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Russ: Welcome to a special edition of the Business Maker Show, brought to you by Comcast Business built for business. Special because we're in front of a live audience at the Hilton hotel at the University of Houston, and it is another cool MIT Enterprise Forum event also brought to you by Comcast Business, and it is my great pleasure to have as my guest here the cofounder and CEO of the most successful startup in business history. Producing more first year revenue than EBay, Microsoft, Google, and Facebook combined. Please join me in welcoming Rod Canion. Okay lots of discussion about that startup; $111 million, fastest company to get to a billion dollars in sales. How in the world did you do that?
Rod: Oh it was easy.
Russ: Okay next question.
Rod: As I was writing the book that just came out last October, and putting together some of the details of it, it's the first time I really realized why we went after a $100 million dollars in our first; when you really think about it that was a stupid thing to do. I mean a startup that just finished developing a product, has no manufacturing, why in the world would you try to ramp up your manufacturing that fast? Well there's an answer, and it actually kind of makes sense. We put this idea together, which was to build a portable computer. What we were looking for was something that wasn't being done at that time in computers, and there was a whole lot of computer companies so there wasn't much that wasn't being done, but the idea was a portable computer, rugged, nicely styled, that would work in an office, and meet the needs of the market at the time.
The one big problem we had was how are we going to possibly get software, and that's when the idea finally gelled in my head on January the 8th. One of the things that's burned into my brain, you know that I'll always remember was the chill running down my spine, what if we can make our portable IBM/PC software. Then it would always have the most important, the newest software available for it. It was a simple idea. Could it be done? So we charged off down the path. We raised some money, hired a team, built prototypes, continued on down the path, and then we got ready to go sell the product. You know you can build the greatest mousetrap every, but if you don't have a way to sell it it was all for not. Well fortunately there were these computer stores that were becoming the main ways that the computers were sold at the time, and IBM had entered the market so IBM and Apple were in all of these stores, and they were doing quite well. So it was natural that we would go to the computer store and show them our product.
So let me give you an example of how that worked. I just happened to have one of these, a portable. Trust me, it's a portable. Okay maybe it's transportable, okay this has been called a lot of names, one of which is it looks like a portable sewing machine, but we designed this the feet in the bottom so that we can set it on the table, and I would go into a dealer, and I would set it down on his table, and I would lean it over like that, and then the keyboard stamps on the front. It has feet on it like that. I would unstamp the keyboard, and I'd say we have a computer.
Thank you. That's what I thought to, but the dealers didn't really think much of it. They said, well it's kind of nice. So we'd go on and tell them how great it was. It was rugged, and you know how many megahertz it had, and how many kilobytes of RAM, and they would be okay. Then we'd get to the end, and we would say okay now this really does run all the IBM software so you can go pick any program you want off the shelf, take it out of the shrink wrap so this hadn't been staged, and plug it in. So they would go skeptically pick the one they though probably wouldn't run, take it out of the box, come plug it in, and when it came up and ran just like it did on the IBM PC their eyes got really big. I mean their eyes got big, and you could see the wheels turning, and then the next thing out of their mouth was how soon can I get 20 of these? How soon can I get 25 of these?
The number varied, but the reaction was the same. That was a nice thing to hear, because it meant they liked our product, and of course it was like our baby, but more importantly it turned out that they were hearing something from them. They weren't really saying exactly what it was, and that is there is a pent up demand for a product like this. So we've been thinking of it as a cool portable computer that had access to IBM software. What they saw it as was a portable version of the IBM PC, and people had been asking for a portable version of the IBM PC.
So sure enough, there was this pent up demand that hey we discovered it, but nobody else knew about it. So now we had this opportunity, if we could capitalize on it, to really go capture a big piece of the market very quickly. After going to a lot of dealers, and getting the same reaction we went back to Houston, back to our office, and did the calculations, and we were blown away. When you just simply multiply it out, you know 5 units per month per dealer times 2,000 dealers, you know we can do a $100 million dollars this year. Wow, are we going to do that. Well we were pretty conservative, so our first reaction was nah. We can rent faster than what we got in the plan, but let's don't take any real risk.
Then as we began to do in those days, we began to really think more about it. Okay so what's the repercussion of that, and it wasn't quite as simple to foresee, because here's an opportunity we can actually go get in, we believe, almost if not all of these IBM dealers, and they will try to sell our product, but if we can't meet their demand, if we can't supply the computers what are they going to do? Well we're going to create more demand, and then they're going to sell somebody else's because sure enough there's going to be a lot of people that follow us. So if we want to capture the demand, and then hold onto the dealers that we get in, we're going to have to ramp up really fast.
So we really thought it through. We decided on the fastest ramp we thought we could manage. We had to change our plans completely. We had to go out and raise $20 million more dollars. We had already raised $10 million dollars in two different crutches, but in February of 1983 we raised an additional $20 million dollars to fund the ramp that year. The other thing I guess is worth pointing out is we were afraid to actually tell the investors we were trying for $100 million. We thought they would laugh. So we said $80, we said we think we can do $80 if we're really lucky, and maybe it'll be less or more, but we're going to go for $80, and the good news is we missed the forecast, but we hit $111 million dollars instead. So anyway, that's how we hit $100 million dollars is the opportunity was really there, it was really clear, and we decided to go for it.
Russ: Sounds pretty easy actually.
Rod: It was.
Russ: No I mean when you put all that in perspective, and look at the number of people you hired, the number of assembly lines you had to build, and then you had to build computers, you had to ship them, and you had to have people accept them, and pay for them, I mean that's just an extraordinary execution. Was it stressful there? Was everybody worked to death?
Rod: Everybody on the team worked very hard, but we found out something about people in that first couple of years and that is if you create an environment where people are working together, and not sort of fighting each other, they're not trying to look better than the other guy. If they understand where you're trying to lead the company, what the game plan is, what our model is, you know we emphasize quality. We're not going to ship anything that doesn't have the highest quality we can possibly build into it. Get everybody on the same page, and then get them to work together to that end it really becomes a different place to work.
People would come to work, and they couldn't wait to get there. I can't tell you how many people I still run into at a sporting event, at a mall, I don't remember them. They'd come up and shake my hand, and say you know I couldn't wait to get to work in the morning when I worked for Compact. Thank you for starting Compact, or whatever, but the point is it was a great experience for the employees even though they were working very hard, and so that's how we were fortunate enough to attract really confident people, because you start with a good core of expertise in all the different fields, and then it tends to attract good people there, but then you create an environment where they work together, and they become very efficient, very effective, and so we were able to pull it off.
Russ: Well I think I've told you this before, but I witnessed that. I was invited out to the assembly lines one time. It must've been in 1987, '88. '89, maybe '90. I don't know it all melts together now, but as a leader of one of your dealerships to just tell them what it's like to be a dealer and to be selling their product, and as I talk to him, and there were like 500 people in the room. All from assembly lines, and they were all really intently paying attention to me, but I sort of felt this thing that you're talking about, about how much they enjoyed working there. Actually I had experienced this one other time in my career. It was at IBM, and it seemed like everybody's self-esteem went up about 25 percent when they went to work there, and it's just an incredible feet for the culture, and the culture I felt it all the way through. It was just incredible.
Alright, so that's still didn't explain $111 million in my opinion, but we'll take it. I think a key part of it too though; that you already talked about was the strategy, which was your idea. You always talk about feeling like an electrical volt went through you as you thought about a portable computer that was compatible with IBM, and if there are some young people in the audience, which I see there are, they might not understand this, but in the beginning of the PC world there were 10, 15, 20 manufacturers, and every one of them used a different version of DOS, and therefore had different versions of all the software.
So it was real complicated. You couldn't just go into a store, pick out the hardware, and then pick out the software. Software versions didn't stay up to date. That puts in the more perspective what the original strategy accomplished. He chose what was suddenly the most popular PC after 1991 after IBM introduced it, to follow that path, and quite frankly it wasn't easy to make software compatible to it. Explain that, the reverse engineering thing.
Rod: So we have this idea that we're going to make our portable run IBM PC software, and we make some assumptions. First of all we know that IBM's PC runs product they get from Microsoft. It's called PC DOS, and it's basically the same thing as this other product called MS DOS, which they sell to all the other companies, and each company then goes and adapts it to their different computers, because they're all different. We also know that IBM has a bios ROM, which is highly protected. It's copyrighted, so we have to figure out a way to legally go in, and reverse engineer the copyrighted ROM.
So we do that, but what we didn't know at the time, we actually go to put the plan together. We raised money. We closed the initial investment, and then I have a meeting with Bill Gates. You know this young kid. We're out in San Francisco at a computer fair. I explained to Bill, look Bill we've started the company based on the idea that we can get a version of you of MS DOS that's actually compatible with IBM's because we found out that the one you sell everyone is totally incompatible. It won't run any of the IBM software. Can you do that? Can you sell us a version that runs all the IBM software, and he doesn't know that answer to that.
He thinks about it. He thinks it's a good idea, but he's got to go back and check. So he goes back the next week, and he checks with his people, and a couple of weeks go by, and finally we get the answer, no we can't. We don't have it, and we can't build it. The reason they couldn't was obvious, because while it started off as a Microsoft product, IBM had modified greatly over the time, and it belonged to IBM. The only way Microsoft could create a version that actually was compatible was to go reverse engineer it. It's one thing if you're at Compact trying to reverse engineer it, but if you're Microsoft, and IBM is your biggest customer there is just no way you can throw that relationship out the window. So that couldn't happen.
So what we figured out while we're down the road a couple of months is oh no. We've got to go figure out how to take the incompatible version and make it compatible. That was almost a stopper. That was so hard that it would've been easy to just say oh we'll go do something else, but we were committed to it, and we weren't about to turn back. So we hired several more software people, and went down the path of discovering each and every incompatibility between MS DOS and PC DOS, figuring out how to make it compatible and making that change. So we did that starting about sometime in March, March or April of '82, and then did it all the way through the beginning of the next year. We gradually built up a bigger and bigger team, because it was so hard we didn't make much progress at first, and then finally we got the process going, and we began to find them, and fix.
Several hundred changes had to be made to MS DOS to make it run all the software. Now as it turned out, we were the only company that committed. Others got into it, and they were sort of compatible, or more or less compatible, but we were the only company that ran all the software, and where we discovered that is when we went to our first show COMDEX in November of '82 in Las Vegas there must be 50 companies announcing compatible computers. Well we end up getting this award called best and show. The reason we did is because we're the only company that ran all the software. Everybody knew IBM compatibility was going to be a big deal, but there was only one company that really had taken it all the way, and ran all the software. So that was sort of the launch of a reputation. It took a lot more pieces to build it along the way, but that was the beginning of it.
Russ: This is huge. This was huge. The example that Rod talked about when he took the portable in, put software in it, IBM software, and it ran. I mean from a dealer's perspective it was just a godsend, because I mean it completely changed the amount of inventory you had to carry, and so forth. It made it really good. Rod though was real popular amongst all the dealers you know. IBM was still kind of waffling in whether or not they were loyal to the dealer network, or were going to sell direct. Rod and his team discovered that weakness along the way, and became extremely loyal to the dealer network. I've told this story in front of him before. I don't think he likes me to tell it, but I'm going to do it anyway.
There was this huge computer land conference. This probably was in '87 in Vancouver, and the highlight of this particular day was a presentation from the IBM vice president on the PC, and what it was going to be like for the future followed by Rod Canion, and boy there was a lot of hostility in the audience when the IBM guy spoke, but he finished, and he's walking out this huge hotel room, and Rod Canion is announced, and then place erupts into a standing ovation that kept going until the IBM guy was even out of the door. I mean it was emotional. It was really incredible.
So anyway, back to this strategy. Portable, and totally compatible; you took that compatibility to a point where eventually you were more compatible with IBM than IBM was.
Rod: So let's talk about what happened there. It started out as a very simple idea. We're going to be able to run IBM PC software. Well that was when IBM had one product a PC, and we had one product a portable, but as the technology advanced, as you know, it does more rapidly all the time, faster and faster processors. As the next generation processor came out, originally it was the 8088 in the IBM PC. The 8286 from INTEL was in the next generation PC, which was the IBM AT, well it wasn't quite compatible.
For some reason IBM didn't see the need to make the new AT run all the old software, but we had learned how to make a computer run existing software. So when we came out with our 286 product, it ran all the old software, and that was really the beginning of an industry standard, because IBM saw it as just different computers that were faster and faster, but we saw it as a way to really create a very big customer benefit, which is you buy all the software, and you learn how to operate a computer, and you learn how to operate the software on that computer, and then when you upgrade in the next generation you don't have to throw it all away and start over. You can actually take all of that with you, and it's not only the software by the way; it's the plug in cards that you would call peripherals now. All the same of those works on our machine, and IBM's machine, and then when you upgraded to the next machine, ours ran all the old cards. IBM didn't run all the old cards.
So it was a little bit at first, but I began to build. So what Compact began to create was an industry standard. It was based on the IBM architecture, but it was Compact really making this backward compatibility work, and then something happened that really solidified it, and that was we became worried about how different our MS DOS was from what we were getting from Microsoft, because there would be a new version of MS DOS every six months or a year, and every time they came out with a new one we had to go make all of these changes to the new on.
So it was a lot of work, and a lot of resources, and time. We came up with the idea of why don't we license our version back to Microsoft, because they clearly wanted to be able to sell a compatible version of MS DOS. So we did. We licensed, secretly, our version back to Microsoft, and they began selling it to all of our competitors except for IBM.
IBM could've used it. I mean they could've had access to it, but that's not the way they work. So at that point in time, now we were still the most compatible, because things were always changing, and we were always staying out in front, but now all of the other computer makers, PC makers that ran IBM software had a very high degree of compatibility. So now customers really had the confidence that if I wanted to switch from a Compact to a Dell or to an HP, I can do it, and the software will run. So it was a safety factor for the customer. It really made freedom of choice much larger, and by the way because one of the ways you could compete was on price it actually put lower pricing pressure on all of the makers to be able to continue to bring prices down to where they were more affordable.
You see this thing when it first sold was $3,000.00 dollars for one floppy. You can imagine now you can go out and buy this amazing notebook computer for you know $3, or $4, or $500.00 dollars. So that's not just the way it happened. It's a result of the industry standard creating a level playing field where people have to compete on either better features and technology, or lower price, and so there were some of both, and that over time led to where we are today.
Russ: Okay so in this period of time, really late '85/'86 I was definitely computer land, a dealer of Compact, and IBM, and Apple, and the company that bought my company was real pro IBM. So we kept having all of these strategy sessions with them, and it was interesting. It was obvious that there was a battle brewing big time, but it was always talked about as a battle between IBM, and Microsoft. Somehow or another Rod or Compact wasn't talked about much, but suddenly this kind of discussion, and rumor started that IBM has finally had enough, and they're going to do something about it. So gradually things started leaking out, which was very un-IBM. They used to not do that at all, and along came a proprietary system of proprietary software, PS2, micro channel architecture. You guys did pay attention to that, and it was an interesting time in your company.
Rod: IBM made a very bold move that everybody believed that it was going to work. I mean it was brilliant if you looked at it from their perspective. It created the industry leadership position, they had all of these companies literally you said 20 or 30, at one time it was 200. It grows and shrinks, but maybe it was 50 at that time, but all of these companies trying to follow them around making computers that run the same software. So basically it was IBM, you know the pipe piper, and all of the others except for Compact who understood how to do these things so we actually got out in front of IBM. That's part of what built our reputation as an independent technology leader, but IBM decides they've had enough of this, and so they're going to come out with a very proprietary, very protected computer, and they're going to license it to all of these followers for 5 percent of their sales.
So they kind of see that there's some benefit in having a bunch of other companies out there, but they don't want them to get the money. They want to take money that they feel like really should be there; because it's their architecture right, and we had all followed them it was right. It was their architecture. It should've worked. As it came into the market, it was heralded by the press, and by the analysis, and by the major companies as this is the next big thing. They began to buy them in the millions. Worse than that, all of our competitors began to buy licenses and build compatible machines. So by the end of 1997, 9 months after IBM enters the market with the PS2, literally all of our competitors; HP, Dell, Radio Shack, all of them have licensed it, and are bringing or are already in market with a PS2 compatible machine. It's all but over with before we finally decided we just can't go that path. We have to do something to stop it.
Now IBM didn't have the ability to, I didn't realize this until I wrote the book, the reason they didn't make their new machine backward compatible with the old architecture is they didn't know how to do that. They had never had to do that. They just brought out the next machine. So they were bringing out an advanced architecture. It was IBM's name on it. They could sell it. They could sell ice to an Eskimo so they were confident they could sell it, and they were selling millions of them, but we understood that it was really a big customer benefit to maintain this backward compatibility. So we used our technology, which it turns out we were the only company that had it to be able to build an advanced architecture, and since we had theirs as a model, we could make ours a little better than theirs, but also be backward compatible.
So we came up with a design to do that, but the problem there is they're IBM and we're Compact, and it's a marketing game, and we're not going to win that battle. If we say we're better, and IBM says they're better, you know we'll sell some computers, but IBM is going to win the battle. How are we going to get our better architecture that has these advances, these features that IBM doesn't have to be accepted by everybody, and the way we decided is we're going to take this most valuable technology that we own, and we're going to give it away to all of our competitors.
Well is that really a smart thing to do, I mean you know? Well, yeah and the reason is we've got one shot at this. If we're going to stop IBM, they're already way down the path, if we're going to keep them from literally taking over the market the only way we can do that is if we put every advantage we have into this better architecture, convince all of the other computer companies to join up with us, and commit to building computers based on it, and not on the PS2 architecture, then at least we have a chance of shifting the momentum away from IBM, and back to the industry standard. So once we decided we're going to do that we commit the whole company to that.
We go first to Microsoft, Bill Gates; he's scared to death of IBM. They're actually not just coming after the clones. They're coming after Microsoft and INTEL. So we go to Bill Gates. He says yeah we'll help you. We go to INTEL. They said yeah we'll help you. So we go to HP, because they're the other strongest brand besides IBM, and they join forces with us. It took a couple of months to get them on board, because I mean it is one of those things that's too good to be true right? Here's this great technology that's better than IBM. You don't have to pay out royalty, and you're giving it to me free, but we finally convinced them, and it made sense if we can stop IBM with this than it's worth it for us. They join forces.
A long story short, by the day of announcement we have 80 companies that have signed up. Literally all the other computer companies have signed up to support this new extended industry standard architecture instead of IBM's PS2, and the day we announced it was the first time I ever remember the major business press actually giving us the positive coverage, and IBM the negative. That is saying this looks like it'll work. IBM has a problem here, and sure enough it broke their momentum. A year later when we came out with the first products that used the EISA, extended industry standard architecture, they were so powerful and so fast it blew away all of the IBM stuff including some of their mini computers as far as performance goes. It really broke the back of this new move by IBM, and it was about four or five years later that they ended up taking it off the market. It's about the same time that Compact passed IBM and became the world leader.
Russ: That is the incredible part of the story.
I mean if you really think about it, what he did is that he beat IBM. IBM essentially eventually got out of the business, but not only that in reality there's nobody that played a better role in the growth of Microsoft after that time than Compact, and INTEL as well. Everybody sort of standardized, and I should let you describe this, but the standardization is what made, you know the microcomputer industry take off, become lower cost, and everybody started buying one. Now there's probably young people in the audience that they think about the globalization of the world today, they think well it's all about mobilization, that we have these little devices and it is, but before that they can think way back to when it was just about socialization and social media, and that's what it was all about. Some of them might even be old enough to remember when the internet first became a player.
Well this is what happened before the internet. Without this, the internet would not have taken off, because there wouldn't have been so many PCs out there, and thank you for doing what you did so well.
Rod: Well you know I used to tell people, you know Compact saved the world from IBM, and of course they would say yeah right.
But it was not until I finished writing the book, and really sort of figured out a way to explain it that I realized in way we really did, because if IBM had succeeded, what would've happened is they would've decided when each new technology came out. They would've kept the prices from going down as fast. When IBM wasn't in control anymore and the open industry standard was really clear that it was going to continue on. Then everybody began to learn how to play on this level playing field.
So if you wanted to be a player you had two choices. You could either differentiate by better features, and new technologies, which meant people when they came up with an idea they rushed to beat Compact to market with this new technology so it sped up the rate of advance of technology, and at the same time you could also get some market share by lowering your price. So it really sped up the lowering of prices down the price curve, and when you unleash that over this next decade through the '90s, and then you fed it with this demand for internet access, then it really caused this explosion that lead to the rapid advance of technology that lead to the mobile devices we have today.
I believe, and I think if anybody really studied it carefully, you would be able to prove that if it has slowed down at all during that period in time that we wouldn't have had enough horse power, enough technology to actually make the iPhone work when it came to market in 2007. In fact, Steve Jobs said he tried to get it out earlier. The technology wasn't there. As soon as they had the performance and the capabilities they need they came out with the iPhone, and that was really the beginning of this next wave. In fact the last chapter of the book sort of explains how IBM went from almost out of business to really becoming the market leader in a very short time, and it was all based on the total surprise them finding the next big thing, and their competitors not seeing it coming.
Russ: Incredible. Before I let you go, two more last questions. Let's imagine we have a young entrepreneur in the audience, we very well might. What kind of just general advice would you give him or her?
Rod: Oh there's so much that goes with success in starting a company. Entrepreneurs don't like it when I tell them this, but great ideas are a dime a dozen. In other words, a lot of creative people, a lot of really good ideas, and that will get you nowhere unless you really do all the other things you have to do to make a successful business. Now we had an advantage when we started Compact, we entered a market that was mostly kids. IBM obviously wasn't, and all the established companies, but a lot of the startups were young people. We had 10/15 years' experience in a very good company that taught us how companies should work. So one of the things I would tell an entrepreneur, if you can stand it, go to work for a good company, and learn how business operates, because starting a company without that knowledge makes it much more likely you're going to make some mistakes, and if you can't wait go ahead and try, but if you want to improve your odds of success wait as long as you can, and get some really good experience out there in as many different areas.
In my own case without even realizing it, I started out as a design engineer, and then managed a design team, and then I worked in sales support, and then I worked in the factory helping to build test equipment, and then I worked in solving problems as they came up in the factor. You know doing all of those things gave me this rounded background to be able to, and then when I had a chance to start my own thing to have some understanding of how each of the areas work, and that's really key.
Russ: So the last question. I hate to end on this, but tell us what you think of halt and catch fire.
Rod: So for those of you who haven't heard, Halt and Catch Fire is a new TV program on AMC that's loosely based on the computer industry as it grew up in the 1980s, some would say loosely based on Compact, but it's broader than that in the sense they sort of took the idea of a company copying IBM's architecture to run their software. They miss the whole point unfortunately, they hadn't read my book so when they wrote the series they didn't really get the jest of it. I mean obviously our book would not make a very exciting TV series, but it would've been nice if it would've been sort of close to the real story, but anyway it'll be interesting to see how well it does. It's really spicy. You know it's got the intrigue, and the sex, and the back stabbing, and all of that that makes for good TV shows.
Russ: It started off with an armadillo crossing the road.
Rod: Well we got a few armadillos around here.
Russ: That's right, that's right. Well Rod I really appreciate you sharing your story, and I appreciate you doing what you've done.
Rod: Well thank you very much, happy to do it. You bet.
Russ: And that wraps up my interview with Rod Canion, the former cofounder and CEO of Compact computer, and that wraps up this episode of the Business Maker show brought to you by Comcast Business built for business.