Monday, November 11, 1996
An Evolutionary Dead End
or
Commodore 64, Where Are You?
By MF Runkle

This past week I was paging through one of my marketing textbooks and a case study caught my eye. Guess which company was the top seller of home computers in 1984? Apple? Unh-uh. IBM? Are you kidding? Radio Shack? HA! It was Commodore. That year, Commodore held 38% of the market share in home computers. Do you remember Commodore? I was curious about the company, and how it died, so I did a little bit of research.

Let's go about this the long way, since that is more fun. The evolution of computers probably can be traced to the 19th century to Babbage's proposed "thinking machine." However, ENIAC was the first real electronic computer and it appeared at the end of World War II. It was a horrible thing, filled with vacuum tubes, and took up a good amount of square footage. However, nature moved on, and transistors evolved, then integrated circuits, and in 1969 a young company called Intel developed the 4004 microprocessor. This sped up evolution and in 1974, the first micro climbed out of the primordial computer soup -- the Altair. It would only appeal to a real techno-geek, no monitor, printer, disk drive, operating system ... you get the picture. As the seventies went disco, other companies came on the scene with more advanced versions of the personal computer. One of these companies was Commodore Business Machines, Ltd.

Back in 1976, when many of us had embarrassing polyester clothing, Commodore reorganized into Commodore International. Its computer at this time was the PET, which didn't have a whole lot of influence on computers here in the U.S. At the same time, Apple came out of a garage, and IBM still sold big computers with salesmen in white shirts and gray suits. The market was young, and open to entrepreneurs with guts, brains, and some serious financial backing.

Commodore really made the splash with its Commodore 64 computer, which was introduced in 1982. There were some production snags in 1983, and 20-30% of the units were returned, according to retailers. Even so, as I remember, the Commodore 64 was THE home computer. It was cheap, easy to use, and had only a relative handful of competitors in the home market. If you remember, back then we had no idea why you really needed a computer at home. You could word process with your Commodore 64 and balance your check book; what else did you need?. Commodore was dominating its market segment like a Tyrannosaurus Rex in the middle of a chicken farm.

IBM was concentrating its sales of PCs in the business market. Apple was a favorite in the educational market. It seemed perfectly natural to have such radically different computers for business and home; it really wasn't, however. The 800-pound gorilla called MS-DOS was still a little spider monkey, but it was evolving. Nobody could have really seen this in 1984. In the home market, CP/M was the dominant operating system, along with some of its cousins.

PCs evolved quickly, however, and started to come down from the trees. MS-DOS and Apple were rapidly pushing CP/M to extinction, and by 1985, things weren't going so well for Commodore. Desperate measures were needed, and they sure got desperate. They introduced the Amiga in July with a lavish promotion. Andy Warhol used it to draw Debra Harry (Blondie). Blondie was a rock star, who ironically was at the very end of her career. The Amiga was aggressively priced at $1,295. For comparison, the IBM PC (ugh) Jr. was priced about the same a year before. There is no real comparison between the two; the Amiga was fast, and offered stunning graphics. Too bad! Microsoft was now a 500-pound gorilla, and everybody was into "IBM Compatibles." Many of us had no desire to invest in what could be (and was) an evolutionary dead end.

From there, things went downhill fast. Computers using CP/M were disappearing, and the Radio Shack TRS-80 computer (now called the Trash 80) was going the way of the garbage heap too. Looking back, the Amiga was a perfect case of the management not understanding the market, and engineers too enamored with their own technology. If you build a better mousetrap the world doesn't really beat a path to your door. If you market a mediocre mousetrap effectively, the world buys it instead -- if it fills a need. Reading the post-mortem, I don't think anybody in Commodore International took Marketing 101. The company rapidly became an endangered species, and like Neanderthal Man, hung on for a few more years. Finally, it went under in 1994.

What happened to those who owned Commodore stock? If I had owned it, I'd say we aren't talking about that right now, but heck, I didn't put my money into it, so I can talk about it. The stock went to zero, and the company is gone. I wonder how many people rode this stock all the way down because they were in love with the company? How many people kept thinking things would turn around? How many people "averaged down" in this stock on the advice of their brokers? I don't doubt that many stock holders felt this was a "really great company" and America would wake up some day, and rush out and buy Amigas, saving their investment.

Ultimately, everybody who held onto the stock lost all of his money. Today we can learn something from this. Commodore International was no doubt an excellent investment in 1983, but only two years later it was a dog. If you bought the stock and didn't know anything about personal computers, you probably wouldn't have caught this. The Blondie demonstration may have impressed you. Your broker (who probably knew less) may have recommended it. However, the market prevailed. Any company can die. Idiots can take over management; the product may become obsolete, or any other number of misfortunes. To be Foolish investors, we need to understand what we are investing in, and not fall in love with the companies. Otherwise, we may see our investments go the way of the dinosaurs... Amigas.

Transmitted: 11/11/96