Horizontalization In Tech And Sloppy Thinking

Ken Olsen, founder of Digital Equipment Corporation (DEC), and by extension the east coast technology corridor, died this week. Though he was a very low key guy, the legacy of the company that he built still looms large around here, with both the engineering culture he created and scads of alums having gone on to live well beyond DEC’s being swallowed by Compaq over a decade ago.

Of all the commemorative stuff written about Olsen this week, it was Andy Kessler’s piece at GigaOm that most caught my attention. In it Andy (who often writes really thoughtful stuff) ascribes the failure of DEC to its inability to “horizontalize” in the face of the PC where Intel, Microsoft and the banana handlers (HP, Compaq, Dell, et al) focused on providing just one layer of value instead of DEC’s attempt at an integrated solution.

It would certainly be easier if it was truly axiomatic that this type of vertical integration is certain death for companies in technology. Except of course that it is not as in the case of the smartphone shows today. Or what the storage vendors have shown over the last 10 years. Or the current “cloud” providers on both the compute cycle and storage services.

The best model for understanding what really matters is presented by Clayton Christensen, of Innovator’s Dilemma fame, in a book called Seeing What’s Next (which in my opinion is the best of the lot because he puts his framework to practice). In it he fleshes out the argument that vertical integration actually makes sense depending on how effectively the technology can address the market need. In cases where some fundamental constraint (computing power, storage, cost) exists to deliver what it takes to satisfy the customer, it is often the integrated players that win. And when the technology (often fuelled by the exponent in Moore’s law) gets to the point where it overshoots the solution, then it is ok for layers to be created where each one can begin to move at a different rate, and incidentally when the most opportunities are created for lots of capital efficient startups to be born.

But integration is not bad per se, and more importantly, it is not always a quick transition from one state to the other.

In fact, this transition was not what killed DEC. DEC was vertically integrated in the minicomputer space because it made sense to be— even long after the PDP era, the tight coupling between VAX and VMS made it possible for the company to use relatively underpowered hardware to deliver solutions into the market that were decades ahead of the rest of the world. What killed DEC was much simpler: they just missed the PC altogether (the DEC Rainbow was a half-assed attempt at getting in the PC business).

So what is the lesson to take here? First that over simplifications are often wrong and in the era of blogs an retweets they can often hide simplistic thinking in easily digestible repetition.

More importantly though, to all the folks waiting for the “horizontalization” that got DEC to come and kill today’s integrated king, or who perhaps are pointing their product development roadmaps towards the coming “layer” winners (read: Android), you might be waiting a long time. Or at least until the BrainPal comes to kill the smartphone.

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