This week, we’re publishing a whopper of a case: The Rise and Fall of Data General(members only). This took some time to put together, because the first half summarises the development of the computer business from the 40s through to the 50s.
Counter-Positioning — Data General counter-positioned themselves successfully against DEC, the most dominant leader of the minicomputer market. Note that this competitive advantage did not last, as might be expected of a counter-positioning moat. (How long it did last is left as an exercise for the alert reader).
Technological Windows — Notice how the early minicomputer entrants all died. It was only when DEC released a computer under the price of $20,000 that the category became viable ... nearly a decade after the initial wave of entrants.
Idea Maze — And then notice how Data General did not face the same level of uncertainty that the DEC folks did, since the product configuration that worked had been proven out by DEC’s PDP-8, and the shape of the demand that existed in the market was more certain by the point Edson de Castro quit to start his company.
Competitive Arbitrage— Data General was in many ways a winner of the minicomputer boom because it had excellent execution (as one of the founders put it: “We did everything well.”) But notice a) how even the best execution could not hold off the forces of competitive arbitrage forever, but also b) how long their period of outperformance was. Moats matter. That said, it is important to calibrate on how long you can thrive without one.
Turnarounds — Data General’s story is also a decent example of a turnaround — albeit a failed one. If you’re anything like me, you might read the last bit of this case thinking: “what would I have done if I were in Ronald Skate’s shoes?” Then you should compare what happened to the next case in the Turnaround concept sequence, on General Dynamics (which was also a company in an industry in massive secular decline; most of the businesses that General was in could not be saved).
As rich as these set of concept instantiations are, however, I want to draw your attention to a more contemporary question, one that should make you read the case in a different light:
Was the minicomputer boom a technology bubble?
I’m not going to answer this question ... at least not directly. (If you are a Commoncog member, feel free to hit reply in the comments section below, and chime in). But before we duke it out in the forums, I want to clarify why this question might be useful to think through.
One of the things I’ve noticed about discussions of the current AI bubble — (or non bubble, depending on your opinion) — is that people tend to over-index on comparisons with the dot-com bubble and the 2008 global financial crisis. This makes sense — after all, these are two of the more salient bubbles in recent memory. But I think the comparisons are somewhat limiting. First, the 2008 crisis wasn’t a technology bubble. Second, the dot-com bubble was idiosyncratic for a number of reasons, the biggest one being that going public has since become an order-magnitude more difficult. The net result of the ’99 dot-com bust and the WorldCom and Enron accounting scandals was the Sarbanes-Oxley Act, which many have cited as causing a slowdown in IPOs.
As a result, it shouldn’t come as a surprise that the hottest AI companies today are all private companies, unavailable to the retail investor. That’s different enough from 1999 that it should, I think, give you pause.
My point is this: thinking through what occurred in the minicomputer boom is useful because it gives you a new prototype to calibrate against. The minicomputer boom did not produce an equities bubble like we commonly think of in the late 90s. In fact, it occurred over two waves — one in the 50s, and another in the 60s. The boom resulted in multi-billion dollar losses for some of the major conglomerates that started computer divisions; it saw the birth and then death of many hundreds of minicomputer-related startups, and it also — eventually — produced a number of quality public companies — albeit over the course of two decades.
This doesn’t map neatly to our conception of a bubble. In fact, it’s important to remember that a great many things were also happening in the 60s:
There was widespread space age optimism, which led to ...
A ‘tronics’ craze in the early 60s. More new issues (IPOs) were created in the 1959 to 1962 period than in the previous period in the history of the stock market. The vast majority of these issues contained some form of the word ‘-tronic’ or ‘-tron’ in the name, which were eagerly lapped up by investors.
By the mid-60s, a conglomerate boom had taken over. Investors believed that growth in earnings per share was all important, and that conglomeration would result in more earnings per share together than separately thanks to ‘synergies’.
Finally, the previous two manias caused a retreat into ‘safe, premier growth stocks’, which were then deemed the Nifty Fifty. As more and more investors piled into these fifty companies over the course of the late 60s and through to the 70s, the prices of their stocks rose to astoundingly high levels. Ultimately, the price level could not be supported, and the Nifty Fifty stocks came crashing back down.
In truth, much of this “are we, aren’t we in a bubble” talk isn’t actually useful if you are operating in our current environment. What is more important to ask is “what should I do?” and “what are some of the things to watch out for?” and “how do I make sense of our current moment?”
Your answer to these questions will depend on whether you are a public markets investor or a private markets investor or a startup founder or a customer of the new technology.
And so I want to gently suggest that calling this a bubble or no doesn’t actually matter. What matters is the following bit of sensemaking:
That there is a new technology, which is useful and possibly revolutionary and increasingly cheaper as the boom progresses ...
That the emergence of this technology has, in turn, resulted in a period of rapid industry expansion and intense competition.
That this expansion is accompanied by the emergence of many publications hyping up the developments of the segment.
And this will be followed by consolidation and a shake-out, over the course of a few years.
And what that looks like in practice is a wave of companies all experiencing massive growth, with a number of hot issues (if they go public) and some consumer surplus ... before consolidation occurs.
I submit that calibrating on this pattern, and the various ways it has shown up in history is more important than naming a bubble.
We will be publishing more such cases next year, for exactly this purpose. Stay tuned.
