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Ken Olsen, DEC & the Horizontal Revolution

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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.

18 Responses to “Ken Olsen, DEC & the Horizontal Revolution”

  1. Anybody remember CompuServe and how they also vertically integrated using their own computers and operating systems that they built or modified components from DEC among others? Like DEC they too went by the way side for many reasons including outgrowing their model technology adaptability. In the beginning they had to modify, adapt, and create as CompuServe arguably was ahead of the curve for its time. However technology caught up as it did to DEC.

    Speaking of vertically aligned, how about Sun with their SPARC and Solaris, sure they evolved, however are also now part of Oracle who also just happened to buy some of the DEC database along with lock management IP.

    Anybody think of another vertically aligned service provider today that builds their own hardware/software solutions until other technologies catch-up that their competitors are or may be using?

    Dejavu anyone?

    RIP Ken Olsen

    Cheers gs

  2. there is an long, very active thread on LinkedIn’s DEC Alumni group about what killed DEC: management, product, the PC, and the rise of the workstation are all trotted out as boogeymen in the long, drawn out demise of DEC (of which I was an early 80s employee).

    But I have to say that to take the passing of a beloved industry figure and use that as a mechanism to hype your new book, and to do so without a shred of actual evidence based on specific knowledge about how DEC operated as a company beyond saying “It was DEC’s business model that was their undoing,” is indecent and disrespectful.

    Shame on you.

    • rbpasker or is it bob?

      feel free to disagree with me or even make the other side of the argument, but don’t call me “indecent and disrespectful”.

      I spent the better part of 30 years studying and analyzing how the computer industry operated and business models that have worked and those that have failed. i’ve done it as an equity analyst as well as managing assets, putting money where my nose took me and betting against those i found wanting. i know how DEC operated, and i have plenty of actual evidence. i think Ken Olsen is a great human being, having built an industry, and created wealth for himself and for shareholders and for society with the productivity his machines enabled. but he made mistakes. so have Bill Gates and Larry Ellison and Carly Fiorina and Steve Jobs (NeXT?).

      in Olsen’s case, he lost the company. it happens. techies and beloved industry figures don’t always make smart business decisions.

      in my view, it was inevitable as the horizontal business model destroyed everything vertical in its path (IBM almost croaked but financial service companies, especially credit card processors, kept buying their machines as the economy grew.)

      i have no disrespect for Ken Olsen or his accomplishments. i happen to think the next wave of entrepreneurs can learn from previous leaders mistakes. NOT doing that would be disrespectful.

      • Usually, in polite society, we take the opportunity after someone passes to pay homage to them, and not dwell on their mistakes. Should one wish to place him in the pantheon of flawed heroes, one might have chosen a more appropriate occasion, of which there are many, to do so.

  3. Even IBMers had a healthy respect for DEC. In the early 80’s (when I was an IBM intern) DEC was fearsome. Some companies adapted to new paradigms(IBM began to lay off workers by the late 80’s) while others did not.

  4. Asok Asus

    Vertical isn’t what killed DEC. Olsen’s ego and autocratic direction of DEC killed it. DEC had great products up until the end of their VAX cycle, but they never evolved beyond the VAX. DEC completely missed the boat on PCs, and while DECnet was great in its day, DEC only reluctantly embraced TCP/IP, and when they did, they came out with over-priced and proprietary networking products, and Cisco kicked their ass.

    DEC never developed a successor to the VAX, and Sun, SGI, and others kicked their ass. DEC devolved into a dinosaur in every way. The death blow was when DEC hired their legions of technically ignorant sales folks to harass their customers to buy obsolete products, using DEC’s proprietary “VUPS” performance measure for their failing VAX line, because the industry-standard MIPS showed just how pathetic the VAXen were when compared to the new minicomputers developed by SUN, SGI, and the rest.

    DEC also completely refused to listen to their customers, presumably because Olsen didn’t want to hear what they had to say. All of their technologically-savy customers told them that RISC, TCP/IP networking, UNIX, and PCs were the technologies of the future and that the ship they were traveling on was soon going to be capsized by the tsunami of new technologies unless they got with the program. But all we heard back from DEC was the sound of chirping crickets.

    It was a bit sad when DEC died, because they started out so great. But in the end, DEC died in the bed Olsen made for them, and they deserved it.

    • Fascinating. I mean clinically.
      Can it be that Olsen went thumbs down on TCP/IP? (I recall reading a draft of Ax-25 in ?what? ’71. I was over the moon.) If so … how? Not rhetorically, I mean forensically: how?

      In a sorta way I’m reassured when I see Darwinism work. But that isn’t to say that it’s rational. Just that karma can’t be conned.

      I’d love to explore his gifts / genius. If only to better highlight what seems to be some sorta Napoleon complex.

  5. One failing that needs to be pointed out is DEC’s policy to not lay off people .

    I remember a case study in B school where DEC was used as the example of a failed company that attempted to size the business to the employee base vs the reverse.

    I worked for a High tech company in Boston in the late 80’s and many (most)of our weakest sales people dreamed of working for DEC.

  6. Where is the mention of first ever 64 bit chip?
    VAX/VMS was the first VM.
    They also had a database. Find out who owns it now!
    Also don’t forget DEC SRC in Palo Alto.

    • VMS the first VM? Oh, you poor youngster; go learn about IBM’s VM/CMS on System 360 and 370. Back when Ken Olsen was thinking about starting DEC, IBM were doing the R&D that led through VAX/VMS (a great system in its own right, agreed) on up to the VMWare Fusion VMs running on the same system I’m typing this from.

      Those who do not learn history are doomed to repeat the mistakes of those who went before. Useful thought with all the “cloud” propaganda these days.

  7. Cheers Andy – nice job on this post and kudos to you for writing it. Many in our industry have no idea of who he was or what DEC contributed to our industry. I had the pleasure of working for/with some of Ken’s direct reports in the late 80’s and into early 90’s and only met him once for a few minutes. He was definitely ahead of his time in some ways but behind in others. I disagree with you a bit, I think the PC explosion caught him and DEC by surprise and I don’t think they ever recovered. Also, clearly Ken was an engineer in every fiber of his being and I think sales types were always an afterthought. But, when all is said and done, he was a brilliant executive who inspired a level of loyalty and camaraderie that few executives of his day could command. Trite to say, but he will be missed, but not forgotten…..

  8. DEC wasn’t alone look at SGI, Commodore Amiga, Palm, and Apple all vertical companies, only Apple because of Steve Jobs made a comeback, vertical is where it’s at if you want to control your future, however you have to have vision from someone Jobs, Ellison etc…

    • SGI … I’d like to read the blood&guts details of that. (I’m sure I wasn’t the only one that got bit when VRML went the way of the great auk.)
      But I feel disrespectful … still looking for a pantheon to display Ken Olsen’s achievements.

  9. Lucian Armasu

    When you introduce a new product category you must be as integrated as possible. First, because you want to squeeze every bit of performance out of your product through optimizations, and second, because those 3rd party layers might not even exist when you’re launching a new product category or dramatically redefining a market. Those will come in time, and as they appear and the market matures, the product category will will be decomposed in all these layers, built by specialized companies.

    Read Innovator’s Solution – all this is there about “integrating and desintegrating” a market. Also, in Innovator’s Dilemma, the author talks about IBM, DEC and the PC and the challenges they’ve all faced, and about the missed opportunies, but you might’ve read that already.

  10. brian mullan

    And now to show that everything comes full circle the “cloud” crowd is talking thin clients and centralized servers all over again .

    DEC machines were some of the first I ever touched with Unix on them. PDP11.

    Ken wasn’t totally wrong he was just 20 years and 50 generations of technology early.