by Alfred D. Chandler Jr. HBS-WK
Inventing the Electronic Century: The Epic Story of the Consumer Electronics and Computer Industries—
Begin with consumer electronics. That industry began with radio. Two enterprises that commercialized, that is, brought the technology into public use: Radio Corporation of America (RCA), a joint venture of the three leading U.S. electrical and telecommunication manufacturers (General Electric, Westinghouse, and AT&T), and Telefunken (a joint venture of the two European leaders, Siemens and AEG). After World War II knocked out Telefunken, RCA took the lead in commercializing television worldwide. It was then solely responsible for color television, a major managerial and technological achievement. In the 1960s, however, it began to self-destruct by diversifying, first in attempting to compete with IBM in the production of mainframes and then by becoming a conglomerate, purchasing, among others, Hertz Rent A Car, frozen-food companies, savings and loan enterprises, and others. RCA died in the late 1970s, taking with it a number of smaller U.S. enterprises. The latter were acquired by Japanese companies and Europe's Philips.
In the same brief historical period, from the late 1960s to the late 1970s, the Japanese industry led by Sony and Matsushita conquered world markets. Sony became the world's foremost commercializer of products of new technologies in consumer electronics including the Walkman, Triton Color TV, the VCR, the CD (and CD-ROM), and the DVD. Matsushita became the industry's most successful firm in product development, production, and marketing worldwide. By the late 1980s, these two, with Sanyo and Sharp, had driven both the U.S. and European consumer electronics companies out of their own home markets. Japan's achievements are unparalleled in the annals of industrial history, a particularly spectacular performance in a mass-producing, mass-marketing, high-tech industry.
The technological and institutional infrastructure of the new consumer electronics industry was determined in the crucible of international competition between four companies in the 1970s and 1980s—RCA, Sony, Matsushita, and Philips.
Sony provides a model for the successful strategy of commercializing new technologies by using the learning and income from the previous set of successful innovations. Matsushita's story is different and unique. In 1952, Matsushita arranged to acquire the technical capabilities of the Dutch company Philips in return for 35 percent of the Japanese company's equity. It then concentrated on enhancing its functional capabilities in product development, production, and marketing. These learned capabilities permitted it to enter related electronic commercial, industrial, and even information technology markets. As a result, by 1962 only 28 percent of its sales revenues of $64 billion came from consumer electronics.
The story of Europe's Philips provides still another fascinating chapter for business, industrial, and technological historians. Philips played a critical role in providing the technical capabilities that Matsushita and Sony used to commercialize their new products. Then it was driven out of business by these same two Japanese firms and Sharp. Philips had on its own attempted to produce a CD for television, comparable to the earlier CD-ROM for computers, losing half a billion dollars in the effort. As a result, it lacked the funds necessary to build a DVD factory and exited the consumer electronic industry almost entirely at the end of the 1990s. Again, this relatively unknown story provides an intriguing opportunity for description and analysis by business historians.
The opportunities in the evolution of the computer industry
The evolution of the computer industry also has an exciting, largely untold story. In no major industry has a single enterprise so shaped its evolution as did IBM in computers. During the half century since the electronic computer industry began, IBM has dominated in terms of revenues and product lines developed. Moreover, in no other industry have the leader's most successful competitors been those that produced products that the leader had commercialized. In the late 1970s, the Japanese industry became competitive by making and marketing IBM plug-compatible mainframes. By the late 1980s, the most successful producers of computers were those that produced and marketed IBM personal computer clones.
In 1963 IBM's revenues were three times those of its major U.S. competitors combined. In 1984 they were six times those of its nearest competitors, Digital Equipment and Japan's Fujitsu; in 1996 they were two and a half times those of its largest competitors, Japan's Fujitsu and Hewlett-Packard.
IBM had, of course, been the dominant enterprise in the data processing industry well before the coming of the electronic computer. Its evolution provides a classic illustration of first-mover advantages. From its beginning in 1914, it created an integrated learning base to commercialize a new data processing punched-card technology. By the 1920s, its initial factory in New York and a new one in Europe were supplying its worldwide marketing organization with electrically driven data processing equipment. In 1927 Remington Rand, the first mover in typewriters, entered the industry by acquiring a small maker of punched-card tabulators. But during the 1930s, Remington Rand never gained more than 15 percent of the market. After World War II, Remington Rand acquired two of the four projects developing high-speed analytical devices for military purposes. In 1951 it introduced the UNIVAC, the first giant commercial computer, but IBM immediately followed with its own 700 computer.
IBM's continued dominance did not, however, come from its 700 computer. It rested on the replacement of electric power by electronic technology for its punched-card tabulators. In 1954 came its 650 computer, powered by vacuum tubes (an invention at the end of World War I), followed by its 1400, powered by a transistor that was first licensed by AT&T in 1952. The 1400 was leased at $2,500 a month, the cost of a middle-sized punched-card tabulator. Its revenues of $2 billion helped to finance the commercializing of the world's most successful data processor, the System 360, a family of compatible computers.
In 1963, before the announcement of the System 360, IBM's computer revenues were $1.24 billion; Rand's were $145.5 million. Thomas Watson Jr., the executive most responsible for the change from data processing through electricity to electronics, noted: "While our great million dollar 700 got the publicity, the 650 became computing's Model T" (Inventing the Electronic Century, 87-8).
In the 1970s the System 360 all but ruled the world. The attempts of the two major U.S. companies, RCA and GE, to build a comparable family of mainframes failed, with large losses in funds and research time. The Japanese and European computer makers were even less successful. The most successful competitors were those that commercialized products on either side of IBM's 360's price and performance standards; these included the much smaller Digital Equipment, with its stripped-down minicomputer, and Control Data's supercomputer.
Then in 1970 Gene Amdahl, the designer of the System 360 and its successor, the System 370, left IBM to start his own enterprise, producing a plug-compatible System 370. Unable to raise the $40 million required to produce his system, he turned to Japan's Fujitsu, which received him with elation and, in turn, made his plug-compatible equipment available to other Japanese computer makers. With the acquisition of Amdahl's technology, Japan's industry quickly captured its own rapidly growing domestic market for computers. Then in the early 1980s, the four European computer producers turned to Fujitsu, Hitachi, and NEC to acquire plug-compatibles on an original equipment manufacturer (OEM) basis, that is, to be sold as products of the European companies.
With this sudden expansion of their market, the same three companies (with Toshiba and Mitsubishi Electric) concentrated on the mass production of a memory chip, which had been invented by Intel. In the briefest period of time during the early 1980s, the Japanese five knocked out the U.S. memory industry, forcing Intel and the four other major U.S. producers to shut down their memory chip plants.
The U.S. computer industry nevertheless recovered through the introduction at that moment of the microprocessor, and with it the personal computer. Here again IBM played the critical role. The personal computer had been initially commercialized by young hobbyists in the late 1970s. In 1980 IBM's managers set up a unit in Boca Raton, Florida, to mass-produce and mass-market a personal computer and to do so within a single year. The unit's revenues were $500 million at the close of the first year, close to Apple's $600 million. By 1983 and 1984 they had soared to $5.5 billion. Moreover, IBM's personal computer was an open system to be licensed by any applicant. Within a brief time 200 clones poured into the market. While few of the clones survived, the U.S.-produced and U.S.-mass-marketed personal computer transformed the computer industry.
IBM itself gained little from its mass-produced personal computer. Indeed, it suffered heavy losses in its mainframe business. But IBM clones conquered world markets. And every clone had to use an Intel chip and a Microsoft operating system. The resulting advantages of scale and scope, plus Microsoft's control over applications, made these two the world's most powerful computer companies. By the early 1990s, Apple was the only major survivor of the pre-IBM producers that had its own proprietary operating systems.
Although the Japanese missed out on the personal computer revolution, the rapidly growing demand for computing power created by the swift expansion of local and wide area corporate computer networks (LANS and WANs) and the privatized Internet brought a second Japanese challenge in the early 1990s. Critical here was the development of the workstation using another microprocessor, the reduced instruction set computing (RISC) chip, which, with a UNIX operating system, became the primary competitor to the IBM personal computer clones. This technology—developed by Sun Microsystems and the U.S. makers of minicomputers—was quickly acquired by the Japanese computer companies.
By 1996, as recorded by Datamation, a leading trade journal, the four Japanese companies shared with IBM the revived market for large systems. In servers, the heirs of the workstation—IBM, Hewlett-Packard, and Compaq—led in revenues received, with NEC, Toshiba, Fujitsu, and Hitachi following. More surprising, in desktops, where IBM and Compaq were at the top, with close to the same revenues, three of these four Japanese companies followed. In software, IBM remained the world's leading revenue producer; then came Microsoft, followed by Hitachi, Fujitsu, and NEC. By 1996 the European industry had all but died. It had become a major outlet for the Japanese manufacturers.
Although the briefest facts of the computer and the broader information technology industry are no better known than those of consumer electronics, more has been written on the producers of computers than on those of audio and video. Kenneth Flamm of the Brookings Institution has published two excellent books, Targeting the Computer and Creating the Computer, which provide excellent brief reviews of the industry's story into the 1970s. He has done so by focusing on the computer-making enterprises and their national industries. Martin Campbell-Kelly and William Aspray, in Computer, focus on the early years of the industry, with only three short chapters on the microprocessor era. They do not mention the Japanese challenge, nor do two detailed books on Microsoft, nor does Paul Cerruzzi's excellent study on the evolution of computing technology. Martin Fransman, Japan's Computer and Communication Industry, which focuses on NEC, and Marie Anchordoguy, Computers, Inc., set the stage for Japan's challenge but say little about capturing the European market in mainframes and the industry's swift domination in memory chips. Very little has been written about the move of the core companies into the client server (RISC chips and UNIX operating systems) technology that permitted them to mount a major challenge to the United States in the early 1990s, when the marriage of the corporate WANs and the Internet completed the basic infrastructure of the new electronic-based century.