Over the past four months we have compared the reoccurring business patterns from the prior tech wave with the current wave, specifically demonstrating the tech wave parallels between Big Data and Cloud Computing. We then showed how the confluence of those technologies would become the basis for the tech utilities for the 21^st century which will become just as important for the Information Age in the 21^st century as the power utilities were for the 20^th century.  

If you found those articles compelling you will see that the tech wave parallels between the auto age / mass production and the PC / Smartphone age to be even more highly correlated. The development patterns for core technologies parallels to past and present can give the investor the insight advantage in order to discern which companies are making the right strategic innogration moves to win in the market.

When Henry Ford built the first bestselling car almost of all time, the Model T, he did not simply launch a robust auto industry. Instead, what Ford launched was a technology wave built around the mobility of everyone from the common man to the common business. The impact would be recognized and with the addition of a national highway system would go on to change how people worked and lived.

Individuals could work further away and move into new bedroom communities which in turn launched the creation of new industries and businesses like malls, fast food, motels and hotels chains. The economy would launch into the stratosphere based on what could suddenly be built and trucked virtually anywhere inside of the US. Entire communities would be mass produced, like Levittown, which could not have even been contemplated by the pre-auto technology economy.

The parallels of Steve Jobs and Steve Wozniak building the first bestselling personal Apple computer have let lose another mobile revolution just as Ford had. Where people lose sight of the parallels is in the details.

Ironically, both Henry Ford and Steve Jobs learned the identical, hard lesson about not being the majority shareholder in the companies that they headed. Ford started a company with investors and would be fired as the CEO from the company which bore his name. That company would later go bankrupt.

Steve Jobs experienced the same event when Apple (NSDQ: AAPL) felt he was heading the company for bankruptcy in his quest for the successor to the first bestselling Apple PC. Both Henry Ford and Steve Jobs were sacked for being too overbearing. They shared a very difficult personality which bordered on being nasty at times. They both were extremely detail oriented while sharing the confidence that only they knew where their respective industries were headed.

It is likely that these solid steel personalities are what it takes to develop a core technology which changes everything around it.  The decisions which have to be made have shown to be very difficult indeed, particularly for these two individuals who did not have any real sources for capital coming from very basic middle class roots.

Ford lost the company which bore his name before he had struck it rich. Jobs, on the other hand, lost control of Apple after he had already been on the cover of magazines. Likely, Jobs loss was considerably more painful. Ford would make sure he was the majority stockholder in his next venture. He was able to get his name back as the company which had fired him had gone bankrupt.

Steve Jobs was brought back to Apple when the company was teetering financially. The majority shareholder had left and the successor made sure Steve Jobs would not have to worry about money or his position ever again if he could turn Apple around. Jobs did turn Apple around and put the company into the stratosphere on his second tour of duty with it.

Henry Ford had come from a rural middle class world where it had been a hardscrabble life. How Ford manifested his idea from the experiences of his youth was in the goal of creating a very reliable car which could be used on the farm. There were no real roads at that time in history and therefore one of the reasons that the Model T was called the “Tin Lizzie” is it had high clearance to the ground, was solidly built, and was virtually indestructible.

[photo courtesy Wikipedia]

Ford is also famous for having applied mass production techniques to his manufacturing process. Ford had built 12,000 Model T’s before he began modifying the manufacturing process. Once Ford had the mass production process in place he would go on to build 15 million Model T’s. It would take the Volkswagen beetle to surpass the Model T’s record but only decades later in 1972!

Though Ford’s assembly line is known by even school children it was not the basis for Ford’s success. The mass production process would drive his costs down to the point where he could sell a car for $240 it was only one of the elements in his innogration ideas which made Ford the company it ultimately became.

What Ford understood was that he had to integrate all of the materials and technologies in order to come out of the pack of over 400 auto manufacturing companies to become and maintain Ford’s position at the top of the auto manufacturing companies. He resoundingly brought this point home when he opened the Ford River Rouge plant where coal was transported by boats barges and trains into one side of the plant and then processed so that cars would roll out the other end of the Rouge plant. It was through Ford’s vertical integration of materials and manufacturing process which made Ford a category killer (autos) in prior tech wave.

Steve Jobs had met Steve Wozniak and immediately understood what Wozniak had invented with one of his early personal computers, later called the Apple I. He saw a computing device for everyone, just as Henry Ford had built an automobile for the masses. There were hundreds of companies trying to build the first viable personal computer. Personal computers were sold as kits that were assembled by geeks (such as some of us at STI).

When Steve Jobs and Steve Wozniak produced the first small scale Apple II they had built the first personal computer which was successfully mass produced and sold wildly. Why? Jobs understood what Ford had understood in the last wave. He bundled the hardware and software together so that the computer was usable the minute the customer turned it on.

Apple did not stop there. They continued to integrate applications as they were invented. An Apple customer to this day never has to worry about the integration of the system with the applications or hardware. Apple spends the time to insure that the products work together. It has always been Apple’s differentiator.

The Apple II was a hit and the company continued to grow, and one might ask so what on earth could have caused the Apple board to fire Steve Jobs? Henry Ford had control of his company before his car company took off with the Model T. As Ford so loved the Model T he continued to build it for years focusing on driving down cost while competitors had continued to integrate cars with new features and technologies. As he was the majority stock holder he could not be fired. He eventually bought up all the stock and took the company private.

Ford and Apple both shared the experience of the competition in catching up to them. With Ford’s mistake in continuing to make the Model T which was the low cost car it was easy to see how the competition caught up. With Apple they had never been the low cost provider of personal computers. The delta of value between Apple’s computers and the competition had dwindled to the point where Apple’s price was then too high. The market moved in ever larger numbers to the new low cost competition.

The parallel with the auto tech wave and computer tech wave does not stop with Ford and Apple. The competitors which sprang up were built on identical integration models. The major competitor to Ford was a company named General Motors (GM). GM had been several different car companies before the salesman William (Billy) Durant appeared at one of the companies.

Billy Durant had been an extremely successful salesman who had taken control of a carriage company. Yes, the kind of carriages pulled by horses. What Durant did was to buy up several small car-making companies – he did so with his own money – and then put them all together and called the company GM.

Where Ford had vertically integrated the components to build cars, Durant vertically integrated the company which owned the companies which built the cars. In this way Billy Durant leveraged the revenue from all the separate companies, now called GM divisions, for investment in greater technology and design.

Durant’s wild financial handling of GM eventually cost him his position and he was replaced by the management guru Alfred Sloan. What Durant had controlled himself Sloan replaced with a management system to oversee GM. GM supplanted Ford in sales and revenue in the prior tech wave as result.

Apple ran into the modern equivalent of GM. Bill Gates had the financial resources – his family – to borrow the money to buy the first version of the operating system called DOS. DOS was bundled along with all the other components on IBM’s new PCs. IBM had seen the market Apple had created; however, they did not try to replicate Apple’s integration model.

Instead, IBM purchased all of the components for their PC from suppliers. Microsoft (NSDQ: MSFT) was the supplier of the operating system – DOS. Quickly, the industry realized that IBM’s design was an open one which could be copied. Microsoft realized that the only thing inside of the PC which could not be easily copied was their operating system (OS).

Microsoft realized that the only way to compete with Apple was with similar technology at a lower price. Microsoft brought out a Graphical User Interface based on the mouse, using Windows. Steve Jobs for years claimed that Microsoft had stolen this from Apple; however, there is evidence to show that Xerox had invented these technologies which both Jobs and Gates had seen together when they were still friends. Microsoft did follow Apple with these technologies to market.

Where Microsoft took a page out of the last tech wave was through GM’s vertical integration of the funding model for new technologies and designs. Microsoft published where the interfaces were for their operating system which created an ecosystem of application companies that wrote the applications for Microsoft’s Windows OS.           

Since every IBM compatible PC required Microsoft’s OS, Microsoft controlled the IBM-compatible market. For years Microsoft could bring cheaper software to market than Apple could. It didn’t matter that the software was not as integrated as Apple’s; the Microsoft software was cheaper. As it became a Windows based world, economies of scale kicked in and PC prices became much cheaper for the Apple competitors.

This was how Apple got to the point that they dismissed Jobs.  There were few companies outside of Apple which were creating the software applications which are so critical for a personal computer. Apple had to not only integrate the software, but they had to basically develop it themselves, too.

We believe that the first mover creating a new technology and industry is always at a competitive disadvantage. The competition gets to see what the industry looks like and typically will bring out a model which provides more investment dollars upfront to compete with the first mover.

Secondarily, we suspect that the strategic integration likely breaks along the same lines as we saw with the parallels between Ford and Apple and the parallels between GM and Microsoft. It was not an accident that the first movers (Ford and Apple) were at the disadvantage for the second round of competition.

Because consumers want to buy the winning technology and not have to throw the loser away, the one which takes the biggest lead tends to win the lion’s share of the market. We saw this with both GM and Microsoft. In the second round the competitors take their vertical investment advantage and expand marketshare to the point where one wonders how the first movers (Ford and Apple) can survive.

In the case of Microsoft their management was so concentrated in such a small group that they repeated the mistake of Henry Ford. They assumed the personal computer industry was going to continue without radical change, similar to Henry Ford’s thinking about his Model T.

Bill Gates not only said the Internet was a fad before doing an about face when it was clear the Internet was going to change absolutely everything, but then he committed the cardinal sin in the tech world. He sat by while Steve Ballmer focused on pulling every dollar out of their customers pockets instead of looking at the cell phone and realizing the replacement for the PC was literally at hand.

Perhaps one could argue that creating leading edge technology was not in Microsoft’s DNA. That may fly for people outside of the industry but for those of us inside it we know that IBM introduced the first smartphone in 1994 with IBM Simon. When PDA’s were all the rage Nokia hit a homerun with their 9000 Communicator which they released and became the bestselling PDA in 1996.  Understand, Nokia’s PDA was a phone also with a big screen.

Instead, Microsoft’s first offering in smartphone was a total dud. If someone would have shown that piece of garbage to Steve Jobs he would have fired them. We suspect Microsoft was happier shaving cost off the project because they were blissfully unaware that the smartphone was already hurtling towards them even though there was plenty of evidence saying this new technology was almost here. When you look at your cellphone, realize it is made up chips and is in fact a personal computer. It may still be a few years before wireless keyboards attach to the smartphone which then connects wirelessly to a smartTV, but that day it is coming.

Microsoft has demonstrated they are able to make less expensive products in the past. They were never the first mover. The problem they have in Mobile is Samsung has already moved into the cheap seats. They can only hope now that Samsung makes the mistake of trying to vertically integrate the smartphone applications in competing with Apple. If Samsung does then Microsoft can move past them with a cheaper version of the Windows smartphone. Microsoft does have opportunities in other areas like Cloud and Big Data yet, but this gaffe cost them very likely an entire category.

When I watch a sporting match it is always somehow more satisfying to see a team win rather than a team makes mistakes and hands the game to its opponent. Microsoft has now put themselves in a position where they need Samsung and Apple to error to bring them back. I guess these new tech companies still could really benefit from studying Alfred Sloan’s theories from his years at the helm of GM in their glory days of the prior wave.