The companies that were at the forefront of the PC revolution in the 70s were SMEs. As the market grew, many of these companies grew to become gigantic enterprises, while some of them fell by the wayside. There are strategy lessons in the stories that we can learn from and apply in our businesses.
In 1975, the IBM 5100 was launched with an IBM proprietary CPU that had been developed internally. Its prices started at $9000. Designed for the mid-sized business, it took 2 years to develop. This was a major achievement, considering the computer industry at that point of time, and IBM’s history in developing mainframes.
The brilliant Ed Roberts ran an MSME called MITS with 20 employees. In 1975, his company designed and launched the Altair 8800 computer with an Intel CPU, and with a do-it-yourself kit. Designed for the hobbyists, its prices started at $439. Computers at that time were a series of lights and switches as input and output devices. The average user needed to first solder and assemble the machine, and then use machine language for programming and using the device.
Roberts was hoping to sell 200 units to break even, an unthinkably large amount. He had negotiated a bulk deal with Intel to get chips with minor surface defects for $75 instead of $360. Altair got lots of free publicity as the “World’s First Minicomputer Kit to Rival Commercial Models”, and was deluged with thousands of orders.
Sensing an opportunity, a home-based company Traf-O-Data requested for a meeting with Roberts. Traf-O-Data was an MSME, with just 3 employees in 1975. Roberts was wiling to take a chance with the two young boys. They sold Altair BASIC to Roberts for an initial fee of $3000 and a royalty of $30 per copy. Roberts sold BASIC bundled with Altair for $75. The software was a work of love, and its founders and developers burnt midnight oil to deliver the product. However, many hobbyists simply borrowed the software instead of paying for it – software programs were not eligible for patents till 1981. Bill, the 20-year old founder of Traf-O-Data published appeals asking people to pay him for his software and not use it for free. In 1975, Traf-O-Data’s revenue was $16,005.
At $439, the Altair was just a break-even sale – the profit came from sale of memory boards and other add-ons such as BASIC. During the Altair’s brief life, 60,000 units were sold. MITS had the biggest exhibition spaces, sponsored conventions, had full page advertisements, and was a first mover. However, Roberts failed to keep up with its avalanche of orders for Altair that far exceeded projections – leading to a problem of plenty. Add-ons that were released were faulty and delayed (customers were offered refunds, but they wanted the computers). Other suppliers stepped in to capture the add-ons market. MITS’ distributorship model failed miserably. His cash flow got squeezed. Other companies stepped in to meet the market demand that Roberts had so successfully created. He was now competing with smarter businesses and marketing geniuses, all of whom launched a range of newer computers with better design, pricing and distribution.
By 1977, Roberts felt burned out. He was tiring of his management responsibilities, and sold MITS for $6 million to a larger hardware supplier. He walked away from the computer industry with his share of $2 million. He bought a large farm, became a farmer, studied medicine and eventually became a small-town doctor.
The home-based Traf-O-Data went on to change its name as its focus changed from handling data from traffic counters to developing software for computers. The company was now called Micro-Soft. Microsoft’s revenues today are $70 billion per year, with profits of $23 billion. Its founders Paul Allen and Bill Gates are among the richest people on Earth, with net-worth of $13 billion and $59 billion respectively.
Altair 8800 sparked the computer revolution, but the company MITS and its founder Ed Roberts could not scale up – a problem that most SMEs face. They were brilliant innovators but not so great at business, and left the computer industry when it was still a baby.