B. THE REGIONAL
REVOLUTION IN I.T.: A CASE STUDY
Radical advances in
technology can dislodge established regions or nations from the top ranks of
wealth and power. In the late 19th century, Britain famously lost its lead to
Germany and the U.S. when the key sectors in the world economy shifted from
steam power and textiles to electricity and chemicals. Whatever Britain had
done right in the earlier era, after about 1870 it was no longer enough to keep
the first industrial nation ahead of its newcomer rivals.
Something similar happened
within the U.S. when the microprocessor was invented at Intel in 1971. The
outcome of that basic breakthrough would be to strike down the established
information technology (I.T.) giants of the American Northeast, in favor of
younger companies in such western states as California, Texas, and Washington.
As American computing
evolved from the mainframe and minicomputer to the PC and the Internet, the
centers of design, strategy, and control that were initially combined at IBM's
headquarters at Armonk, New York, scattered far and wide. The sequence of
industry stages in FIGURE 11 is from researchers at
Morgan Stanley, an investment bank. I have
added characteristic home-regions to the mainframe, mini, and PC eras. These
are New York State for mainframes, Boston's Route 128 for minicomputers, and
the West generally for the PC era. The current stage, Internet-Enabled Systems,
began about 1994. Its home-region remains an open question.
See Figure 11.
Our theme is that in the PC
era the younger firms in the West revolutionized world computing and in so
doing won back a leadership role that was rapidly shifting to Japan. Two quick
comparisons help put this idea in perspective:
- The decade after 1987,
the period of the unexpected U.S. resurgence vis-à-vis Japan, saw a
reversal in the market valuations of America's leading I.T. firms. (TABLE 5.)
The West's Intel and Microsoft leapfrogged the Northeast's IBM and DEC (Digital
Equipment Corporation). (Norris, 1997.)
- More generally, by a
recent ranking 9 of the world's top10 I.T. firms are American, and 8 of the 9
are from the three western states.
|TABLE 5. REVERSAL OF FORTUNES
AMONG US COMPUTER GIANTS 1987-1997
Largest U.S. corporations, ranked by market capitalization in
12 May 1997
|Source. Norris (1997). Computer
companies in bold.
This case-study links the
American comeback in information technology in the 1990s to the regional
realignment that marked the PC era. The module unfolds as follows:
coming Japanese conquest (ca. 1989)
rise of the Wild West companies
break-up of the old computer industry, 1985-1990
U.S. comeback, 1989-1994
companies in the Internet Era (1994-)
location of the top 100 I.T. firms in 1997
Europe's potential in the net-centered era
As background, we need to
recall how different the world looked a decade ago.
1. THE COMING JAPANESE CONQUEST (ca. 1989)
..."the Japanese have now embarked on
"take-lead" strategies they hope will ensure that Japan will inevitably become
the undisputed No. 1 in computers. This is a matter of great concern because
it is difficult to find an example of any American or European industry that
has successfully fought back...where the Japanese have decided to go for
leadership." (Tom Forester, 1993, p. 86, emphasis added).
In 1989, Japan gave every
indication of pulling away from its technological competitors. The Rising Sun
seemed to herald not only a national victory but also an affirmation of the
Ministry of Trade and Industrys (MITI's) strategic intervention and of
industrial policy generally. A glance at several specific I.T. sectors shows
how comprehensive the victory was expected to be.
Japan had caught the U.S. in its output of semiconductors by 1986, and by 1988
and 1989 it was supplying over 50 percent of the world market. Despite a
partial captive market (e.g., IBM producing its own chips for its own
computers), "merchant" memory chips for sale in the open market had been
largely taken over by Japan.
That left mainly
microprocessors for the U.S.but even this creative side of semiconductor
chips was being bought up by Japanese firms. According to M.I.T.'s (the
university, not the Japanese ministry) Made in America, "Without some
dramatic realignment of the American merchant industry, its decline is likely
not only to continue but to accelerate." (Michael Dertouzos et al., 1989, p.
(2) Computers. The
shift from desktop microcomputers to portables seemed to signal a shift toward
Japanese leadership. The flat screens in laptop and palmtop computers had
liquid-crystal-diode (L.C.D.) displays, a Japanese strength. (This was also
another example of a U.S. discoveryat R.C.A. in 1963which only the
Japanese had seen fit to commercialize, for use on digital watch faces and
video games). Hence the evolution of the industry toward laptops was thought to
help Japan. Charles H. Ferguson thus wrote, "Some say: 'Japan will make the
commodities and the U.S. will profit from design, software, and marketing.'
This is fantasy." (1990, p. 66.) His prescription: U.S. government-industry
consortia along Japanese lines.
(3) Software. Even
in software, the Fifth Generation project (artificial intelligence, or AI)
Japan initiated in 1982 was still being touted as a locomotive coming through
the tunnel. This was the accepted outlook despite Japan's language and other
handicaps in software. If MITI could make it happen in VCR's, the prevailing
view then intoned, why not software too?
(4) HDTV. In 1989
lobbyists for a U.S. high-definition television (HDTV) effort to counter
Japan's were making major inroads within the Executive Branch of the federal
government. They converted Robert Mosbacher, the Secretary of Commerce, and
Craig Fields of the Pentagon's Defense Advanced Research Project Agency,
DARPA (now ARPA), to the view that the U.S.
was hopelessly behind Japan and could only catch up in this "critical" (i.e, to
national security) technology with help from the government. While not central
to I.T., HDTV was nonetheless feared in the U.S. as an advanced technology that
would permanently guarantee Japan's supremacy across consumer electronics and
home entertainment generally.
But a funny thing happened
on the way to Japans inexorable conquest of the worlds I.T. sector.
The conquest fell apart on all fronts: chips, boxes, software,
televisionand , for that matter, telecommunications as well. You name
it: if it required creativity and a rapid response, Japan lost it. They
lost it, as a rule, to U.S. companies headquartered in the Western states, in
an arc from Texas to Seattle.
Who were these companies?
Why did they spring up in the western half of the U.S.? How did they defeat
Japan's bid for leadership in I.T., the world's premiere growth sector?
2. THE RISE OF THE WILD WEST COMPANIES
One way to answer these
questions is to list a series of examples in which old-style companies in the
Northeast (call them "managerial corporations") bungled opportunities to
innovate. In the vacuum, younger and more innovative firms (call them
"entrepreneurial corporations") took advantage of the figurative wide open
spaces of the West to move the industrial system to its next stage of
This section is a narrative
account of the regional realignment. (Other issues of interpretation are
touched upon in Section 3, in
connection with cluster theory.)
CASE 1: FAIRCHILD SPAWNS
In contrast to mainframes
and minicomputers, personal computers are blown up from thumbnail-sized
microprocessors. Silicon Valley started with transistors, moved on to memory
and logic (or microprocessor) chips, and evolved into a complex producing the
whole I.T. spectrum. Its origins as a semiconductor center would ultimately
give the Valley a decisive advantage over Route 128.
In this sense, it can be
said that Silicon Valley is "a place that was invented one afternoon in 1957
when Bob Noyce and seven other engineers quit en masse from Shockley
Semiconductor" to found Fairchild Semiconductor. This was a division of the
established Syosset, New York firm, Fairchild Camera and Instrument.
(Robert X. Cringely, p. 36.) The path leads from New Jersey's Bell Labs
to a moment in 1968 when Noyce and crew would again leave, this time from
Background: The Origins
of Silicon Valley. A key technological moment in the Valley's development
was William Shockley's arrival in 1955 from Bell Labs. Shockley had been a
co-inventor of the transistor in 1947 for Bell Labs, which would later garner
him a Nobel Prize. In 1955 Shockley returned from New Jersey to his home state
to start a transistor company in Mountain View, near Stanford. (Bell Labs is
He called it Shockley
Semiconductor because the transistor could be switched on or off to
register a 0 or 1 in binary code, depending on whether it was in a conductive
or non-conductive mode. This "semiconductor" property is present in the
minerals germanium and silicon. Years later, in 1971, a
newsletter writer named Don C. Hoefler accordingly coined the term, "Silicon
Valley." (Rogers and Larsen, 1984, pp. 25-26.)
Shockley moved west to
Mountain View in part because it was his home ground and his mother still lived
there. But business logic also favored the move. Two key components were
already in place to create a seedbed for new enterprises. One was the Stanford
Industrial Park launched in 1951 and followed in 1954 by the Stanford Research
Park. The impetus was not economic development but the desire to make money
from real estate the university owned yet (by the terms of Leland Stanford's
gift) could not sell.
The second keystone was
Hewlett-Packard, started by the two Stanford
students on the eve of World War II to manufacture electronic oscillators,
under the guidance of an electrical engineering professor studying negative
feedback, Fred Terman. The two components had come together in 1954 when H-P
took a lease in the Stanford Research Park and served as the anchor for
subsequent tenants. (Rogers and Larsen, chapter 2.)
Eight. Shockley had barely started his semiconductor company when it
foundered on a legendary spin-off, which would eventually beget Intel. It has
been said that Silicon Valley is "a place that was invented one afternoon in
1957 when Bob Noyce and seven other engineers quit en masse from Shockley
Semiconductor" to found Fairchild Semiconductor, as a division of the
established Syosset, New York, firm Fairchild Camera and Instrument. (Cringely,
1993, p. 36.)
Eight, (as Shockley saw them) share credit with Texas Instruments (TI) for
inventing integrated circuits (ICs). Germanium ICs were designed by Jack
Kilby at Texas Instruments (TI) in Dallas, but
he lacked a method of layering transistors on a flat surface. Jean Hoerni, one
of the Fairchild Eight, came up with a "planar" technique to embed rather than
stack component layers.
Noyce carried the idea
through to create complete circuit maps on a single silicon slice,
clearing the way for photolithography (or "burning" the circuits into the
slice) and thus for batch production. TI and Fairchild both announced the
breakthrough in 1959. ICs came into production within two years, for use by the
U.S. government at $100 apiece to miniaturize the future Apollo moon rocket's
onboard computer (Palfreman and Swade, 1991, pp. 87-91).
Intel. A decade
later, Noyce, Moore, and others jumped ship again to found Intel, a more
egalitarian company than Fairchild's eastern owners would permit. As a
minister's son from Iowa, Noyce did without dress codes, reserved parking
places, closed offices, executive dining rooms, and the other status trappings
of more hierarchical and bureaucratic mature U.S. corporations. The remote
control thus foundered on the divergent philosophies of Syosset and Silicon
Valley: Noyce couldn't get
Fairchild's eastern owners to accept the idea that stock options should be a
part of compensation for all employees, not just for management. He wanted
to tie everyone, from janitors to bosses, into the overall success of the
company.... This management style still sets the standard for every computer,
software, and semiconductor company in the Valley today.... ...Every CEO still
wants to think that the place is being run the way Bob Noyce would have run it.
(Cringely, p. 39.) CASE 2: XEROX FAILS TO MARKET PARC'S DISCOVERIES
Noyce's brush with the
Northeasts resistance to change was repeated at Xerox PARC, this time
over bringing new products to market. In 1970, the eastern copier firm, Xerox,
founded Palo Alto Research Center (PARC) as a flat organization of some 50
creative researchers whose mission was to create "the architecture of
PARC'S web site puts it,
they responded "
by inventing personal distributed computing, graphical
user interfaces, the first commercial mouse, bit-mapped displays, Ethernet,
client/ server architecture, object-oriented programming, laser printing and
many of the basic protocols of the Internet." Preoccupied with copiers,
however, the New York-based Xerox failed to bring any of these potentially
breakthrough technologies to market. That remained for such western firms
as Hewlett-Packard, Apple, and Utah's Novell.
CASE 3: IBM AND DEC IGNORE
Noyce and his colleagues
thus formed Intel in 1968, as a spin-off (like its competitor National
Semiconductor and some 50 other companies) from Fairchild. Intel made its mark
on the world in November 1971 when it announced a triple breakthrough: the
microprocessor, dynamic random access memory (DRAM), and erasable programmable
memory (EPROM) for software. (George Gilder, 1989, p. 101.) Here was the
package to make personal computers a reality.
But the big computer
companies of the Northeast were not interested: "IBM and DEC...decided there was no market.
They could not imagine why anyone would need or want a small computer; if
people wanted to use a computer, they could hook into...time-sharing
systems." (Palfreman and Swade, 1991, p. 108.) Thus microprocessors
languished, scorned by the mainframe and mini- establishmentsand not
pushed by Intelfor another three years.
What would it take to bring
the new firepower into play? The answer came with the now legendary January
1975 issue of Popular
Electronics, whose cover showed the MITS Altair kit for a home-made
microcomputer based on an Intel 8080 processor chip. Inspired, Steve Wosniak
devised the Apple 1 to impress the hobbyists at the Homebrew Computer Club in
Palo Alto. When Steve Jobs entered the picture the result was the Apple II,
which found a ready market.
breakthrough was matched on the software side by the 19-year-old Seattle-ite,
Bill Gates. Using a DEC PDP 10 minicomputer at Harvard to emulate the MITS
Altair, Gates and his high-school friend from Seattle, Honeywell programmer
Paul Allen, devised a modified version of Dartmouth's mainframe BASIC
programming language. Moving to New Mexico to be near the MITS facility, they
formed Microsoft to market MITS BASIC, their microcomputer version of the
mainframe programming language. Over the next five years, Microsoft would then
develop, market, and license other languages for microcomputers, reaching $2.5
million in sales and 25 employees by the end of 1979.
In other words, the four
seminal figures in the PC industry after 1975 (when IBM in New York and DEC in
Massachusetts saw no future in it) were barely 21 on average and hailed from
the San Francisco Bay area and Seattle.
Compaq in Houston,
Dell in Austin, Texas Instruments in Dallas,
and WordPerfect and Novell in Utahis a reminder that the technological
transformation of American computing ranged from Texas to Seattle. If
Silicon Valley was the West's capital, it sometimes followed the lead of the
The next episode was played
out not in the West at all, but in Florida. Yet the theme remains the same: new
territory as a spur to innovation.
CASE 4: THE PC'S ROOTS IN
BOCA RATON, SILICON VALLEY, AND SEATTLE
Microsoft's initial takeoff
following the New Mexico start-up brought the company to IBM's attention. In
the mid-1970s, IBM had actually introduced an expensive PC-like machine that
drew little response from its corporate customers and was quickly abandoned. By
1980, as microcomputer sales by Apple, Radio Shack, Atari and Commodore
generated over $1 billion, IBM decided to try again.
This time IBM's development
team was placed far from Armonk, New York, headquarters in Boca Raton, Florida,
with a one-year project deadline. The crash-program deadline, unprecedented at
IBM, forced the PC project chief, Bill Lowe, to design a machine built from
other people's componentsanother radical departure for IBM.
Microsoft. Lowe's plan for IBM was
initially just to buy Microsoft BASIC, a standard feature of existing
microcomputers, and to run it over a CP/M operating system from Gary Kildall's
Digital Research of Pacific Grove, California. But when negotiations with
Kildall misfired (because he did not show up for the meeting in Pacific Grove),
Lowe turned to Microsoft for the operating system as well. Gates replied that
IBM should use a 16-bit microprocessor, the new Intel 8088 chip. But since
Gates had no operating system for a 16-bit processor, Microsoft now had to come
up with one.
Gates' solution was to
spend about $50,000 to buy an existing 8088 operating system, QDOS ("Quick and
Dirty Operating System") from Tim Paterson's Seattle Computer Products and to
rename it MS-DOS. In August 1981 the IBM PC appeared on schedule, featuring
MS-DOS (called "PC-DOS" by IBM), and Microsoft BASIC, with available Microsoft
versions of FORTRAN, COBOL, and PASCAL.
The package was thus
equal parts hardware from Boca Raton and Silicon Valley's Intel and system
software from Seattle. The creative points of origin were far removed from
Armonk, New York.
Such was the beginning of
the IBM-Microsoft collaboration that ended in 1990 with a complete reversal of
fortunes, symbolized by IBM's plummeting employment, from 395,000 in 1984 to
243,000 in 1994. Microsoft's standard-setting strategy succeeded to
the point where its stock-market value, like Intel's, surpassed IBM's by 1993.
(Not the least colorful aspect of the reversal is that IBM unloaded stock in
Microsoft and Intel that, if retained, would have been worth $18 billion by
In the meantime, it
wasnt just IBM who took a tumble in the 1980s. Something comparable was
also happening along Boston's Route 128, where the big four minicomputer
companies (Digital, Wang, Data General, and Prime) had entered the 1980s as
giant-killers, Davids to IBMs Goliath.
CASE 5: THE FALL OF THE
ROUTE 128 MINICOMPUTER COMPLEX
The reindustrialization of
New England from the early 1970s to the mid-1980s was an amazing story (one I
sketched in an analysis published by the
Federal Reserve Bank of Boston). The
linked article, "The Role of Services and Manufacturing in New England's
Economic Resurgence," is based on a simple technique known as
In the study I contended
that (in contrast to New York City's comeback at about the same time), New
England's resurgence was powered by manufacturing. The technique allowed a
graphical portrayal of manufacturing's role, as initially lagging, then surging
ahead on its own, then bringing other sectors along, then collapsing in the
mid-1980s. It should be added that the services sector played a nonetheless
crucial part in New England's reindustrialization, because two of the three key
catalysts to the comeback were venture capital and higher
In any event, after about
1985 the two outwardly similar high-tech clusters, Bostons Route 128 and
Californias Silicon Valley, moved in opposite directions. Along Route
128, the "Massachusetts Miracle" (as touted by defeated presidential candidate
Michael Dukakis) collapsed in a heap, wiping out tens of thousands of jobs
across New England. But Silicon Valley kept on adding employment, despite
Californias high taxes and housing prices.
A little-noted reason for
this eclipse was management failure along Route 128. All the key players in the
New England complex saw the handwriting on the wall in the early 1980s. The
future of computing was the PC, not minicomputers, let alone mainframes. Yet
not one of the successful and profitable companies (DEC, Wang, Data General,
Prime), had the boldness to cannibalize their
profitable minicomputer lines to shift to a PC strategy.
What could account for this
collective failure of nerve? Technologically, Route 128's minicomputers were
actually mainframe computers shrunk down, not microprocessors blown up, like
the PC. For that reason it was much harder for the Route 128 companies to
introduce new and uncertain personal computers. Putting it differently, the
economies of scopefavoring Silicon Valleys
microprocessor-based complex were missing along Route 128. Facing the
technology barrier, managers along Route 128 stayed too long with cash-cow,
proprietary (or closed) systems in minicomputers.
The long-term outcome would
be a default I.T. role for Route 128 as a software and now Internet specialist,
a role MIT's presence more or less guarantees. But the immediate result was for
hardware production to move west, to Silicon Valley and then to Texas.
CASE 6: HOW TEXAS BECAME
THE PC STATE
"End of an era. The
Texans have taken over."
(David Vellante, February 1, 1998, on
Compaq's purchase of DEC)
Today Texas has the two
leading PC producers in the world, Compaq and Dell. How did the Lone Star State
become the PC State?
Compaq's provenance traces a fairly precise lineage of industrial evolution. In
the 1930s engineers with a new instrumentation technology for seismographic oil
exploration came from the Northeast to Dallas to found Geophysical Services. In
1951, the original firm gave way to Texas Instruments (TI). As we have seen,
the technologies TI employed led naturally to semiconductor research and in
1959 to the co-discovery of the integrated circuit by Jack Kilby, a TI
engineer. Military and space contracts from the federal government spurred the
company's ascent to one of the top semiconductor manufacturers in the U.S. by
Compaq. In 1982 four
TI engineers from the company's Houston facility broke away to form a spin-off.
Their leader was Rod Canion, and the company was Compaq. The breakaway team
patiently reverse-engineered the then new IBM PC, so that it could legally
invent its own BIOS (or interface) chip to emulate the PC for 100-percent
software compatibility. Their success created Compaq's breakthrough as the
legitimate king of the PC clone-makers. Compaq rose from its inception to
Fortune 500 status in only four yearsa record Dell would itself later
What is the meaning of the
TI-Compaq story? The link between resource endowments and innovative
capacity. Historically, the development of technological strength in
an American region can typically be traced to the region's resource base.
(Perloff and Wingo, 1961.) A given resource endowment either generates or fails
to spark a related set of resource-processing activities that in turn encourage
the development of new skills and technologies. (Norton and Rees, 1979.) The
link between iron and coal endowments and metalworking, via the machine tools
industry, was how the Manufacturing Belt of the Northeast and Upper Midwest
became the nation's seedbed for innovation in the century from 1850 to 1950.
The 60-year path from oil exploration to Compaq's world leadership in PC
production displays a similar logic.
Dell. In contrast,
Dell's meteoric rise in the 1990s has no such precisely traceable lineage.
Instead, Michael Dell's strategy has been to devise a new distribution system
to "mass-customize" the PC to order and to get the product delivered in a
matter of days through the mail. "Because Dell holds very little inventory, it
takes advantage of lower component costs and is always selling a fresher
product, which can command a higher profit margin." (Fisher, 1998.)
This comment by a
journalist in August 1998 accompanies robust earnings announcements that show
Dell moving into the position of No. 2 desktop computer seller in the U.S.,
i.e., moving ahead of IBM and Hewlett-Packard. (Compaq remains in first place.)
It would be hard to find a better illustration of the triumph of the Texas PC
producers over their rivals in other regions.
3. "THE BREAK-UP OF THE OLD COMPUTER INDUSTRY"
To recap, Intels
invention of the microprocessor in 1971 set the stage for the PCwhich the
Northeasts computer firms then failed to develop. That task was left
to newcomers, adolescent or 20-ish prodigies from California and Washington
State. After several failures, IBM finally managed to emulate Apples
success, but only by moving the PC projects design far from Big
Blues headquarters, to Boca Raton in Florida, and only by using
components from Intel and Microsoft.
By the mid-1980s, as Japan
moved into the I.T. passing lane, IBM summoned its PC management back to its
Armonk headquarters, where the PC was smotheredpartly by jealous
competition from IBMs mainframe managers! Meantime, the initial
outsourcing to Intel and Microsoft meant that clones using the same components
were now taking away larger and larger shares of the PC market. IBM was about
to fall, and Japan was ready.
Moreover, Japan had by the
mid-1980s seemingly wrested the semiconductor lead from Intel. Intel had lost
money in 1983 and 1984 in the face of heightened Japanese competition in DRAM
memory chips. Andrew Grove, Intel's Hungarian-refugee CEO has since said,
"There is at least one point in the history of any company when you have to
change dramatically to rise to the next performance level. Miss the moment and
you start to decline." (Andrew Grove, 1993, p. 58.) At Intel the moment came in
1985. (FIGURE 12.) The company surrendered memory
chips to Japan and turned solely to microprocessors (at the time, 286s).
What happened between
Intel's company-saving decision and 1990 Grove describes as "The breakup of
the old computer industry... [which] gave Intel its chance and made the
mass-produced computer possible." The change can be described in terms of
Grove's sketch of vertically integrated companies vs. new horizontal tiers
differentiated by component. (FIGURE 13.) The old
system had self-contained, relatively closed and proprietary systems a la Route
128 and IBM. "These vertically integrated companies would compete against [each
other]...and buyers had to commit to the whole package of one manufacturer or
another." (Grove, p. 57.)
By contrast, the new model
of competition is based on open (i.e., published) technical standards and full
compatibility between every component-maker's products and every other's. In
FIGURE 13, for example, each horizontal line represents a product axis along
which companies in a particular segment of the market (systems software,
monitors, printers, software applications, etc.) compete. The products from
each segment must be fully compatible with those on every other horizontal
tier--or customers will not buy them. This new system Grove terms
"industrial democracy," in the sense that "It resists central guidance.
Nobody can tell anyone else what to do." (P. 57.) In contrast to the old
regime, choices abound and competition drives prices down.
Consumers also benefit from
an accelerated pace of technological change. In a demonstration of the "Arrow
effect," IBM had notoriously restricted the pace of technological change with a
view to maximizing its profits over time. Its mainframe installations were
known for "golden screwdriver" techniques, in which a demand for more
performance (at higher rental rates) would prompt a visit from an IBM
technician who would insert a few lines of code into existing software and
unlock new power in the machine. (James Carroll, 1993, p. 217.) Similar
restrictions of hardware potential marked IBM's missteps with its PC-AT in the
The new rules force the
pace of technological change and translate lab potential into product.
Groves analogy is skis. "Any ski boot works with any binding. Any
binding fits any ski. That permits innovation to take place independently in
boots, bindings, and skis." (Grove, p. 57.)
But who makes the profits
required for high levels of sustained RD? Charles Morris and Charles Ferguson
contend that the key to profitability is to control the standards, protocols,
and formats by which the different parts of an information system are linked.
Put the other way around, we find a (perhaps belated) recognition that Japan is
only human. Scale, friendly
government policies, world-class manufacturing prowess, a strong position in
desk-top markets, excellent software, top design and innovative
skillsnone of these, it seems, is sufficient, either by itself or in
combination with each other, to ensure competitive success in this field.
(Charles R. Morris and Charles H. Ferguson, 1993, p. 87.) The key, in their
view, is proprietary control over a dominant open system. Examples were
Microsoft in system software, Novell in
network software, Sun in network hardware and
software, Adobe and Hewlett-Packard in
printer protocols, and Intel in microprocessors. These Wild West companies
managed to make the codes and standards for their products established as
industry norms. Then the proprietary, company-specific control of the open
system gave the company in question an edge in the race to pump out new
As Grove observes, "A
leading-edge product requires leading-edge manufacturing capability, and you
can't buy it." (Grove, pp. 57-58.) It requires massive investment, which
requires massive profits, which come from competition via standard-setting.
That is the puzzle the
successful Wild West firms solved in the 1990s. In turn, their ability to
handle the pace of innovation given by
while still maintaining continuity of standards
created shock waves worldwide. It gave the U.S. a second wind as the race with
Japan carried into the 1990s.
4. THE U.S. COMEBACK, 1989-1994
In every one of the four
I.T. sectors sketched in the introduction to this case, what actually happened
was more or less opposite what most people had expected in 1989.
Timelines show Japan taking the lead in 1985, pulling far ahead by 1989, then
being overtaken by 1993. Not only has U.S. pressure from the high-markup
microprocessor end of the chip spectrum hurt Japan. Korea has attacked from the
commoditized memory-chip end, in a bid reminiscent of that country's success
vis-a-vis Japan in steel and shipbuilding.
Computer "boxes" have also displayed a surprising U.S. resilience since 1989.
One indicator is the failure of Japanese microcomputers to make much of an
inroad into the U.S. market. Following a jump from 9 to 13 percent between 1989
and 1990, Japan's U.S. share fell back to 6 percent in 1991. Commenting on this
reversal, Steve Jobs observed in 1992 that "The United States computer
manufacturers have re-invented themselves and are holding on to the most
desirable market in the world." (Quoted in Markoff, 1992.) The result finds
Japanese firms supplying U.S. computer makers with flat screens and memory
chips, but struggling to sell the U.S. markets the actual computers.
(3) Software.As to
software, point one is the demise of Japan's Fifth Generation project. After 10
years, MITI gave up the ghost in mid-1992. "The problem for Japan is that
the computer industry shifted so rapidly that the technological path the Fifth
Generation tookwhich seemed a wise choice in 1982turned out to be
at odds with the computer industry's direction by 1992." (Andrew Pollack,
1992.) The lack of interest in the software that resulted led MITI to give it
away free, though few took them up on the offer.
Equally important is the
triumph of Microsoft's Windows platform, an exercise in cumulative
standard-setting that has given an edge to U.S. computer companies relative to,
say, NEC or
Toshiba, which were late to commit to the
(4) HDTV. As with
the Fifth Generation project's commitment to the wrong technological
trajectory, so too with HDTV. U.S. companies have developed digital approaches
that appear to have leapfrogged Japan's analog approach. Thus "...enlightened
federal regulation, rapidly advancing digital technology and cooperation
between competing organizations have combined to vault the late-starting United
States into a clear lead in the race to develop practical high-definition
television." (William J. Cook, 1992, p. 14.)
In 1994 the director
general of broadcasting in Japan's Ministry of Posts and Telecommunications
conceded as much. He created a furor by revealing that his ministry was
contemplating withdrawing support for Japan's HDTV program. The announcement
was taken to signal "The triumph of American-style HDTV, something almost
unimaginable five years ago...." (Andrew Pollack, 1994.)
CAN INDUSTRIAL POLICY HURT
These four distinct sectors
suggest that industrial policy can retard change in a dynamic technological
environment. Pollack comments that the HDTV episode is especially telling:
"...Japan's plan for HDTV showed the drawbacks in this country's system of
Government-backed cooperative industrial development. The system allows
for great staying power and steady progress down a particular path, but does
not adjust well when the technological road turns." (Emphasis added.)
By the mid-1990s, such
second thoughts about MITI and the role between Japans bureaucrats and
its giant firms had become widespread. The failure of the Fifth Generation
software project and of the HDTV campaign, combined with Japans distant
lag in its over-regulated telecommunications sectorall these stand in
contrast to the diversity and dynamism of the U.S. technological landscape.
What had seemed to work so well for Japan in the automotive and
consumer-electronics sectors in the 1970s and 1980s looked strangely dated
We have considered six
examples of tensions between the old computer industry of the U.S. Northeast
and more entrepreneurial actors in the South and West. We also compared the
dismal 1989 prospects and startling U.S. comebacks during the 1990s in
computers, software, semiconductors (more specifically, microprocessors), and
HDTV. The counterparts were surprising setbacks for Japanese efforts in each of
the four components of Information Technology, as well as in the related sector
The logical link between
these two sets of events is what Andrew Grove termed "the breakup of the old
computer industry" between about 1985 and 1990. The relentless drumbeat of
18-month product cycles for chips given by Moores (and Joys) Laws
required quick responses by players throughout the I.T. sector. The
technologys momentum in effect required entrepreneurial agility.
Agilitys nemesis is bureaucracywhich in the mainframe culture
of IBM would slow decision-making to a standstill as Microsoft heated up the
system-software design wars of the 1980s. In a parallel quest, Intels
radical bet-the-company reinvention after 1985 wrested standard-setting
leadership for microprocessors away not only from IBM but from Japan as well.
The new business model that
took hold after 1985 spawned competition via open (published) systems,
compatible components, and uniform technical standards across vendors. In
addition, the characteristic PC firm was specialized in a particular slice of
the PC industry
from its earliest beginnings adopted a purely horizontal supplier structure.
Companies such as Intel, Microsoft, Novell, Lotus, Compaq,
Seagate, Oracle, 3com, Electronic
Data Systems, and many others thrived by being specialists in particular
layers of a newly emerging IT industry value chain. By focusing on just one
technology area, the horizontal companies moved with a speed, deftness, and
openness that the older systems companies simply couldn't match. (David
Moschella, 1997, pp. x-xi.)
The competitors that
succeeded under the new rules were not only American, but from the West. "From
a global perspective, this change in vendor business models led to an even more
dominant U.S. competitive position. Most of the companies that mastered the
horizontal model turned out to be American, usually from the western half of
the country." (Moschella, p. xi, emphasis added.)
Without the regional
realignment, the history of the U.S. computer sector would have remained the
preserve of IBM and Route 128 (the aging upstarts). Japan would likely have
taken outright leadership in the I.T. sector from the U.S. Its great
electronics companies, notably Fujitsu and Hitachi, but also Toshiba and NEC,
gave every indication in the 1970s of knowing how to catch and overtake Big
Blue. Instead, that would fall to such standard-setters as Intel and Microsoft.
To be sure, some observers
still viewed the U.S. resurgence as only temporary. Eamonn Fingleton, for
example, wrote a 1995 book with the uncompromising title, Blindside: Why
Japan Is Still on Track to Overtake the US by the Year 2000. But as 2000
approaches, the forecast seems a bit strained. Perhaps a more plausible comment
on the state of the worlds I.T. sector today came from a Czech computer
expert commenting on software in March 1996. "Americans are showing an
unbelievable burst of creativity. By relying on sophisticated tools, Americans
have shifted the competitive arena from sweat labor to imaginative design."
With the arrival of the
Internet in 1994, the creativity factor would play an even larger role.
5. NEW COMPANIES IN THE INTERNET ERA (1994-)
simply, the story of computer industry competition has been one of new waves of
technology, led by new waves of vendors, rapidly overpowering much of the
[T]he network-centric era will result in market and
supplier restructuring every bit as great of those of the PC revolution."
(Moschella, 1997, pp. vi-vii.)
In a useful
simplification, the Internet or network-centric era can be dated from 1994, the
year the barriers finally came down to the creation of a "network of networks."
The Defense Department's ARPANET had been around since 1969. By the mid-80s the
National Science Foundation had helped it evolve into a university research
network based on the Pentagon's software standard, Transmission Control
Protocol/Internet Protocol (TCP/IP). In 1989 Tim Berners-Lee, a British
scientist working at the physics research lab CERN in Switzerland, had devised the
hyperlink system of document linkage and accessan example of which
you are now reading. The problem remained, however, how to hook up and
standardize the numerous proprietary networks (e.g., ATT and MCI) competing for
corporate and consumer business.
The problem was effectively
solved in 1993 by programmers at the University of Illinois (the source also of
the widely used free e-mail program, Eudora). Headed by Marc Andreeson, they
came up with a good graphical-user-interface (GUI) browser, MOSAIC. Then
Andreeson decamped for Silicon Valley and helped launched
Netscape Navigator for profit in 1994.
At this juncture
kicked in. To repeat: the costs of adding
users to a network increase linearly, while the benefits expand quadratically.
If a network's users increase in number from 99 to 100, for example, the costs
to the network go up by the incremental cost per node, the same as if the
number increased from two to three users. But the number of additional two-way
connections go up by 99, vs. only 3 more when a third subscriber is added. The
larger the network, the greater the value to existing users of new members.
The smaller, isolated
proprietary networks of the 1980s had failed to break through to the threshold
that was now accessible via the Internet and a Mosaic-class browser. After
1994, any such constraints would be rent asunder. The shockwaves are with us
still, as the new communications links redefine every sector of the economy.
NEW FUNCTIONS, NEW
The Internet permitted a
blending of computing, communications, and entertainment in the mid-90s that,
like the PC before it, changed the rules of the I.T. game. As to the pattern of
regional advantage, one indicator of the new regime is the appearance of new
companies. Another is the re-making of existing ones.
To get a sense of these
tendencies, we can turn to a recent list of the world's top I.T. firms, then
look at specific firms and their locations.
The July 1997
PC Magazine list of the world's 100
"most influential" I.T. firms appears as TABLE 6. The
criteria for the list are subjective, but plausible. Perhaps the main caveats
are (1) the list is American, and biased to that extent, and (2) these are the
top firms from the perspective of a PC magazine, not from the standpoint of
mainframes, telecommunications, or biotechnology. The list may well be open to
debate as to exact ranks of companies, and its makeup and rankings will change
from one year to the next. For our purposes, however, it appears sufficiently
reliable to serve as a roadmap for the new geography of I.T.
The impact of the Internet
can be gauged by the fact that 15 of the most influential 100 I.T. firms in
1997 had not existed in 1989. (TABLE 7.) In addition
to Netscape, these included such firms as PointCast , U.S. Robotics, DeLorme Mapping
(Maine), Progressive Networks (Ohio), Yahoo! and Firefly Network (Massachusetts).
Eight of the 15 new firms from the 1990s were located in California, three in
the Northeast, two in the Midwest, one in Texas, and one in Kentucky.
In addition, a number of
other companies on the list are labeled as telecommunications- or
Internet-related. They include ATT, idealab!, MCI, CompuServe,
SAP AG (Germany), Hayes, 3Com, Santa Cruz,
Number Nine Visual Technologies, Quarterdeck, Creative Technology (Singapore),
Cisco Systems, Macromedia,
America Online, Bay Networks, Madge Networks
(the Netherlands), Cabletron Systems, and Ascend Communications (recently acquired by
It is important to
recognize that every company on the list of 100 (like most companies
regardless of industry) experiences the Internet as a revolutionary
technology. Tables 6 and 7 are more specific. They include companies that
either sprang into existence to take advantage of the Internet or that qualify
as I.T. companies because they have expertise in communications or media.
Beyond these two sets of
firms, of course, the firm that leads the list, Microsoft, did a drastic change
of course after 1995 to try to catch up with and overtake Netscape in the
browser market. Without going into the antitrust case now being heard, we
should nevertheless touch upon one aspect of the Microsoft vs. Netscape-AOL-Sun
Microsystems conflict that is now taking shape.
FROM ILLINOIS TO SILICON
VALLEY TO VIRGINIA
Has the Internet had much
impact on the pattern of regional specialization in I.T.? The events of late
1998 offer a new angle on this question, in that they reveal the inability
of Silicon Valley companies to set the agenda for the Internet era.
Not only is PC production
centered in Texas. Not only has Microsoft set the software standards for the
world to follow. Now it turns out that the struggle for commercial leadership
on the Internet will take place between a Seattle-area firm and one based in
Virginia: America Online. That is the implication of
AOL's $4 billion takeover of Netscape, as
bolstered by the Valley's Sun Microsystems.
As a columnist for the San
Jose Mercury News observes,
Before Marc Andreesen co-founded Netscape
Communications Corp. in 1994, he'd moved from Illinois to Silicon Valley
It is the nerve center of visionary technology. But it sometimes lacks
vision, or the ability to sustain it.
Silicon Valley has long
disdained AOL as an East Coast pretender.
But America Online is not a
technology company. It is a media company, and an online shopping mall.
Every person, and place, has limitations. It's no slam on Silicon Valley
to note that its imagination has sometimes been limited to techno- whizzery.
(Dan Gillmor, November 23, 1998.) By implication (though certainly not a
meaning intended by Gillmor), the world needed Microsoft as a successor to IBM
to set uniform standards for I.T. Intel aside, Silicon Valley is a fluid
assemblage of technology, creativity, and capital that at the same time never
produced a strategic grandmaster on the order of Bill Gates or Steve Case.
Now we are on the eve of
legal (antitrust) and technological (Open-Systems software, exemplified by
Linux) challenges that seem likely to destroy Microsoft's position as a
standard-setting natural monopoly. Would it be too nostalgic to recognize the
possibility that the PC and the Internet explosion benefited from the Windows
standard that Microsoft createdand from the Wintel duopoly Microsoft and
6. THE LOCATION OF THE TOP 100 I.T. FIRMS IN 1997
One way to sum up the
impact of the regional realignment of information technology is to say that for
the moment, Seattle, Silicon Valley, Texas, and now Virginia make the rules,
and the rest of the world adapts to them. That statement used to hold for IBM.
Then, in the late 1980s, it looked to everyone as if Japan's great electronics
companies would replicate earlier triumphs in home electronics and automobiles.
But that did not happen. Once again the U.S. holds a clear lead in I.T. The
difference is that the sector's dynamism comes not from a company with a dress
code (IBM), but from a variegated spectrum of younger enterprises in the West.
As we said, Silicon
Valley dominates the list numericallybut not strategically.
TABLE 8 shows the distribution of the 81 American
firms on the list among U.S. regions. Within the U.S., 54 of the 81 are in the
West. Numerically, 44 of the 53 western entries are from California. In terms
of ranks, Washington (whose only firm on the list, Microsoft, leads it) and
Texas (with 5 entries, but two in the top 11), are also prominent. (The absence
another Seattle-area firm, must be an artifact of the timing of publication of
the list, in mid-1997.)
In keeping with the theme
of the new firmthe entrepreneurial vs. the managerial
corporationthe ages of the 100 firms become younger as we move
west. The firms founded before 1960 are more likely to have a location in
the Northeast or outside the U.S. In the Far East (as it were),
among Japan's 10 entries, 8 were founded before World War II, and the average
founding date is 1927. (The remaining elder statesman on the list is Philips
Electronics of the Netherlands, founded in 1891.)
While they made the list,
few among these mature firms could be said to thrive in the new game. The only
two stars from among the19 are IBM (which has risen from the grave in a
Hewlett-Packardwhich is also the sole California firm among those on the
list founded before 1960. Many of the other entries on the vintage list are
struggling. In particular, three of the four great Japanese electronics
combines are losing money in 1998, an unprecedented sign of weakened
It is surprising how
extensive the U.S. comeback in I.T. has been. Only 19 of the top 100 firms are
from outside the U.S., and Toshiba, at number 10, is the highest ranking of
them. Indeed, 43 of the top 50 are American. The role of U.S. firms is thus
even more dominant than the 81 percent share suggests, since most of the 19
non-U.S. firms ranked below number 50. (TABLE 6.)
The nationalities of the 19
firms are mainly Asian, with Canada and Europe hosting three each. Japan
accounts for 10 listings: Toshiba (number 10), Softbank (21), Canon (27), Sony
(43), Seiko (51), Matsushita (57), Sharp (60), Fujitsu (61), Hitachi (62), and
NEC (63). Canada has three: Corel (17), Matrox Graphics (66), and ATI
Technologies (77). Europe has three (the Netherlands' Philips Electronics, the U.K.'s Madge
Networks, and Germany's SAP), but none in the top 50. In Asia, Taiwan's
Acer is ranked at 34, Singapore's
Creative Technology at 40, and Korea's Samsung/AST Research at 55. Of all the
companies mentioned, perhaps the only one that today strikes fear and envy in
the U.S. is Germany's SAP ("systems analysis and program" development).
(Deborah Claymon, 1998.)
7. EUROPE'S POTENTIAL IN THE NET-CENTERED ERA
How does this episode in
the history of technology relate to earlier crises of national competitiveness?
One way to interpret the issue is to view the U.S. as a nation of
country-sized regions at different stages of economic development. In that
light, the I.T. sector experienced an internal, regionally focused maturity
crisis in the Northeast a la 19th-century Britain. (R. D. Norton, 1986.)
The difference was that the newcomer companies, created by entrepreneurs in
younger regions, were still American.
By the same token, one
reason for the eclipse of Europe's I.T. sector seems to be the smaller role
played by entrepreneurs, relative to mature firms. The result, as Lester Thurow
(1998) observes, is that Europe dropped behind Japan and the U.S. in the
world's growth industries:
breakthrough technologies occur, it is very difficult for old large
firms to lead. They have to cannibalize themselves to save themselves,
and that is simply very difficult to do. If one looks at the 25 biggest firms
(based upon stock market capitalization) in the United States in 1960 and again
in 1997, six of America's twenty-five biggest firms either did not exist in
1960 or were very small. In contrast, in Europe all of the twenty- five biggest
firms in 1997 were big in 1960. In the past four decades Europe has been able
to grow no new big firms that could lead the world technologically.
To that extent, the changes now
occurring in Europe may help open up new possibilities for entrepreneurial
creativity. More generally, a strong case can be made for a resurgence of
European companies as the Internet era proceeds, during the next five or six
years. Indeed, it appears now that Europe collectively has better prospects in
the I.T. race than Japan. This prognosis rests on an analysis in Moschella
One characteristic of the
transition is the shift in what he terms supplier structure away from the
current horizontal value chain toward a communications chain. Apace with this
he sees a corresponding shift in supplier leadership from U.S. made components
to national telecommunications carriers. In other words, he assumes that
national governments will retain control over major telecommunications
suppliers, preventing complete globalization in this sector. The upshot is a
localization of the present unified global market in which competitive
advantage is gained through sheer design or cost efficiency.
In an ingenious application
of Michael Porter's diamond model of national competitiveness, Moschella
assigns number grades (in the form of stars) to the U.S., Japan, and Europe in
a variety of categories he deems important for the next few years. The detailed
evaluations are listed in TABLE 9 (below).
COMPETITOR SCORES ON COMPONENTS OF PORTERS DIAMOND IN I.T.
Factor conditions (telecom. infrastructure.)
|Source: compiled from ratings in Moschella (1997),
The bottom line is a better
outlook for Europe than for Japan. Summing over Porter's categories of (1)
factor conditions, (2) related industries, (3) demand sophistication, and (3)
domestic rivalry, Moschella computes aggregate ratings. The scorecard finds the
U.S. with 4 1/2 stars (out of a maximum of five), Europe 3 1/2, and Japan 2
1/2. By this reading, however preliminary, we are about to turn the page to a
new chapter in which Europe plays a larger part.
So much for the regional
origins of the digital economy. Our next step is to interpret the geography of
innovation and entrepreneurship from the standpoint of metropolitan areas, or
back to Section A