In Memoriam: Ken Olsen, DEC & the Horizontal Revolution

Ken Olsen, founder and CEO of Digital Equipment Corporation, died on Super Bowl Sunday. Coders of a certain age have been reminiscing about their first times with a PDP-8 and getting a PDP-11 to really sing. Me too. I wasted millions of ratepayers’ dollars at AT&T Bell Labs on VAX 11/780s. Woo-hoo. DEC was a great company.

But Ken Olsen made a classic mistake. He idolized IBM. Wanted to be them. DEC was the same vertically oriented company as IBM. They designed chips, wrapped plastic around them, wrote operating systems, wrote applications, and then marketed, sold and serviced their minicomputers. Soup to nuts. Chip to dip. (Any reference to salesmen as dips is purely coincidental.) But the world was soon going horizontal and would take DEC out at the knees.

In 1987, Ken Olsen famously hired the giant 963-foot, 70,000-gross ton Queen Elizabeth II ocean liner to dock in Boston Harbor to hold his DECWorld expo. DEC stock hit its all time high of $ 199.50, and Ken Olsen proudly announced DEC was hiring an additional 10,000 salesmen — “feet on the street,” I believe was Olsen’s quote — to gain market share and not only dominate the weak sisters in minicomputers, like Data General, Wang and HP, but to start to take on the big prize, IBM.

But think about it. This was 1987. The PC was introduced in 1981. Lotus and Compaq went public in 1983. Microsoft went public in 1986. DEC even offered, sorta, kinda PCs under the name Rainbow (it had a proprietary floppy disk format, yikes!).

But the PC didn’t kill DEC, not directly. It was DEC’s business model that was their undoing. Vertical was dead. Olsen just didn’t get the memo. Neither did IBM, really.

Ken Olsen, Charles Townes, Peter Elias in front of PDP-1 computer. (Photo Courtesy of Computer History Museum.)

Instead, the computer industry, without pre-thought or oversight, organized horizontally. Intel microprocessors, Western Digital hard drives, Read-Rite disk drive heads, Microsoft operating systems, Lotus and Aldus and Adobe applications, and of course IBM and Compaq and Acer and Packard Bell and Dell and Sony and Toshiba computers (who could tell the difference?). The sales channel was not only retail like CompUSA, but distributors like Ingram and 800 numbers like Dell and mail-order catalogs. PCs had more feet on the street than Ken Olsen could ever hire.

By 1990 the stock was $ 57 and eventually, DEC was sold to Compaq (ouch!) in 1998 for a paltry $ 9 billion. That’s a slow sinking of a once-great ocean liner.

The lesson? Get horizontal. AT&T once sold phone service from soup to nuts, offered local and long distance, sold phones, repaired wiring. The Internet evolved horizontally. Cisco routers and Netgear switches, Comcast or Verizon broadband, Rackspace servers and distributed data centers, Google search and Apple iPhone Edge devices. There is always room for someone to enter and define a new horizontal layer and own a valuable service (think Facebook) without having to duplicate the entire infrastructure, i.e., you don’t have to rebuild the QE2.

Horizontal makes things efficient. Each layer can go at its own pace of innovation (for example, several iterations of Pentiums during one Microsoft operating system cycle.)  After Scale and Waste Abundance, Horizontal is my Rule #3 (out of 12 and a bonus Rule) in my new book Eat People and Other Unapologetic Rules for Game-Changing Entrepreneurs. Now you know how I learned this Rule!

Andy Kessler is a veteran Silicon Valley investor who switched trades and started writing books instead of running money. He is also a keen observer of human foibles.