Business Brilliant

by Lewis Schiff

  By the mid-1980s, Digital Research had entered a death spiral and Kildall waved the white flag of surrender. He approached Gates and asked him to consider buying Digital Research for what Kildall considered a fair price—$26 million. Gates rejected the offer and told Kildall the company might be worth only $10 million. A humbled Kildall had to look elsewhere to find a savior for his declining company.

  Where did Kildall go wrong? One obvious answer is hubris. Having fathered a revolution in personal computing, Kildall assumed that all the other players would continue their childlike dependency on him. “In Gary’s mind [CP/M] was the dominant thing and it would always be dominant,” one close colleague of Kildall’s told an interviewer years later. “And he really honestly believed that would never change.” Kildall was blind to how the delayed release of CP/M-86 had pushed IBM, Microsoft, and Seattle Computer Products to their breaking points. He couldn’t imagine that all three companies might work around him to steal CP/M’s market. The irony is that the people at all three companies would have much preferred to help Kildall and CP/M-86 succeed. Instead, they were forced to go to the extreme lengths of launching a competitor to CP/M-86, solely because Kildall had left them no other choice.

  Kildall’s more fundamental mistake, however, was this: He didn’t follow the money. He derided IBM’s clumsy technology and overlooked its enormous market power, probably because technical subjects interested Kildall and marketing strategy didn’t. Gates set his priorities in the exact opposite order. He was willing to hand IBM a shoddy product derived from other people’s work because what mattered most to Gates was that the mighty IBM get its project done on time. Kildall, the innovator, followed his passion for technical excellence and was shocked that IBM wouldn’t follow him. Gates, the imitator, took his cues from IBM every step of the way, because he believed that following Big Blue was the smartest way to follow the money. Gates guessed right, and became one of the richest men in the world.

  The Ride on the Back of the Bear

  The rise of Bill Gates and the fall of Gary Kildall is a tangled tale, but it’s also a strangely familiar one. Behind the development of any major invention you’d care to name—the telephone, the light bulb, the automobile, the television—there are legions of broken and disheartened men like Gary Kildall who might be considered the “true” inventors. Thomas Edison did not invent the light bulb. Joseph Swan had held the British patent for 18 years before Edison introduced his “improved electric lamp” in 1878. And Henry Ford did not invent the automobile. George Selden of Rochester, New York, patented the “safe, simple and cheap road-locomotive” in 1895, while Ford was still laboring as a midlevel engineer in Edison’s electric company.

  The names Swan, Selden, and Kildall are now largely forgotten because the myth of the lone inventor possessed by a brilliant idea is a powerful one in our culture. “We like to hear a good story about someone who’s ingenious and comes up with a great idea and sees it through,” says Stanislav Dobrev, a University of Utah professor who has studied the history of innovation. “[But] that’s not true most of the time.”

  Dobrev researched the 2,197 car company start-ups in the United States between 1885 and 1981. The first 25 leading car companies were all defunct within 15 years, contributing to Dobrev’s conclusion that it pays to be a latecomer, an imitator. Most people believe otherwise in part because vanquished innovators like Kildall and Selden tend to vanish from history. “You rarely hear about first movers who failed,” Dobrev told the Wall Street Journal in 2011. “They don’t exist very long. They don’t leave a lot of records.”

  In The Myths of Innovation, Scott Berkun writes how innovators achieved their status as heroic figures in American history because “people preferred to believe, and tell, positive stories about them rather than the less interesting, and more complicated, truths.” The notion that it takes a single bright idea to produce a great fortune is so widely held, Berkun points out, “that it’s a surprise to many to learn that having one big idea isn’t enough to succeed.”

  Most inventors who buy into the myth of innovation wind up sadly disappointed. A Canadian study from 2003 provides a vivid snapshot of how steeply the odds are stacked against inventors who expect to profit from their ideas. Of 1,091 inventions patented in Canada, only 75 of them ever made it to market—less than 1 percent. Of these, 45 lost money. Just 6 out of 1,091 patented inventions made significant profits for their inventors. By Berkun’s estimation, inventors face such long odds because every innovation needs to overcome eight distinct development hurdles involving design, financing, and marketing before it can achieve financial success. When the odds of overcoming each hurdle are set at a somewhat generous 50-50, the chance of overcoming all eight is an infinitesimal four-tenths of 1 percent—amazingly similar to the success rate revealed by the Canadian study.

  The other side of the coin is that while innovating rarely makes good business sense, most good businesses don’t rely on innovation. Researchers who have studied small business find that the vast majority of start-up companies aren’t innovative in the least. Studies by George Washington University researcher Paul D. Reynolds have shown that only about 2 percent of all company founders say they expect their businesses to have a major impact on the markets in which they operate. More than 9 out of 10 surveyed said they expect to have little or no impact at all. Hardly any of them plan to do anything particularly new or different. They plan to be successful without being innovative.

  A survey of a far more elite group of business owners reveals the same general aversion to innovation. In 2005, Amar V. Bhide of the Harvard Business School interviewed 100 company founders from among Inc. magazine’s 500 fastest-growing private firms in the United States. Only 6 percent of these company founders told Bhide that they started their businesses with unique products or services. Just 12 percent attributed their success to “an unusual or extraordinary idea.” Instead, 88 percent cited “the exceptional execution of an ordinary idea” as the source of their high growth and success.

  There are strong echoes of these results in the Business Brilliant survey. Only 3 out of 10 self-made millionaires agree that “Having a big or new idea is a critical factor to becoming wealthy.” Nearly 9 out of 10 said “it is more important to do something well than do something new,” which almost exactly mirrored Bhide’s findings about “the exceptional execution of an ordinary idea” among Inc. 500 founders.

  And yet, the enthusiastic belief in the “big idea” continues to cast its spell over the much larger middle-class population. About 7 out of 10 of middle-class survey respondents—people without any firsthand experience in becoming wealthy—said they believe it takes “a big or new idea” to become wealthy. About half think that doing something new is indeed more important than doing something well.

  The notion that you can get rich from one brilliant idea is such a commonly held dream that whenever someone actually seems to have done it, the media eagerly embrace the story. Unfortunately, media coverage offers an extremely distorted view of reality. More people die from bee stings than shark attacks every summer, but you’d never know that based on the hysterical coverage devoted to occasional shark sightings. The same holds true with fatal lightning strikes, which always make the evening news, while many more people are killed each year by falling off ladders. Clever ideas are the shark attacks and lightning strikes of business success—they are dramatic, exciting, and very rare. You’re more likely to make headlines with a big new idea, but you’re more likely to succeed without one.

  The media’s appetite for tales of people getting rich off their out-of-the-blue brainstorms has provoked many successful companies to come up with media-friendly “creation myths.” The most infamous case is that of eBay. For years, eBay pushed the story that founder Pierre Omidyar had been inspired to create the online auction site because his fiancée wanted to use the Internet to grow her collection of PEZ dispensers. Businessweek, the Wall Street Journal, and the New Yorker all seized on this de
lightful story of how a fortune was built when one man in love wanted to please his bride-to-be and help her trade in the most frivolous and useless objects imaginable—PEZ dispensers. For years this story was repeated and played up by eBay’s top executives. They even posed for news photographers while holding the goofy little toys that had supposedly made them all multimillionaires.

  It wasn’t until 2002, eight years after eBay’s founding, that a book about the company revealed how the PEZ story was a complete fabrication. It was made up by a young employee who was failing in her job of drawing media attention to the company. In truth, Omidyar had started something called AuctionWeb as a hobby, and his first sales involved all sorts of drab, uninteresting items. Yes, Omidyar’s girlfriend did eventually buy and sell some PEZ dispensers on the site, but only after it had been up and running for more than two years.

  Even without such corporate spin, the media can usually be counted on to promote the myth of innovation on their own. Look up the first long New Yorker profile of Bill Gates and you’ll find no mention of Gary Kildall. The article opens its segment on Gates’s dealings with IBM this way: “In 1980, I.B.M. approached Gates to write an operating system for the personal computer it was designing.” That’s not really true, but if the writer had included the story of how Gates had sent IBM to see Kildall, he would have undermined the premise of his article, that Gates was a software visionary whose speculations about the future were worth reading about in the pages of the New Yorker.

  If there is any harm done by creation myths like eBay’s PEZ story or media puffery like the New Yorker’s Bill Gates profile, it’s that they offer the public badly distorted ideas about what it takes to be successful. In 2004, a pair of University of California, Berkeley, business professors attempted to explore the power of what they termed “the garage belief”—the common notion that most entrepreneurs start out by tinkering and innovating in garages, basement workshops, or even dorm rooms. Pino Audia and Chris Rider surveyed business school students and found that on average the students believed about half of all start-up businesses begin this way, while a more accurate count is much closer to 25 percent.

  When Audia and Rider then studied a group of 96 new businesses that received venture capital funding, they found that most hadn’t counted on garages or innovations to get started. The distinguishing feature most commonly shared among almost all of these companies was that they started out by relying on knowledge, partners, and funding sources that their founders had identified in their previous jobs. As Dan and Chip Heath would write, “companies aren’t born in garages. Companies are born in companies.”

  Audia and Rider concluded that “by misrepresenting the process by which many individuals become entrepreneurs, the garage belief may lead to seriously misinformed employment choices by individuals, ill-advised resource allocation decisions by companies, unsuccessful course offerings by business schools, and/or ineffective program offerings by governments.”

  Bhide came to a similar conclusion after his survey of Inc. 500 founders. These successful startup entrepreneurs weren’t lone-wolf inventors pursuing big ideas. They were imitators working from their areas of expertise, borrowing or stealing what they learned from their former employers. “The Inc. founders we interviewed typically imitated someone else’s ideas that they often encountered in the course of a previous job,” Bhide wrote. “Any innovations were incremental or easily replicated. They were too obvious to qualify for patent and were too visible to protect as a trade secret.”

  Gates’s true role as imitator, not innovator, was always assumed among his Silicon Valley rivals. Larry Ellison, the billionaire founder of Oracle Corporation, has been particularly outspoken in his criticism of Gates’s business practices. “Bill goes out and methodically searches for good ideas to steal,” Ellison told an interviewer. “That’s perfectly rational behavior. That’s made him very successful. But then, one by one, Bill starts to claim credit for the stolen ideas. He actually starts believing that they really were his ideas in the first place.. . . He can’t bear to see himself as Rockefeller; he sees himself as Edison.”

  The passage of time, however, has revealed Gates’s terrible track record as a visionary. Gates’s first book, published in November 1995, was called The Road Ahead; it devoted just a few pages to the Internet, paying it lip service as a “beginning” step toward a true information superhighway. “Seeing far into the future is not what Mr. Gates does best,” the Economist groused when the book came out. “Naturally, he has a vision; but the vision is disappointingly similar to that of so many pundits who have tried to look ahead.” Within six months of the book’s publication, Internet usage had exploded and Gates and his coauthors had to rewrite almost half of The Road Ahead prior to its paperback release in 1996. “No matter how much Bill Gates may claim otherwise,” Netscape founder Jim Clark has said, “he missed the Internet, like a barreling freight train that he didn’t hear or see coming.”

  My point here is not to take anything away from Bill Gates. I think that the true Bill Gates story, the one that never gets told, is a valuable one. For example, the game plan that Gates relied on, the one that consistently yielded results for him, is a sound business strategy that anybody can learn from and imitate: find the field that interests you the most, work with the biggest and richest player willing to partner with you, and then do everything you can to help that big, rich partner succeed.

  For Gates, who started out in the fast-growing software industry, it took just three steps within about seven years for this strategy to take him from college dropout to multimillionaire. First, Gates and his partner, Paul Allen, wrote Microsoft BASIC with the sole intent of partnering with the leading maker of personal computer kits. Then they developed the Softcard in order to wed Microsoft BASIC with CP/M, the leading operating system at the time. The third step was more a function of luck, but luck, as they say, always favors the prepared mind. The Softcard is how Microsoft gained the attention of IBM. When Kildall faltered in helping IBM with its operating system, Gates pounced.

  As a growth strategy for little start-ups, this is a business approach that could be applied to just about any industry. (It can even be adapted as a career strategy inside any large organization: just seek out and offer help to the most powerful patron or mentor who will have you.) It’s a proven recipe for success, but it’s hardly a magic formula. The difficult part of the recipe, one frequently encountered by Microsoft in its dealings with IBM, is executing in the face of adversity. In the computer industry, IBM was notoriously difficult to partner with and was well known for its arrogant treatment of small vendors. During the development phase of MS-DOS, IBM’s insistence on secrecy and strict security measures strained both Microsoft’s meager resources and the patience of Microsoft employees. It didn’t help that IBM’s buttoned-down corporate engineering culture chafed against the high-energy nonconformist atmosphere at Microsoft. But Gates endured every challenge, not only because he appreciated IBM as a source of tremendous opportunity, but also because he saw firsthand the peril of underestimating Big Blue’s power, the way Kildall had.

  Steve Ballmer, now Microsoft’s CEO, was one of Gates’s chief lieutenants in the 1980s. He has compared working with IBM in those days to being at the mercy of a dangerous animal. “We used to call it, at the time, riding the bear,” the excitable Ballmer once said in a filmed interview. “You just had to try to stay on the bear’s back. The bear would twist and turn and try to buck you and throw you but darn, we were going to ride the bear! Because the bear was the biggest, the most important—you just had to be with the bear! Otherwise you’d be under the bear!” In the computer industry, IBM was the bear. Riders on the bear got rich. The rest, with few exceptions, got eaten.

  The Egg of Columbus

  It was the summer of 2004, and weekends were killing Stuart Frankel’s business. As the owner of two Subway franchise sandwich shops inside a Miami hospital complex, Frankel was growing frustrated with the way his sales droppe
d off every Saturday and Sunday. The two-day lull in foot traffic to his stores was eating into whatever profits he made on weekdays. It left his employees with little to do and good food was going to waste because his inventory wasn’t turning over fast enough to keep everything fresh.

  So Frankel did what every cash-strapped shopkeeper does. He ran a sale. He decided to advertise cut-rate weekend prices for Subway’s popular Footlong sandwiches. On weekdays, Footlongs at Frankel’s shops remained at $5.95 plus tax, but he reduced the weekend price to $4.67, so that the total after tax came to a flat $5. Frankel put up signs in the windows: “Five-Dollar Footlongs!”

  As ideas go, this was hardly a big one or a new one. Cutting prices to generate revenue is a pretty basic, commonsense business practice. One little twist was Frankel’s choice of a $5 sale price. Conventional wisdom says that a $4.99 sandwich will sell much faster than a $5 sandwich. There are even brain theories, backed by clinical research, suggesting that we appraise value by reading prices from left to right so that $4.99 feels like a much better bargain than $5.