Chapter 11 - Self-Accelerating Economies of Scale

Volume wins. And volume is often driven initially by consumer crowds, not business buyers, as shown in the success of Apple, Microsoft, and Dell. And with applications or services like Google or Facebook or iPhone, volume attracts still more consumers and then more applications in a relentless virtuous circle. This chapter is really about volume and the consumer as the driver of technologies that eventually seep into the business enterprise. Just months before the Macintosh burst on the scene, Fortune (May 1983) forecast compounded growth of 50 percent for the overall industry through 1987: “Now the less well-known business of selling the software that brings these machines to life is poised to become just as magical.” Heeding the call, venture capitalists showered $180 million on the top ninety start-ups.

“Talent, innovation, wealth, the American Dream ... or a contemporary South Sea bubble?” we worried. The near-term results weren’t pretty and did nothing to lessen our fears. And just one year later, in August 1984, BusinessWeek reported the existence of 250 word- processing packages, 200 databases, and 150 different spreadsheets. But savage consolidation had already begun. Just twenty products accounted for half the industry’s revenues.

Leading the pack with a 14 percent market share was Lotus 1-2-3, a top seller for 107 weeks. Number two was Microsoft Word, on the top- seller list for sixty-six weeks, followed by SideKick (Borland’s notepad and calendar application) and Ashton-Tate’s dBASE III database, a 123-week stalwart whose run was winding down. Novell’s networking nodes were also high on the list.

Competition and innovation seemed stymied, though, as Apple CEO John Sculley declared at a major industry trade show in November: “The PC industry appears to be, at least momentarily, trapped in a gigantic rut” (San Jose Mercury, November 1984). Venture capitalists were losing interest, Sculley continued, and the (un)happy cottagers were now spending more time in litigation or in debates over standards than they were dedicating to new-product development.

At that point, Microsoft already held 90 percent of the 16-bit operating-system market, with also-rans Digital Research, Pick, and Bell Labs’ Unix variant trailing far behind. And by 1990, the market leaders for 2000 had already been established (see Table 11.1), and of the leaders before then, all but Lotus were doomed.

Table 11.1 Changing Leadership    
Year Company Revenue (Millions)
1980 1. Informatics $126
2. Dun & Bradstreet 121
3. ASK Computer Systems 65
4. American Management 59
5. Management Science 54
1985 1. AGS $250
2. Lotus 226
3. Informatics 192
4. Cullinet 170
5. Management Science 152
1990 1. Computer Associates $1,308
2. Microsoft 1,214
3. Oracle 971
4. Lotus 685
5. Novell 539
1995 1. Microsoft $7,419
2. Oracle 3,777
3. Computer Associate 3,196
4. Novell 1,986
5. SAP 1,887