Apple, Inc. – a Fire From an R&D Spark
Investing in research and development is a risky business. Failures outnumber successes, repelling private businesses and leaving the whole endeavor to the government. The government—an investor of last resort—picks its risks under the advice of scientific bodies and after tough budget battles. Does it make sense to spend money on R&D when the involved products, while often fascinating, appear detached from reality? (The reader is asked to contemplate that question the next time he or she uses the Internet – sparked by DARPA and CERN – or asks GPS for directions, developed by US Dept. of Defense, all government-funded bodies.) Yet breakthroughs are rarely the result of refining well-understood products or just watching the bottom line. In fact, it has been argued that, paradoxically, the latter can lead to a company’s withering.
One company that understood this principle was the Xerox Corporation, which in 1970 established its research arm far away from its New York headquarters and sales force, in the San Francisco Bay area. The Xerox PARC, as the division was called, was located at the center of what is known today as the Silicon Valley, a hotbed of semiconductor, computer hardware and software companies. The research center, within eyeshot of Stanford University, assembled a group of top-notch engineers and, in many respects, gave them free rein: big budgets, mostly approved expenses, and no other duties than technical exploration (as opposed to many a researcher who was burdened by teaching). “It was heaven,” recalled one of the engineers who worked there at the time.
Soon the news of cutting-edge inventions coming from Xerox PARC spread around the Valley. The company conceived its own personal computer, a laser printer, and one of the first computer networks. In 1979, Steve Jobs, a 24-year-old CEO of a hot start-up company called Apple Computer, struck a very strange deal with Xerox PARC. For a discounted block of 100,000 shares of Apple in the upcoming IPO, Jobs was allowed to see some of PARC’s inventions. Xerox’s engineers showed Jobs an invention which the young entrepreneur immediately recognized as ingenious. At a time when every computer displayed a single monochromatic, full screen window, and accepted
only typed commands (mercilessly punishing any misspellings), PARC inventors developed the “mouse” and the Graphical User Interface (GUI). Using the device, one could now choose from whole menus of commands and create multiple, self-sufficient windows without even touching the keyboard. Xerox prototypes cost about $16,000 to build, and the mouse accounted for $300 of the total. Legend has it that after the meeting Steve Jobs could not think about anything else except “doing the ‘mouse”. When he and his company were done with the task, they unveiled the $2,500 Apple Macintosh in which the cost of the mouse was reduced to $15.
Although Xerox was the first to build a fully functional product based on prototypes invented by Stanford computer scientist Douglas Engelbart, the company did not realize the power of its invention until it was too late. Sales of their personal computer named Alto floundered in the 1980s, out-gunned by cheaper and nimbler units like Macintosh. Soon, the research powerhouse withdrew from the personal computing business.
One could ask: In the end, didn’t Xerox lose, investing in its Palo Alto Research Center? Wrong. Despite the miss with personal computers, the company earns billions of dollars from its other invention, the laser printer. The printer has paid for all other Xerox’s projects combined, and then some. In the words of former Microsoft executive Nathan Myhrvold, what matters in the invention game is “what you catch, not what you spill.”
Remember the time when an average person asked, “Computers? What do we need them for?”
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