper. Those companies could hire more people and improve the lives of their own customers.

The cycle never stops. Microsoft is struggling. Dell is in trouble. Sun Microsystems doesn’t exist anymore. Hewlett Packard is trying to find a new direction and has changed CEOs yet again. People are experimenting with quantum computing. Seymour Cray, founder of Cray Research, speculated that one day computers would not be built, they would be grown. You just know somebody is working on that right now.

Something amazing is going to happen, and when it does somebody else’s employer will be killed. It’s wonderful. It’s terrible.