Rod Canion Recounts How Compaq Fought IBM and Won

By LAURA LOREK
Founder of Silicon Hills News

BiAY_NfCYAAsek-A true life David vs. Goliath story played out in the early days of the PC industry-pitting upstart Compaq Computer against industry behemoth IBM Corp.

Rod Canion, co-founder of Compaq, recounted the tale during a conversation Wednesday night with Brett Hurt, Entrepreneur in Residence at the University of Texas. The Longhorn Entrepreneurship Agency sponsored the event as part of its UTEWeek.

In the early days of the PC industry, PCs became open architecture machines because IBM, the number one computer company in the world, put a skunkworks team in Boca Raton, Florida and ordered them to create an IBM PC in one year.

That IBM team created the first IBM PC, which debuted in 1981 based on open architecture including Intel’s microchips and Microsoft’s DOS operating system.

“The point is everything that went into the original IBM PCs was off the shelf,” Canion said.

IBM expected they would sell thousands, Canion said. They sold millions and became the leader in the PC industry.

“The PC, as a product in business, was just starting to catch on,” Canion said.

The must-have software application of the day was VisiCalc, the first spreadsheet that created the driving force that caused PCs to permeate businesses in a short amount of time, he said.

Around that time, Canion and his co-founders left Texas Instruments looking for a product to start a company with because they knew the PC industry would explode creating great opportunity. They wanted to create a rugged, portable PC.

“But it almost died before it started because I had enough experience to know we couldn’t get software adapted to it,” Canion said. He knew VisiCorp would never provide its software to a startup.

That’s when Canion came up with the idea of creating a portable computer that would run software written for the IBM PC. They would create compatible software. In 1982, they put together a four page business plan and a few weeks later they landed venture capital from Kleiner Perkins, Silicon Valley’s premier VC firm.

“In about five weeks, from the conception of the idea to when we started the company, we were off and running,” Canion said.

They thought they would be able to buy an operating system from Microsoft to run on the computer. They found out that was wrong. They figured out a way to take what Microsoft did have and fix the incompatibilities in 12 months so they could run IBM’s software, Canion said.

The sewing-machine sized Compaq portable was the first 100 percent IBM-compatible PC and the first portable one.

BiAg9TnCUAA7u2yIn January of 1983, when Compaq Computer shipped its first PCs, they essentially ran all of the IBM PC software, Canion said. Then the company licensed its modified version of MS-DOS back to Microsoft for it to sell to all of the rest of the industry.

“That’s the point where the industry standard really began,” Canion said.

That’s when a large number of computer companies began to run all the same software, Canion said. By 1987, IBM, Compaq and about a dozen other strong brands in the compatible arena accounted for 75 percent of the PC industry. Apple had been relegated to a niche.

“This powerful industry standard had really taken hold,” Canion said.

IBM didn’t like the idea. They came out with a proprietary product, PS2 and they offered their competitors the ability to buy a license by paying 5 percent of royalties. Dell and others began to buy licenses from IBM to the PS2. But Compaq didn’t give up.

Nine months later, they came up a competitive advanced architecture to IBM that would run all of the old software. Canion said they knew if it was IBM vs. Compaq they would still lose.

“IBM’s brand was too strong,” he said.

Instead, Compaq put together an alliance with Microsoft, Intel and HP to compete against IBM. Compaq was going to give its technology to all of the other companies. Eventually, they got seven other companies to sign on and became known as the gang of nine. By September, they held a press conference, and by then they had gotten 80 companies behind the new standard, essentially the whole industry everyone but IBM and Apple behind the Open standard, Canion said.

Four years later, Compaq passed IBM to become the industry leader in PC sales. But more importantly, the company got an open architecture PC standard adopted that led to lower prices and more consumer choice, Canion said.

A few years later, Compaq passed the $1 billion mark in annual revenue, the first company to hit that milestone so quickly.

Canion provides more details on Compaq’s challenge to IBM in his new book “Open: How Compaq Ended IBM’s PC Domination and Helped Invent Modern Computing.” He signed copies of the book following his talk.

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