Tuesday, February 8, 2011

The Hubris of Ken Olsen

Ken Olsen, founder of Digital Equipment Corporation, died Sunday. Unlike many famous people, his obituary emphasized his successes rather than his mistakes.

The Ultimate Entrepreneur: The Story of Ken Olsen and Digital Equipment CorporationAnd certainly the accolades were well deserved. DEC invented the minicomputer and with it an entire segment of the computer industry, one that propelled it to become the second most computer company in the world — more dominant than anything the British, Germans, Japanese (and even the French) could throw at it. Some say DEC was the first successful VC-backed computer startup.

For growing his company from 0-$8 billion in revenue in three decades, 25 years ago Olsen was dubbed “America’s Most Successful Entrepreneur” by Fortune magazine. He was greatly admired by the smart people who once worked for him and his once-great company, including Microsoft’s Gordon Bell (the inventor of Windows NT), Dan Kusnetzky and Robert Mitchell. A Boston radio station interviewed the author of his 1988 biography.

Still, Olsen made two great mistakes, which is why he was eventually forced out from DEC. Unlike Steve Jobs, was no second act, neither for Olsen nor for DEC, which was later purchased at a firesale price.

The first was ignoring the PC. He had democratized the computer by making $500k (later $100k) workgroup computers, but didn’t see how the toy PCs could ever replace it. I can’t blame him — I spent 1979-1986 as a DEC ISV and it took me several years to take PCs seriously, although I eventually quit my secure job to become a self-taught Macintosh programming expert.

The Innovator's Dilemma: The Revolutionary Book that Will Change the Way You Do Business (Collins Business Essentials)More than a decade later — in his 1997 treatise on disruptive innovation — Clay Christensen argued that DEC couldn’t compete in PCs because the PC scale, distribution and cost structure were incompatible with large computer business.

Maybe that was true, but I think DEC and Olsen had a more fundamental problem. In a 1988 Smithsonian interview, Olsen still didn’t get it:

Q: When the personal computer came, truly to be on their desks at home, at work, how did the advent of the microcomputer effect your business? And how did you see it and how did you respond to it?

A: … We saw in the early 70's that it was going to be easy for people to make computers. The type of computers, we had made more powerful than this one, were going to be able to be made by anybody very simply and very cheaply. … The PC itself was a component to the network. We made some PC's designed to be part of the networking but the general PC market was not for us. There were too many people in it and it turned out to be true. At one time I think there was 500 or 700 people making PC's. Anybody could build them. You could build them in your basement. That was not for us.

Q: Was there doubt about that decision? Or debate about that decision?

A: No, because you see our goals were clear and when anybody can do it and there's nothing particularly unique that we can contribute, it's clear it's not for us. Now we had PC's demonstrated here long, probably long before anybody else did. Individually people would make them. But we very formally decided that was not what we were going to do. It would basically be a very good decision.
DEC was late to the PC, but still earlier than Michael Dell. For years, it could have bought Compaq, but instead in 1998 Compaq bought DEC (and was in turn bought by HP in 2002).

But the second-order problem was that Olsen and DEC never understood how to do semi-open strategies. It made piles of money in the 1980s from its VAX/VMS architecture, as the only minicomputer maker with decent software. Then Unix came along, commoditizing system software and allowing any hardware company to sell its computers to the DoD and other large customers.

DEC responded by rebranding its proprietary OS “OpenVMS” — a marketing oxymoron if there ever was one. In the meantime, Scott McNealy enjoyed a 20-year run at the semi-open, semi-proprietary Sun Microsystems, which produced enterprise technology that was simpler than DEC’s but better suited to customer expectations of increasing openness.

As has often been noted, successful firms, entrepreneurs and CEOs are often prone to hubris. Past success brings feelings of omniscience or invulnerability — or at least a belief the old ways will always work.

In this century, Apple, Google and IBM have all done a good job of executing semi-open strategies. Like DEC, Microsoft delayed too long in opening up. Fortunately for Microsoft, its core business is declining far slower than minicomputers 20 years ago, so it still has a chance to pull things out.

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