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Kodak (KODK) had the digital camera 17 years before anybody sold one.
A young engineer there, Steve Sasson, built it in 1975. It was the size of a toaster and weighed eight pounds. It took photos in black and white, and the images were downloaded on to a cassette tape. But it worked, and management told him to keep quiet about it.
Not because they thought it was a bad idea… quite the opposite.
They needed to keep it hush-hush because they were making an enormous amount of money selling film, and this thing was going to kill that business.
They were right about that; it did kill the business. Kodak filed for bankruptcy in 2012.
They didn’t miss the future. They held it, looked at it, and decided the thing they were already good at was worth protecting.
Every big failure in modern business history is that same story.
Xerox (XRX) opened a research lab in Palo Alto in 1970. Over the next few years, that lab invented the graphical user interface, the mouse, Ethernet networking, object-oriented programming, laser printing, and text editors that showed you on screen what would come out of the printer.
In 1973 they put it together into a machine called the Alto, which had windows, folders, a desktop, a keyboard, and a mouse.
Six years later, a young Steve Jobs got a tour of that lab, part of a deal where Xerox bought a chunk of Apple (AAPL). He walked out, went back to Cupertino, and built the Macintosh.
Xerox had all the makings of a computer and decided to stay in the copier business.
They have since donated that lab to a nonprofit research institute so they can focus on their core operations.
Everybody knows Reed Hastings offered to sell Netflix (NFLX) to Blockbuster for $50 million in 2000 and got laughed out of the room.
What people leave out is what happened next.
Blockbuster figured it out afterwards. Their CEO John Antioco built a competing subscription service, and it was adding subscribers faster than Netflix was.
Then the shareholders killed it.
The program cost about $400 million, and investors hated the expense.
Franchisees hated it because it threatened their stores. Antioco left in 2007 after a fight over his salary; his replacement reversed the whole strategy to focus on the retail business, and the company was bankrupt three years later.
They didn’t fail to innovate. They innovated, and then their own owners made them stop.
A business has exactly two ways to grow without inventing anything.
Raise prices until customers walk away, or cut costs until the product gets worse. Both of those have a hard ceiling, and every company eventually hits it.
Innovation is the only thing that breaks through that ceiling, and it’s the entire reason stocks return more than bonds over a long enough stretch.
Take it out, and you’re left with a market growing at the rate of inflation and population, which is a bond with extra steps.
But the lesson from Kodak, Xerox, and Blockbuster is not that innovation matters, because everybody knows that.
The lesson is that the hard part is not inventing the thing. The hard part is being willing to destroy your own profitable business before somebody else does it for you.
Almost nobody can do it. That’s why the list of companies that have survived a century is so short, and why the original Dow, full of leather and rubber and heavy manufacturing, has mostly disappeared.
Over the last three months, the mega-cap technology names have lagged the rest of the Nasdaq. Money is leaving the seven companies everybody owns and moving to the rest of the list, inside the same index.
Those companies are enormous, profitable, and deeply invested in the business models that made them who they are.
Which is exactly the position Kodak was in with film.
I’m not saying they can’t make the turn. Some of them will.
What I’m saying is that the question worth asking about anything you own is whether you’d be willing to burn down the thing that’s paying the bills.
Because at some point that’s what has to happen.
In December 1979, a 24-year-old Steve Jobs wanted inside Xerox’s research lab in Palo Alto.
He offered a trade. Xerox could buy 100,000 shares of Apple for a million dollars, a year before the company went public, and his engineers got a tour PARC.
Xerox took the deal.
They showed him the graphical user interface, the mouse, and a machine called the Alto that put windows and folders on a screen. Larry Tesler, the scientist running the demo, watched Jobs pace the room until he stopped and said, “what is going on here? You’re sitting on a gold mine. Why aren’t you doing something with this? You could change the world.”
Tesler’s verdict afterward: “after an hour looking at demos, they understood our technology and what it meant more than any Xerox executive understood after years.”
Jobs went back to Cupertino and built the Macintosh. Xerox went back to selling copiers.
13 months later, Apple went public at $22 and closed the first day at $29. Xerox sold immediately.
Those 100,000 shares, through five splits, would be 22.4 million shares today. At $328, that is $7.35 billion.
Apple is worth $4.74 trillion. Xerox is worth $402 million.
They sold a stake now worth 18 times their entire company to protect a copier business, after the man they let inside told them to their faces they were sitting on a gold mine.
