Shooting Stars or Industry Stalwarts—What Makes a Great High Tech Company?

You’ve seen them many times. The software company starts off like a bullet, racing at the high-tech company equivalent of 0-60 mph in 4 seconds. These companies often come out of nowhere and are an immediate factor in their market.

There are many examples, in nearly every major market segment. The original browser company, Netscape, comes to mind as one of the more famous. Peregrine Systems and later Awarepoint here in San Diego are other examples. “Somewhat Smartphone” maker RIM/Blackberry is another dramatic example from the past.  I’m sure every reader can think of many more.

So what is the difference between one of these tech-company “shooting stars” and the Microsofts, Hewlett Packards, and Dells of the world that stood the test of time and grew into long-term successes? After all, in the beginning, they often look alike on the surface.

Cutting Corners at a High-Tech Company

I believe if you look under the covers, however, there are fundamental differences. It’s the difference between a fast-rising “house of cards” and a mansion built to withstand Hurricane Katrina. You start with a solid foundation when you go to build something lasting—which of course the proverbial house of cards is lacking completely.

Now most of the time, people don’t intentionally set out to build the tech company equivalent of a house of cards. This usually happens when the stresses and strains of the marketplace get in the way. That’s when management begins taking shortcuts. It’s often an incremental thing:  Cutting expenses in that key project so you can appease Wall Street, by making next quarter’s numbers. Accepting just a slightly less than normal quality level, to allow that behind-schedule new product to finally get out the door. Hiring just a few fewer developers or engineers than were really needed in the plan for this year. Reducing the corporate brand-supporting advertising buy—a ten percent reduction won’t really hurt—will it?

All of these steps are just meant to be temporary. But cutting corners has a way of becoming the permanent default. This is especially true when there is a brutal competitor or extreme quarterly pressure from Wall Street.

A Winning High Tech Company Maintains the Foundation

Every great high-tech company has a foundation that it is built on—and the care and maintenance of that foundation is a non-negotiable expense for long-term success. With HP it was historically the R&D budget and reliability of its products. The R&D monster was always fed because product innovation was what fueled the company’s growth for over 60 years. And for a long time, reliability was never compromised. A product might end up being a little too costly, a little too big, a little too heavy, or late to market. But it was built like a tank and the products were unquestioned leaders in quality and reliability. Indeed, I would say that the HP brand stood for strong reliability for many years.

Then the company lost its way, culminating in being split into two (still) large companies. But even before that, I don’t know that the HP brand still has the same reliability cache’ that it had in prior years.

HP is Not What it Used to Be – The Foundation is Gone

It’s still a quality brand even today, mind you, just not quite the same as in its heyday. The maniacal devotion to quality just hasn’t been there for a while. And it’s funny that just about the only really notable thing that was truly “invented” at HP and its offshoots in recent years was the word “Invent” placed alongside the logo in advertising during the Carly Fiorina era.

Ironically, even with the dearth of HP engineering inventions, R&D expenses remained high relative to competitors for many years. This, of course, is the worst of both worlds. It wasn’t ended until Mark Hurd came in and made a big splash by increasing profitability largely through cost-cutting. Sadly, he was a one-trick pony and kept cost-cutting on what had been a bloated bureaucracy until he cut all the way into the bone, harming the ability of the company to perform well in the long run.

Microsoft Won the War – But Left Money on the Table

Microsoft was built on monopoly power and paranoia. And I don’t mean that in a negative sense. Depending upon your perspective, Microsoft either shrewdly created the DOS/Windows software monopoly position it enjoyed for years—or luckily fell into it. I suspect it was a bit of both, but no matter. Since realizing its position, Microsoft for a long time never lost its aggressiveness or failed to leverage its monopoly platform. Many believe they overstepped at times.

This strategy was largely successful, although I have always felt that they left a lot of money on the table rolling valuable software into the Operating System. Adding them to the OS essentially gave features that had significant independent value away for free. It was done in a paranoid attempt to kill off any competitor that was perceived as a potential threat to its throne. For the longest time, the company reacted every time there has been a threat: Apple, WordPerfect, Novell, Lotus, Netscape, etc. The list of high-tech company road-kill is quite long. They never took their eye off the ball, building and protecting their OS and Office franchises with as much firepower as required for as long as it took.

Looking Forward or Backward?

You can argue that their extreme focus on these franchises and not anticipating secular technology market changes allowed the Googles and Apples of the world to outflank them and become the leaders of the technology business today. MS of course finally did make a comeback after many years of middling performance, with an emphasis on cloud computing with Azure. In the context of the long-term view I’ve taken in this article, this is still an unfinished story and one to discuss another day.

Still, MS is an incredibly large, successful, and profitable enterprise. I believe that their aggressive corporate culture was a big part of the foundation that Microsoft is built upon. It has let them survive and thrive since the infancy of the PC until today. Whether they took their eye off the ball at the beginning of the Cloud/Mobile era–or simply failed to execute–they have recovered and are still a major factor in the tech business and will be for many years to come. With their cloud business growing strongly, one might argue that they have regained a leadership role. This is a rarity in tech.

We’ve examined a couple of long-time winners—now let’s look at one of those classic shooting stars—Netscape.

Formula for Losing

It looked like the next big thing—the Microsoft of the Internet Age. Netscape was to be the successor to the throne. They were the darlings of High Tech at the time and Microsoft was shaking in its boots. It was one of those times when Bill Gates, Steve Ballmer, and the Microsoft gang got caught napping a bit. They didn’t see the Tsunami of the commercial Internet coming at them—until it was almost too late. But the boys from Redmond recovered in time and put all hands on deck. With this aggressive approach, they finally smothered the upstart Netscape. So what happened to Netscape?

Well, in large part Microsoft happened to Netscape. Microsoft put together a Herculean effort to change their company to compete in the Internet Age. They stumbled a bit a first, giving Netscape some breathing room. Early versions of Internet Explorer (like so much software out of Microsoft over the years) were not very good. The early IE releases were almost laughable, to be frank. But Microsoft traditionally has been the Terminator of the software business. It never gave up and kept coming after a competitor, regardless of short-term losses. That’s one reason I was always a bit slow to write them off completely, even during the many years of a flat to decreasing stock price.

Tough to Beat Aggressive Tech Company Incumbents

MS had a habit (and the resources) to just keeps throwing people and money at a problem. Software release after release comes out until they get it right. Unfortunately, Netscape had never built a solid foundation to combat this onslaught. The browser was what they were all about. But an early decision to use the browser as the “razor” in that classic razor/blades marketing strategy may have ultimately been the fatal flaw. Intending to make their money on Servers, I believe that they neglected to keep the Navigator Browser as the market leader. Even though MS was forcing them to “give it away”, it was the product that had created the company’s market position.

It was a tough battle at the time, with Microsoft bundling IE into the OS. However, they needed to find a way, through innovation, to keep the Navigator browser at the forefront of the browser wars. Definitely a tough task—no doubt. But Netscape failed to achieve this critical task. Once that browser franchise began to erode, their reason for existence began to fade away. The browser was their foundation, which began to crack when it wasn’t built to last.

Very Important to Pick Your Battles Carefully

Another mistake that compounded their plight was fighting a multi-front war with Microsoft, much like Hitler infamously did in WWII.

They didn’t have the mature corporate infrastructure or the right level of resources but chose to compete head-to-head in many other markets Microsoft was in. Novell made the same mistake, both companies buying some second-rate competitors to Microsoft to get in the game and compete head-to-head with MS. Instead, they should have focused their resources where they had a lead, and had a real chance to win—Netscape in Browsers, and Novell in Networking. History tells us that the upstart high-tech company must focus and win decisively on that first battlefield before they move on. Think Amazon winning in books before moving on to dominate nearly every category of online ecommerce. If a company can’t secure and dominate its main niche first, it almost certainly will be crushed by a behemoth competitor in the long run.

How Will Google Do in the Even Longer Run?

This brings us back to Google. They have been one of the darlings of tech and a stock market high flyer, along with Apple, Facebook/Meta, Amazon, and others. Once again, Microsoft treated major threats as existential. Google is winning big in search and has been for a long time. But I remember when Novell and Netscape were in front, too. It didn’t last forever. And I see some parallels—Google has diversified but not all that successfully. The great bulk of its revenues and profits still come from search advertising.

I’m not suggesting that Google is going away anytime soon. But their main web-based search advertising platform has slowed in recent years. As we sit here today during a post-pandemic downturn made necessary by high inflation, the online advertising business is getting killed. That may be only temporary. But I personally am skeptical that Google can keep growing its advertising business significantly going forward. Outside of Advertising on YouTube and Android they haven’t really been able to create any other significant revenue streams, despite hundreds of acquisitions and a great deal of effort.

This discussion may seem silly to some given Google’s current position. But remember, I’m taking a very, very long-term view here. There was a time when AltaVista was a dominant company in Search and Google was a little-known upstart. You couldn’t have envisioned Google at the time rising to its current dominance. But this is the tech business. In the long term, things change a lot. Sometimes very quickly.

Takeaways

My takeaways for a VERY long-lasting software or hardware company are:

1. Nothing lasts forever in tech; even historic tech companies like HP, Microsoft, and IBM fell off their dominant perch
2. An extremely solid foundation of some sort must be built for a long tech industry life
3. Cutting corners on that foundation is the beginning of the end
4. In the long run, diversification is necessary to sustain success in the long term. But that diversification must be built in the same solid way as the original foundation, not based upon a few hasty acquisitions

What do you think—what are the most important elements in the making of a great, lasting high-tech company? Post a comment with your thoughts, and we love it if you could share the article with your network.

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