Dealers of Lightning Page 5

  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."

  On Monday, February 10, 1969, the two of them announced that Xerox, in the largest transaction it had ever undertaken and one of the largest in American corporate history up to that time, would buy Scien­tific Data Systems for more than $920 million. McColough s one-man ini­tiative stunned the investment community. For one thing, he proposed to pay Palevsky in Xerox shares. It was true that the stock was a high-flying favorite on Wall Street—trading at $269 a share, it was cheap currency indeed to spend on an acquisition. But that did not mean it could not be squandered. Xerox would have to issue nearly 3.5 million new shares to pay for the deal. Max Palevsky would be transformed into Xerox's single largest stockholder in one giant step. Plus he was to be awarded seats on the board of directors for himself, his venture banker Arthur Rock, and two trusted lieutenants.

  This for a company that had never made more than $10 million in a single year. IBM itself traded for less than half the purchase premium McColough had agreed to pay for a company with one-hundredth of its market share. If things did not pick up at SDS, Xerox's investment would not be paid off for 92 years.

  Concerns surfaced immediately that Xerox was buying an empty shell in its desperation to get into the computer business. Top managers were already leaving SDS in droves, many of them retiring on what they had made from the rise in its stock price over the previous few years. Palevsky himself had openly announced his intention to withdraw from day-to-day management as soon as possible. On the job he was prone to distraction, a dabbler in politics, movies, the peace movement. There was reason to question whether anyone would be left to mind the store.

  Back at headquarters Jack Goldman was as shocked by the SDS deal as everybody else. "I was the head of research for the company," he said, "but I wasn't consulted. At all."

  He was willing to forgive the slight as the price of being a newcomer, but only up to a point. For his opinion to be overlooked on a major technology venture tasted disagreeably of Xerox's traditional concep­tion of research: fine in its place, but irrelevant to anything as impor­tant as strategic planning.

  From what Goldman could tell, this attitude pervaded the company, to its misfortune. It affected even the kind of research being done at Xerox's main technical laboratory, a vast installation spread over the Rochester suburb of Webster. At Ford, Goldman's biggest budgetary headache had been finding money for all the computers the engineers and scientists demanded for their labs, not to mention the outside experts imported by the platoon to help them exploit the new technol­ogy in designing cars.

  Nothing of the kind ever occurred at Xerox research. The Webster engineering and research staff treated the new science of computer- aided design with utter indifference. Webster's classically educated chemists, physicists, and metallurgists devoted their attention to nar­row, product-oriented tasks, trying to develop better toners and pho­toreceptors to drop into copiers designed the same old way. As far as that went they were talented enough, but they had no incentive to keep up with new research techniques. As for applying imagination to an entirely new science, concept, or machine, Webster was hope­less. It was not research as Jack Goldman understood the word; it was product development, which was something very different.

  "Real research people tend to interact with the world at large," he observed. "They know what's happening on the university campuses and get invited back and forth, so they become an avenue through which you can attract new ideas into the company. Research is a funnel through which you can bring in people who normally won't talk to the guys down in the trenches designing equipment," he said. Xerox had not been get­ting new ideas, and it showed. By allowing its researchers to isolate them- selves the company had become as musty as a sealed tomb.

  Goldman had only agreed to join Xerox because he saw a glimmer of hope in McColoughs forward-looking determination. The gentlemanly Canadian-born executive had lured Goldman away from Ford by pledging to place corporate research on an entirely new footing. Gold­man may have felt somewhat out of place at headquarters—short, rotund, and profane, quick-witted and sharp-tongued, and educated at Yeshiva University, he certainly made a contrast to the patrician, Ivy- Leaguish executives that commercial success had attracted the Xerox management cadre. But McColough had promised that as chief scien­tist he would have the authority to conduct research from the bottom up, following wherever science led him, rather than top-down, which only served the interests of the company's old guard. That made the offer hard to resist.

  Now Goldman found his confidence shaken. Acquiring a computer manufacturer could have helped inject a new attitude into a Xerox that had devolved from a nimble, innovative risk-taker into a creaking giant. But SDS was not that kind of acquisition. He was appalled at its intellec­tual
conservatism. SDS computers were good enough in their own mar­ket, he confided to his colleague George White, but their day had passed. No one would mistake them any longer for leading-edge. "He felt those guys down there in El Segundo were just a bunch of dumbbell copycats as far as technology was concerned," White recalled. "They were never going to be first on anything that mattered."

  Yet they might serve a subtler purpose. As the SDS purchase moved toward a shareholder vote at the corporate annual meeting in June, Jack Goldman contemplated how to snatch a new opportunity for Xerox from what was already being labeled "Peter McColough's Folly."

  McColough fought Wall Streets doubts about SDS with all the rhetoric a corporate chief executive could muster. His waning prestige made it an uphill battle. A year or so earlier he had disgruntled the investment com­munity with an equally headstrong—and unsuccessful—takeover bid for the financial services company CIT. This new transaction revived com­plaints about his "golf-course" deal-making, a label he detested. SDS was a successful company with its best years still ahead, he asserted. "It had been making profits every year. The growth record was great. The prof­itability record was great. So we made a deal."

  His arguments only incited more skepticism. The growth prospects in SDSs main lines of business were meager, not great, according to indus­try analysts whose ardor for the transaction continued to cool. Finally, at a luncheon meeting of New York securities analysts, McColough laid out a grandiloquent vision. It was wrong to look at SDS and Xerox as separate companies, he said. His idea was for SDS to help Xerox expand its rule over the office copier market into the domination of a greater universe— "the office of the future." The Xerox to come, he declared emphatically, would control "the architecture of information."

  The phrase was classic CEO-speak, grave, tendentious, and nebu­lous enough to be perfectly consistent with any strategy Xerox chose to pursue. McColough later attributed the wording to his speechwriter. Yet for the next decade it would hang in the air like an persistent echo. The architecture of information: The phrase might as well have been chiseled over the doors of the hilltop palace Xerox would soon build to house a group of employees quite unlike any others the company had ever placed on its payroll.

  "It was a great phrase," one PARC engineer said later, "because nobody knew exactly what it meant. So there were quite a few interest­ing things you could do and simply cite that as the justification."

  In May the shareholders, accepting on faith McColough's hazy vision of the future, approved the acquisition of SDS for a final price of $918 million in stock. Xerox owned its computer company. Now it needed to figure out what to do with it.

  That is where Jack Goldman stepped in. Six weeks after the annual meeting he delivered to McColough a twenty-one-page proposal, com­plete with staffing charts and pro-forma budgets looking ahead five years, for a dynamic new scientific facility.

  The SDS purchase had given him a peg on which to hang the proposal. On the surface the rationale for the so-called "Xerox Advanced Scientific & Systems Laboratory" was to fortify the new subsidiary's weak research capability. But from that foundation Goldman was intent on building a much larger edifice. Cannily recognizing that Xerox yearned to be ranked alongside such paragons of industrial muscle as IBM and AT&T, he sketched out a corporate research center engaged in basic science inde­pendent of any existing product group, exactly like IBM's fabled York- town Heights research center and AT&T's Bell Laboratories. About half the staff would be devoted to advanced physics and materials research, and the rest to the new sciences of systems and computing.

  "He was talking about a first-class research facility," one Webster staff executive of the time recalled later. "Something that would become known worldwide by attracting top scientists doing fundamen­tal research, and maybe winning a Nobel Prize or two."

  Goldman therefore associated the lab not only with the immediate needs of SDS but more vaguely with "Xerox's long-range interests." The staff would be assigned "to establish scientific pre-eminence in those dis­ciplines that appear relevant or likely to become relevant." Even if com­puter science demanded the lion's share of attention, Goldman warned that Xerox must learn to expect the unexpected. "The use of computers has developed at least as fast as anticipated, but not in the manner antic­ipated by most prognosticators." Overall, while encouraging his superiors to believe the new lab sprang logically from Xerox's existing business strategy, he subtly built a case for using basic research to identify new, unanticipated opportunities. Goldman had often been reproached at Ford for lacking a refined sense of business or commerce. (He never tired of telling the story of how Henry Ford II, witnessing a demonstration of some remarkable but impractical new technology, remarked: "Not much of your stuff gets on a car, does it, Jack?") He would later face the same criticism at Xerox. Yet his memo glimpsed where computing might lead the com­pany. Among other things, Goldman recognized—significantly ahead of many others in the field—that software would soon outstrip hard­ware as the driving force of innovation. More important, he saw that it would be the key to Xerox's ability to profit from the computer's ability to drive a high-tech printer.

  "Xerox should be the one to revolutionize certain printing functions with a machine which is half xerographic printer and half computing machine," he wrote, thus anticipating by more than ten years the prod­uct with which Xerox would most profitably commercialize the work of PARC: the laser printer. He also accurately forecast burgeoning oppor­tunities in education and graphics long before the hardware existed to run anything even faintly resembling a commercial system.

  Yet it is also evident that Goldman did not fully appreciate the haz­ards of creating a laboratory almost entirely divorced from the needs of Xerox's existing businesses. Who could have foreseen the abyss that would alienate one tiny group of sequestered and privileged theoreti­cians from the thousands of ordinary engineers who faced relentless deadlines to get product out the door? Or perhaps he was merely being disingenuous when he wrote of a systems science laboratory that would "develop rapport with the entire company."

  Goldman proposed an ambitious growth plan for the corporate lab. It would open with twenty-five to thirty researchers and a budget of less than $1 million, but equal Webster's size within about four years with a staff of 300 housed in a seven-million-dollar facility. The operat­ing budget, he forecast, would plateau at about $6 million a year in 1969 dollars. (The figure turned out to be short by a factor of five.)

  As for the new lab's location, he recommended New Haven, which offered Yale University's "intellectual night life" as a lure for prospec­tive recruits as well as proximity to the new corporate seat in Stamford. "If the new research center is too isolated from Xerox environment and Xerox thinking, the chances of relevant coupling to Xerox's needs and practices will be severely diminished," he wrote prophetically. "On the other hand, a site near corporate headquarters has very much to offer in terms of coupling to the full range of future as well as present business interests of Xerox."

  The liberal and enterprising Peter McColough was thoroughly enchanted by the notion of a corporate research hermitage. His enthu­siasm, however, was not unanimously shared in the top reaches of the company. At the board meeting at which Goldman presented his plans for the new lab, strident opposition arose from an unexpected source: the new board members from SDS.

  Max Palevsky balked violently at the idea of dissipating five or six mil­lion dollars a year on pie-in-the-sky research. He thought McColough and Goldman were approaching a serious financial commitment like dilettantes and that their motives were irrelevant to real corporate goals. "The memory I carried away was the number of times IBM came up in the discussions about the research center," he recalled later. "It was cor­porate conspicuous consumption. I never got the feeling that the people at Xerox understood that something like this didn't pay unless you really did basic research like IBM—treat it as a big undertaking that would need years to give you any return." If Xerox was serious
about computer research, he groused, why not simply give the money to SDS? Then the computer division would be able to develop a new version of its Sigma series computer, which had been brought out to supplant the aging 930.

  Goldman was disgusted. He replied that the best way to serve SDS interests was to mount an independent, far-reaching effort in basic research, not by financing incremental upgrades for an aging product. "They were the people who could best profit from the research lab, and they were completely disinterested," he said later.

  In any event, McColough had the necessary authority to green-light the new lab on his own. He had brought Goldman into the meeting as a courtesy to the board, not as a bid for votes. As for the SDS faction, "Peter didn't pay too much attention to their objections, bless his soul," Goldman recalled. "But as a matter of record he did not require nor did he ask for board approval."

  To Goldman he gave his blessing to establish Xerox's second full- scale research laboratory on a site to be determined, with the under­standing that it was not to outshine in manpower or budget the proud Webster research park outside Rochester. Goldman shrugged at this solitary caveat. According to his master plan, the two labs would be pointed in entirely different directions. Still, there was no question with which one his heart lay. With seed money in his pocket, he set off to build Xerox a shrine to a new science.