GUEST BLOG: A Trillion Reasons By Aegis J. Frumento, Esq.

August 16, 2018

A Trillion Reasons

News that Apple broke the $1 trillion market cap made me remember 1977.

Mostly, I remember being twenty-something.  But also, Star Wars (the original) was the year's blockbuster.  Woody Allen's Annie Hall didn't quite show the Manhattan where I lived, in the pre-grunge grunginess of the West (Greenwich) Village. Saturday Night Fever jump-started the disco era.  (In April, Donald married Ivana, but that spins a different tale.)  And Scientific American devoted its entire September issue to the future of the computer.

It described something none of us had ever heard of, a "graphical user interface", or GUI, with screens that you could drag around, resize, and stack one over the other, all by using a plywood thing they called a "mouse."  Software like that could make computers accessible to real people.  That it took a lot of computing power didn't matter because one author predicted that soon the power of a mainframe could squeeze into something the size of a notebook. 

Yes, I was (may still be) a nerd.  I read Scientific American.  I also knew something about computers.  I won high school science fair prizes for building logic circuits out of government surplus transistors and diodes.  Those let me see a real mainframe -- all several dozen floor-to-ceiling cabinets of it -- at nearby Griffiss Air Force Base.  They were using it to design a stick-figure flight simulator.  The computer room was bigger than our house.

But in real life, I used paper notebooks and ball-point pens, sat in real libraries reading real books.  I got through college statistics with a canary-yellow Pickett slide rule ("Carried on Apollo 11!").  I learned to program using dumb terminals and punch cards, and waiting for some far-off mainframe to get around to them.  To carry my own personal mainframe in a backpack seemed as farfetched as hitching a ride on the Millenium Falcon.

Alan Kay, who predicted the notebook-mainframe, worked for Xerox Corporation.  His article in Scientific American showcased the work of Xerox's Palo Alto Research Center (PARC).  But at least one person didn't read it -- Steve Jobs.  

Jobs incorporated Apple Computer in January 1977.  In September he was too busy to read Scientific American.  Apple was then amidst shipping that year's 2,500 Apple IIs.  It would sell over 5 million Apple IIs over the next 15 years.  But as early as 1979, writes his biographer Walter Isaacson, "Jobs was growing impatient with how boring it was turning out to be."  So Jobs's engineers got him interested in PARC.  As luck would have it, in 1979 Xerox's venture capital arm asked to buy a stake in Apple.  Jobs let them buy 100,000 shares at $10, but only if they shared PARC's technology.  PARC's staff said no, but Xerox's management overruled them.

When Jobs first visited PARC in December, he bounced around waving his arms in excitement.  "You're sitting on a gold mine," he shouted.  "I can't believe Xerox is not taking advantage of this."  So Jobs did instead.  

That's why in 1984 many of Scientific American's wonders were live features of my first Apple Macintosh.  Microsoft's copy-cat Windows 1.0 came out 2 years later.  The rest, as they say, is history.

When the greatest business blunders are hashed out in heaven, Xerox giving Apple PARC's technology will be up there.  "They were copier-heads who had no clue about what a computer could do," Jobs said later.  "Xerox could have owned the entire computer industry."  Xerox's copier-head-in-chief was C. Peter McColough.  But let's not be too harsh.  McColough worked his way from selling copiers to CEO.  He more than doubled Xerox's revenues to $7 billion by 1979.  He started PARC, and his $1 million investment in Apple returned a $16 million profit in a year.  Being a copier-head is not the worst thing when you run the world's largest copier company. 

But . . . there was a tide, and McColough missed it.

I'm sure he didn't think so.  Those early Macs were elegant with gorgeous graphics; the stick figures I saw at Griffiss could not compare to Microsoft's Flight Simulator for the Mac.  But the Mac was woefully underpowered.  Spreadsheets could take an hour to recalculate.  And it was expensive.  The hardware it really needed just wasn't there yet.  Sales started briskly, but soon tapered.

Jobs himself was demanding and abusive, and he poured resources into the unprofitable Macintosh division.  Apple's board fired him in 1985, in favor of more traditional management.  He returned a dozen years later after that management's lack of focus and innovation had driven Apple to the brink of bankruptcy.  Jobs harked back to the elegant simplicity he first saw at PARC.  He refocused Apple on a few great products that exploited the boundary layer where person and machine connect.  And by 1997, the computing power was there.  Out of Jobs's imagination sprang the MacBooks, iPhones, iPods, iPads, iTunes, iWatch and the rest of the iUniverse.

Steve Jobs died in 2011.  Since then, Apple's financial management may have had more to do with its success than innovation.  As Mihir Desai explained in last week's Times, Apple tends to bully customers to pay quick and suppliers to be paid late, so that Apple is always flush with cash.  But customers and suppliers only put up with it because Apples' fingerprints, if not its logos, are on practically every modern digital experience. How long that will last is anyone's guess.

And Xerox?

Alan Kay said the best way to predict the future is to invent it.  Joseph C. Wilson invented a future in 1959 with the Xerox 914, the world's first plain-paper copier.  It was the most successful single product ever made; it may still be.

That was then.  This past May, Xerox ousted its CEO for trying to sell the company to Fujifilm for a bargain price.  We still talk about xeroxing documents on xerox paper.  Most of today's copiers may be from HP, Ricoh or Kyocera, but they xerox just fine.  Meanwhile, when did you last see a Xerox copier? 

Xerox's most recent proxy statement still touts its "world renowned Palo Alto Research Center."  But what does it do?  Ah, here it is:  "defining the future of work and enabling printing beyond paper with new technologies that will disrupt the market and change the way we think about workflows and information processes."

OK.  Whatever that means.


Aegis J. Frumento
Stern Tannenbaum & Bell
Co-Head, Financial Markets Practice

380 Lexington Avenue
New York, NY 10168

Aegis Frumento is a partner of Stern Tannenbaum & Bell, and co-heads the firm's Financial Markets Practice. Mr. Frumento represents persons and businesses in all aspects of commercial, corporate and securities matters and dispute resolution (including trials and arbitrations); SEC and FINRA regulated firms and persons on regulatory compliance issues and in SEC and FINRA enforcement investigations and proceedings; and senior executives of public corporations personal securities law and corporate governance matters. Mr. Frumento has also represented clients in forming and registering broker-dealers and registered investment advisers, in developing compliance policies, procedures and controls, and in adopting proper disclosure documents. 

Prior to joining the firm, Mr. Frumento was a managing director of Citigroup and Morgan Stanley, a partner and the head of the financial markets group of Duane Morris LLP, and the managing partner of Singer Frumento LLP. 

He graduated from Harvard College in 1976 and New York University School of Law in 1979. Mr. Frumento is a frequent author and speaker on securities law issues, and is often quoted in the media on current securities law developments.

NOTE: The views expressed in this Guest Blog are those of the author and do not necessarily reflect those of Blog.