Dealers of Lightning (8 page)

"This thing'll never sell," he said.

Taylor was shaken to the core. For him interactivity was a sacred cause,
and for Max Palevsky to stand in its way was intolerable. Taylor felt his old
urge rising to establish his primacy in the pecking order. "You're wasting
my time," he snarled. "Why don't you get the hell out of here?"

He would always cherish his memory of the day he threw Max Palevsky
out of his office. But the issue they had so clumsily debated was not
closed. A few minutes later Taylor heard someone knock on his door. It
was Rigdon Currie, a courtly Georgian who served as Palevsky's director
of sales and marketing. Currie had watched the recent showdown in
mounting dismay. One of his responsibilities had been to keep an eye on
the Genie team as they transformed the 930. In contrast to his boss, he
was deeply impressed by the machine and its commercial potential.

"I think Max is wrong," he said.

"I know he is," Taylor replied. 'What are you going to do about it?"

"I think we can turn him around
as
long as we get people lined up out­side his door with money," Currie said. "Could
I
bring the customers up
here to see your terminal?"

"You bet."

In the next few weeks Currie escorted scores of customers up to Tay­lor’s Pentagon quarters and emerged with more than a dozen solid
purchase orders. Palevsky had no choice but to capitulate. He autho­rized the marketing of the Genie machine as the SDS 940 with one
stipulation: SDS was to recover all its development costs from the first
three sold. As a result, the 940 was priced at $173,000, about $100,000
more than the base 930, although it carried no more than $5,000
in
additional hardware.

The machine became one of the best-selling products
SDS
ever had,
eventually accounting for nearly one-third of its sales.
It
helped turn
time-sharing into a commercially viable business. But Palevsky never
fully committed his company to the new venture. Right up until the
end, the 940 was manufactured not on a dedicated assembly line, but
by trucking conventional 930s to a special plant, where they were torn
down and the new hardware installed by hand.

Taylor won that battle. But his encounters with
Max
Palevsky were not
over, not by a long shot.
A
few short years later their destinies would con­verge again
—
this time in the aftermath of one of the costliest miscalcu­lations any American corporation has ever made. The corporation was
Xerox.

N
ew Years Eve, 1968. From his office on the twenty-
eighth floor of Xerox Corporation headquarters in
Rochester, New York, Dr. Jacob E. Goldman stared
testily out at the filthy weather. Like a prisoner marking off the term of
his incarceration on the wall of a cell, he mentally toted up the days since
he had seen any trace of the sun.

The number was thirty-one. Since arriving to take up the job of chief
scientist at Xerox on the first of December, Jack Goldman had wit­nessed precipitation in Rochester every single day. He was thoroughly
sick of it.

At that inauspicious moment C. Peter McColough, the company's
chief executive, walked in to wish him a happy new year.

"Peter," Goldman blurted, "I think I've made a great mistake."

"What's the matter, Jack? Aren't you happy here?"

"Peter, look out the window."

Goldman reminded McColough that he had not even had time to
move into a proper house. His car spent every night exposed to the
elements outdoors, and every morning he wasted a half-hour scraping
ice and snow off the windshield. Recently separated and living alone,
Goldman even found himself nervously pondering how future candi­dates for his hand might take to Rochester's dismal climate.

McColough had to be disconcerted by his chief scientist's misery,
given the trouble he had taken to get Jack Goldman into the corpora­tion. He believed fervently that Xerox, successful as it was, needed to
absorb modern technology. The alternative was to risk sinking into
oblivion as its products became supplanted by new developments. Hir­ing Jack Goldman, a visionary technologist and superb judge of
research talent at Ford Motor Company, was a critical component of
that strategy.

But to make way for the new appointee McColough had first had to dis­lodge the incumbent chief scientist. This was the aging John H. Dessauer,
who had held the post for decades. "McColough thought it was time for
Dessauer to step down as the chief technical officer of Xerox, make him
emeritus, congratulate him and thank him for eveiything he's done, and
get a hotshot technologist in there in his place," recalled one executive
from that period. "Naturally Dessauer was very reluctant to go."

That placed McColough, then the Xerox president, in a delicate spot.
Goldman refused to consider Xerox's offer until Dessauer's retirement
was assured. As he bluntly told one corporate headhunter in 1966:
"Come back when you're prepared to offer me his job." But Dessauer
was close to a deity at Xerox. It was he who had inveigled his bosses at
modest little Haloid Company into bankrolling the untested duplicating
technology of an eccentric inventor named Chester Carlson and shep­herded it toward commercialization. He had supervised the design and
development of the celebrated Xerox 914 copier, which became the most
successful industrial product in history. To put it bluntly, Dessauer was as
responsible as any man alive for the fabulous prosperity of what had
evolved into Xerox Corporation.

To overcome his recalcitrance McColough finally appealed to the lone
individual at Xerox occupying an even higher level of divinity: the vener­ated chairman and chief executive, Joe Wilson. Wilson fully sympathized
with McColough's desire to revitalize Xerox research. At length the two
men came up with a plan to simultaneously announce Wilson's own
retirement as chief executive (although not as chairman), McColough's
promotion to CEO, and, as part of the changing of the guard, Dessauer's
retirement as chief scientist. Almost no one personified an American cor­poration as Joe Wilson did Xerox, most of whose employees had never
known another CEO. Dessauer could hardly resist such a self-sacrificing
scenario. Grumbling to the end, he finally acquiesced.

After such maneuvering it would not do for Jack Goldman to get balky
after a month on the job. On that snowy New Years Eve McColough
thought fast. He decided to mollify his new executive by tipping him to
one of the two vital corporate secrets he was at that very moment holding
close to his vest.

"Take heart, Jack," he said. "Things are in the offing. Soon you'll be
thinking more kindly of the outside environment."

Goldman could not guess what exacdy McColough had in mind, but
the CEO's portentous manner told him it was something big. In fact, the
company was finalizing plans to move its headquarters to Stamford, Con­necticut. Given Xerox's stature as a native Rochester institution, this
would be momentous news indeed. The relocation would drain the
region's faltering economy of hundreds, maybe thousands, of jobs. Wary
of a backlash, McColough had no intention of making the decision pub­lic until months more of subtle groundwork could be laid. Appeased by
the hint tliat a favorable change was in the air, even if he could not know
what it was, Goldman accepted his boss's holiday wishes in a much
improved temper.

But it was the other secret, the one McColough failed even to hint at
that evening, which would wind up exerting a much more powerful force
on Xerox's future—and on Jack Goldman's. In a series of highly confi­dential talks, McColough had been negotiating for Xerox to acquire a
computer company in Southern California. Less than six weeks into the
new year he and its chairman would announce a deal worth nearly one
billion dollars.

Not divulging this secret to his new chief scientist may have been one
of the biggest mistakes of Peter McColough s career. Had he only opened
up, Goldman mused later, "I could have led him to knowledgeable peo­ple in the computer field. People who would have advised against it."

Seen another way, however, it was fortunate he did not. For Xerox's
purchase of Scientific Data Systems—a flagrant miscalculation when
considered solely as an act of business strategy—would lead directly to
the founding of PARC.

It was not that Goldman opposed the idea of Xerox getting into digi­tal computing. After all, his responsibility as chief scientist was
precisely to introduce novel technologies into a company grown nar­row-minded and dull. What concerned him was the way it had been
handled.

The urge to enter the computer business came from Joe Wilson, who
had long expressed apprehension that new technologies might someday
render Xerox's image-to-paper monopoly obsolete. "If we're going to be
big ten or twenty years out," he once lectured McColough, "we've got to
be able to handle information in digital form as well as graphic form."

McColough soon concluded that the best way to join the digital revo­lution was to buy a piece of it. This effort, however, turned into a long-
running comedy. By the end of 1968 there were few computer compa­nies in existence that Xerox had not approached with an acquisition offer.
"Peter turned over every rock," recalled one executive who served on
numerous corporate task forces over the course of the saga. "He looked
at everybody." Honeywell, Burroughs, Sperry, Control Data—every
leading manufacturer then competing with the redoubtable IBM
rebuffed the overture. The one time Xerox found a company eager to
sell, it developed cold feet. That happened when General Electric, which
had uncharacteristically made a hash of its time-sharing business, offered
the operation to Xerox at a bargain price. But GE appeared too desper­ate a seller. "They kept increasing the discount and making the terms
more favorable," remembered the same executive. "They were trying to
give McColough a deal he couldn't refuse. But it was a hopeless proposi­tion. GE had neither technology nor a cutting-edge business, and we
turned them down."

At other points there had been mixed signals and missed opportunities.
Xerox made an offer to Ken Olsen, the founder and chairman of Digital
Equipment Corporation, the young and aggressive company known as
DEC. Olsen's answer was a flat refusal. Only years later did General
Georges Doriot, one of DECs original financiers, inform Goldman that
Xerox had approached the wrong person. "Peter was my student at Harvard," he complained. "He should have known you don't approach the
president on a matter like this. You talk to the backers."

McColough's wish list eventually dwindled down to a single name:
Max Palevsky's Scientific Data Systems, the same company for which
Project Genie had built the SDS 940 a few years earlier.

Since bringing out the time-sharing machine SDS had continued to
grow amazingly fast. In 1968, the year McColough came knocking, the
company booked record profits of $10 million. Yet only someone with
McColough's total lack of understanding of the computer industry
could delude himself into viewing SDS as Xerox's entree to a bright
digital future. For the glittering numbers obscured some gloomy facts.
SDS's success at mining a comfortable niche in scientific computing
would not easily transfer to the high-volume business data processing
market, the ferociously competitive sector dominated by IBM in which
McColough now expected Xerox to play a major role. SDS's core mar­ket, meanwhile, was suffering from a serious economic downturn exac­erbated by a drying up of government research funding. And there
were nagging questions about the company's research capabilities and
the depth of its management team.

A relentless salesman, Palevsky glided over such details. Privately
considering Xerox management ponderous and unimaginative—
textbook monopolists destined to be trampled in a competitive market
—
he gamely assured McColough that their two companies were "a
perfect fit." The high-speed printing technology SDS owned, combined
with Xerox's experience in making imaging systems (i.e., copiers) and
marketing them to large corporations, would create unique new busi­ness products to beard IBM in its own lair, he proclaimed. McColough
allowed himself to be persuaded that if Xerox wanted in, it had to move
fast. SDS, as he later put it, was "the only ballgame left in town."

Had he inquired within his own organization before straying into
Palevsky's lair, he might have been better armed to deal with this mas­ter pitchman. Xerox headquarters was equipped with a corps of tal­ented financial experts trained to analyze every major industry. It was a
corporate rule that no acquisition could ever be considered until a task
force placed the targets books and markets under a microscope and
delivered a thoroughly reasoned recommendation to the board.

This time, however, McColough unwisely left the experts at home. It
may have been out of an excess of caution: A run Xerox had made at SDS
five years earlier had collapsed amid rumors that a Xerox executive had
illicitly bought SDS stock in anticipation of the takeover. For whatever
reason, under conditions of extreme secrecy and with virtually no backup
he met with Palevsky in El Segundo, the industrial hamlet where the
modern SDS complex nestled against the boundary line of Los Angeles
International Airport, to "dicker about price." Which side had the upper
hand was, in retrospect, crystal clear. McColough, Palevsky recalled later,
"was determined to make a deal." The meetings, he said, "were very, very
short. Two half-days were all it took."