Learning from the Barbarians

My first job placed me at Kodak, in the city of Rochester, New York. It was a company then at the zenith of its power, with grand headquarters and a hundred and thirty thousand employees. Its cameras and iconic yellow film rolls were to be found at seemingly every store I walked into. Its brand was ranked the fifth-most powerful in the world. The words photography and Kodak were synonymous.

That year, it generated $11.5B in annual revenue and ranked 26th on the Fortune 500. It was one of the most desired companies in the world to work for. Many of its workers had never known a different employer. Why bother, when you could join at 22, work for forty relatively stress-free years, and retire with a generous guaranteed pension?

The business was driven largely by roll film, a seminal invention by the company’s founder, George Eastman.  A century after that original invention, Kodak film still had over 75% worldwide market share and enormous margins. I remember a colleague taking me to a building where the film was packaged and asking me to guess what the cost of making one of those rolls was. My corner drugstore sold them for $4.50 each, so I guessed two dollars. He told me it was thirty seven cents.

Half a dozen years previously, Sony had introduced its first electronic camera. Kodak’s Market Intelligence group had surveyed its own largest retailers and done an extensive competitive study. Their conclusion was that while digital photography had the potential to eat into film, that time was still very far away, with at least ten years to be able to navigate the transition. To counter the threat, they began investing more into R&D in the field of digital imaging.

I had just been hired out of graduate school that summer by Sun Microsystems. Kodak was one of its earliest customers, and I was placed in its Imaging Sciences Lab as an onsite consultant. My job was to administer the network of about forty Sun Unix workstations that were used by Kodak scientists for their research work and to help them write image processing programs.

I had been around a lot of smart people at university, but for sheer intelligence and drive, this group of researchers blew them out of the water. They were for the most part Ph.Ds, and came from as far as Vladivostok and as near as the Rochester Institute of Technology. They had joined because of the stellar reputation of the company and the fact that the city was considered the world center for optics. Xerox Research Labs was located a few miles away in one direction and Bausch and Lomb headquarters a few miles away in the other.

The scientists worked ferociously and with great productivity. It was an organization with impeccable pedigree – after all, one of its engineers, Steve Sasson, had invented the first digital camera almost a dozen years earlier. But when the Lab achieved a critical milestone, a proud demonstration of the first megapixel version of the same camera, the mother company’s reaction was puzzlingly muted. There was no grand press conference, no breathless preparation for a product launch. The perceived threat to core product was considered so high that the project was buried. Tellingly, the internal phrase within the company for the dead initiative was not “digital” but “filmless” photography.

When the company CEO, Colby Chandler, retired a couple of years later, there were two aspirants to the throne. One, Kay Whitmore had painstakingly worked his way up the ranks of the film business for thirty years. The other, Phil Samper, was wiser to the ways of the digital world (he had even had his company invest in Sun). The board chose Kay, who proceeded to double down on film.

It was a fatal decision.

Kodak began a slow and tortuous decline. Attacks on the business came from every side. Fuji began to succeed in winning shelf space with a cheaper, lower quality brand of film. Canon and Nikon joined Sony in producing a relentless flood of digital cameras that doubled their megapixel ratings each year. HP began eating away at the printer and paper markets.

Kodachrome (a name so revered that the songwriter Paul Simon had titled one of his hits after it) still produced the highest-fidelity, best quality images. But consumers didn’t seem to care.

There was a succession of new CEOs, new strategies, new initiatives. There was the ill-fated acquisition and subsequent divestment of a drug company. A hybrid camera called Advantix that allowed you to preview a frame digitally but still required the use of film. Then a foray into low-cost ink for printers. During its final days, even a series of patent infringement lawsuits against competitors. 

At first, the layoffs numbered in the thousands of employees, and then they rapidly expanded in scale to the tens of thousands. On the day of Kodak’s bankruptcy, a stock that had once traded at $90 closed at thirty six cents.

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I had moved to Palo Alto more than a decade prior, to a new position at Sun’s headquarters. The stories I heard about the collateral damage in Rochester, about the shuttering of stores on Monroe Avenue and the devastation to housing prices in Pittsford, were all second-hand. They were echoes of a distant past, and it didn’t seem that a West Coast company, the pride of Silicon Valley, could ever make the same mistake of ignoring a looming threat, even one that started out seeming puny.

Except that it did.

Sun had roared out of the gate after its founding, getting to a billion dollars in revenue in six short years. The five billion mark fell six years later. After another outrageous growth spurt over the subsequent six years, the company got to the level of fifteen billion.  In 1999, it seemed as if every dotcom startup that had just gotten funded would made its first phone call to its local Sun sales rep to get in line to place an order for a half-million dollar SPARCserver.  The company’s huge bet on designing and selling expensive high-end Unix machines was paying off in spades.

During that year, if you had told Sun leadership that PC servers were getting ready to barrage their business, you would have been laughed out of the room. Dells were little toy machines, with underpowered Intel chips and generic networking cards, no power, no aesthetics, no design. It would have been very close to the reaction of a Product VP at Kodak upon examining the very first Sony Mavica two decades earlier and learning that it stored images on a 2.0” floppy.

By the second quarter of 2000, the dotcom rout was on. Within a year, startups were frantically trying to cancel their orders. It turned out that when your board commanded you to squeeze every penny, and you had told your engineering head to do a really deep analysis on web servers, that Dell machine wasn’t so bad at all. It served web pages at a good clip, it was reliable, and most importantly, it was 90% cheaper.

When Sun was put out of its misery in 2010 through an Oracle acquisition, a company that had been valued a short decade earlier at over $200B was sold for a net amount of $5.6B. It remains one of the largest diminutions of enterprise value in the history of American business.

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There has been a well-known study of disruptive innovation conducted by Professor Clayton Christiansen of the Harvard Business School. One of its core lessons is that the thing that kills you in business often seems really trivial the first time you see it. It’s not the lion in the jungle but the microbe in your tea.

Newer companies have learned this lesson.

Netflix disrupted itself in 2011 when it parsed the statistics on broadband penetration to the home and realized that speeds were getting fast enough for movies to be streamed. One of its choices surely was to whistle past the graveyard and continue concentrating on its then highly successful DVD-by-mail business. Instead, it announced that it was going to enter the streaming business itself and separate its two business lines, even at the risk of the new one severely damaging its existing core.

For this wisdom, it was rewarded with a Wall Street questioning of Reed Hasting’s sanity and a straight line drop in its stock price from $295 to $66. It would take another two years for it to recover. But it ensured that there would not be a startup called Streamster that would wreak destruction on it the same way that it had laid waste to Blockbuster.

Jeff Bewkes, the CEO of Time Warner, was famously dismissive of Netflix’s chances of ever competing with HBO in creating quality shows when he said: “It’s a little bit like, is the Albanian Army going to take over the world?” 

The Albanian Army then proceeded to produce House of Cards. And Orange is the New Black. And The Unbreakable Kimmy Schmidt.  And Daredevil.

 To Bewkes’ credit, HBO seems to have now realized that Manhattan’s mandarins of culture do not have a monopoly on good writing. Two weeks ago, the company began offering its own streaming service with terrific shows, unburdened by a cable subscription.  Similar to…. Netflix.

Facebook seems to have especially sensitive antennae for fledgling disruptors and a willingness to spend lavishly to bring them inside the tent. Mark Zuckerberg showed great prescience in foreseeing that the dozen people programming in a building on the San Francisco waterfront would very soon be a real threat to his billion-dollar business. He spent a quarter of his company’s cash-on-hand when buying them out in 2012. Today, my daughter shares messages with her high school classmates exclusively on Instagram. She has never posted on Facebook.

Salesforce.com has an aggressive policy of ferreting out interesting startups and either investing in them early or acquiring them when they are young. At the very least, the DNA of the company gets constantly refreshed and the product suite gets infused with the newest industry ideas during its thrice-a-year iterations.

It also has a policy of embracing up-and-coming platforms and integrating with them so that there is little chance of being left behind should one of them take off. One of the latest examples was the porting of part of the Analytics Cloud application to the Apple Watch.

On the face of it, this seems like a cockamamie idea. Salesforce is a massive enterprise application that is used to run the sales processes of such huge organizations as State Farm and Hewlett-Packard. It seems to have as much place on an Apple Watch as running the operating system of the International Space Station on an Xbox.

But yet.

The investment is what, a few engineers for a few months learning the new API? The company gets to show off something bright and shiny at the next Dreamforce.  Another notch to justify continuing to be called the most innovative company in the world.

And how about if the Apple Watch takes off? Isn’t it worth a venture bet to track this interesting launch, to see if it sells a hundred million units? Surely then, there will be unexpected use cases. Maybe the memory capacity will eventually increase a hundred fold.  Maybe at some point in the future there will be a button to project the watch face onto a wall and see everything the size of a full computer screen. Maybe then a salesperson will expect to be able to turn the Digital Crown to fill out an order form while at a customer site.

What Netflix and HBO and Facebook and Salesforce.com are embracing now is a lesson learned from internalizing what happened to their forebears such as Kodak and Sun.

 That lesson is to always have an open mind. Don’t be disdainful of the young, the odd, the different. Instead engage with them with full heart, with intent to learn and a willingness to change.

In the 5th century AD,  the mightiest empire in history was destroyed by a wave of tiny tribes from the north, Huns and Goths, Visigoths and Vandals. Fifteen hundred years later, its modern-day successors are striving to be more thoughtful.

This time, Rome will not be undone by the Barbarians.