Several Fribbles ago, I wrote about Commodore, and its fall from market leadership to bankruptcy. I received more e-mail on that Fribble than any other I have written. One of the first messages sent to me was from Dale Larson, a former engineer with Commodore. Dale wrote, "You missed some of the details, like the fact that the Amiga was very good at some things and wildly popular in some markets (video, for example). If the machine had been marketed correctly, it could have been very successful in some niches. If some decisions had been made correctly back in 85, it might even have been able to compete as a general computer."
Dale also sent me a videotape on the last days of Commodore, "The Deathbed Vigil." There were also other messages from former employees of the company. The video and messages give a picture of a company with the very best technical people, and managers hired directly from a Dilbert comic strip. I get the picture of management totally unconcerned with product development, marketing, or profitability for that matter. It seems they were only concerned with paying their own high salaries. There may have been a market for the Amiga, with its amazing graphics capability, but we'll never really know. It appeared that Commodore wasn't really trying to get it going.
What amazes me more it that the Amiga is still in use. Dale himself runs a company that sells Amiga stuff, Intangible Assets Manufacturing (http://www.iam.com). I was surprised to see that software and hardware is still being developed for this computer. Another writer directed me to http://www.vistv.com. This is VIScorp's site. The company is attempting to purchase the Amiga technology from bankrupt Escom A.G. Reading through the site, it's clear that it hasn't been easy. We may someday see this system resurrected, probably in set-top boxes for your TV. However, until now the technology has been hit with some incredible bad luck.
Was management of Commodore so utterly incompetent? I really don't know. If we could talk to them, they would probably say it was forces beyond their control that beat the company. Perhaps the emerging Wintel standard was too hard to beat, and they came about too late in the game with the Amiga. Maybe the cash flow wasn't there to develop the technology like it should have been. I'm sure there is plenty of finger pointing to go around. The sad fact is, we can only be so smart, and sometimes the events around us are smarter than we are. If that wasn't true, Scott Adams wouldn't be so wildly successful with his Dilbert comic strip. This wasn't the first company with a good product to fail, and won't be the last.
From all this, I wondered, how could I avoid such a disastrous investment as Commodore? With a superior product, and outstanding technical people, might I have been sucked into buying the stock? Well, maybe there was some key indicator that would help me discover problems. I theorized that cash flow should show problems. I grabbed my notebook and took a trip to the Carnegie Business Library in downtown Pittsburgh. What secrets would I unlock?
The key indicator was kind of obvious; the stock price dropped like a rock in 1983. A couple other things hinted at trouble too. Gross revenues dropped from '84 to '85 from 1,267.2 million to 883.1 million. A couple of times the revenues went up, in '86 and '89 and '91, but mostly they just plummeted. Earnings per share were similarly grim. A couple of times stock prices went up, probably when investors thought a "turn around" was imminent with increases in sales. These were temporary blips, however.
Fortunately, it didn't take a rocket scientist, or shall we say software engineer, to see this was not a good investment all the way back in 1983. What do you look for in a company to be Foolish? I look for consistently rising earnings. In this case, the company didn't have that. Earnings year to year varied wildly, mostly going down. To have bought its stock would have been betting on a "turnaround," and that past poor performance wouldn't be repeated. Buying this company's stock would have been a gamble, not an investment.
The question I asked myself, and still have never answered, is why would somebody have bought this stock after 1983? Not only Commodore, but other companies going down the tubes still see their stock sold on the market. Who buys this stuff?. Why? Did people buy the stock thinking it was so cheap it couldn't go down anymore? Were there some who bought the stock because they had an Amiga and they liked it so much they thought the company had to come back? Was a lot of the stock owned by employees of Commodore that bought in an ESOP program? Did short-sellers buy the stock to cover their shorts? The probable answer is "yes" to all of the above.
Sadly, when Commodore went down, a lot of people who invested a good portion of their lives with the company became unemployed. I wonder how many had the double whammy of seeing stock they bought in their own company go to nothing, too. I'm sure many had to relocate along with all the other financial problems caused by job loss. In addition to employees, how many investors were seriously hurt by having this stock end up worthless. As part of being Foolish, this shows more than ever why we need to research our investments, understand what we are investing in, and know the risks.
Hopefully, the Amiga technology will succeed, and I thank all of you who used to work for Commodore for your notes to me. Your letters have certainly aided me in my never-ending search for Foolishness. Hopefully, reading about the experience of this company will help others become more Foolish, too.