Some years ago, WC attended a workshop on business valuation. The instructor – who was very good – opened by showing the income statements of a long-established company through 1976. The statements showed modest, slow growth in revenue and profits. “How much,” he asked, “Is this business worth?”
We all made out guesses and then he showed us the income statement for 1977. The company had gone broke and filed for bankruptcy.
Why? The financial statements were for a slide rule manufacturer,1 and in 1976 Texas Instruments shipped an electronic calculator with a price of $25.00. A slide rule has 3 places of accuracy, and requires you do determine the orders of magnitude in your head; TI’s gadget had nine significant digits and could handle nine orders of magnitude. And it was faster. Slide rule manufacturers were ambushed by technological change.
The instructor’s point was on the uncertainties of business valuation, but the larger issue is how even a long -established business – 200 years in case of some slide rule makers – can be ambushed by change.
Which takes us to Kodak.
As recently as two decades ago, Kodak was a Fortune 500 company, and owned the intellectual property rights to everything that made photography possible. Other companies made film and film processing equipment, but they all paid royalties to Kodak. But in 1975, a bright young Kodak engineer named Steven Sasson demonstrated a filmless camera, the world’s first digital camera. The brass at Kodak wanted nothing to do with it. If it were developed, they argued, it would hurt Kodak’s film sales.
This is the 40th anniversary of Sasson’s invention. Digital cameras own the industry; film cameras are a hobbyist’s collector item. Kodak went through bankruptcy and emerged a hollow shell of itself. Tens of thousands of Kodak jobs disappeared and Kodak’s hometown, Rochester, New York, has suffered mightily from the failures Kodak executives. Even Kodak’s prize assets, its intellectual property rights, were sold off in its bankruptcy to the digital industry.
Unlike the slide rule industry, Kodak saw the sea change in technology coming; their own engineers demonstrated it for them. But they chose short term profits over long term vision.
What slide rule manufacturers and Kodak – and, for that matter, a dozen other examples – have in common is a failure to appreciate Moore’s Law (which isn’t really a law but is certainly something close to a law). Moore’s Law says that every two years the density of transistors will double and the price will halve. It’s held true for almost five decades. Sophisticated companies plan around it; indeed, they plan for it. Foolish companies get “Kodaked.”
- A slide rule, for WC’s younger readers, was a mechanical analog computer. In its most basic form, the slide rule uses two logarithmic scales to allow rapid multiplication and division of numbers. These common operations can be time-consuming and error-prone when done on paper. More elaborate slide rules allow other calculations, such as square roots, exponentials, logarithms, and trigonometric functions. ↩