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May 86 History
Volume Number:2
Issue Number:5
Column Tag:Historical Computing

Historical Computing

By Dick Heiser, Industry Pioneer

PROBLEMS WITH SILVER LININGS

Today, Thursday sixth, is a rest day. I'm sitting on the lawn at Glen Helen Park, near Devore, California. This is where Steve Wozniak organized the US Festival. It's a beautiful, green, bowl-shaped area beside two lakes. When it's not a rest day, I'm marching in The Great Peace March from Los Angeles to Washington, D.C. This is still our first week, and today is our first rest day. Glen Helen Park is just as ideal for our camping as it was for the US Festival, maybe better. We have a lot of organizing to do yet, so there are lots of loose ends.

The computers, including a Macintosh, share an RV with the Pro-Peace radio station, WQO, 1630AM. The Mac showed up at the last minute, and has proven invaluable. It's being used for daily schedules, bulletins, letters, etc. It has also taken over route planning from my IBM PC, which has been having keyboard problems. Why did I bring an IBM PC if I am such a Mac enthusiast? I'm saving my Mac for after the march, and sacrificing my IBM to the rigors of camping life. Sure enough, I dropped the IBM's keyboard the very first day. I've taken the keyboard apart, popped-off non-functional keys and fixed them by blowing hard. I've glued the broken foot back on. At Radio Shack, I found out the difference between a capacitor and a varistor. They fixed our uninterruptible power supply for free. It was a nice example of community support for The Great Peace March. On the way back to camp, I thought of a neat way to prevent the burnout from repeating. Fixing "handyman" problems feels good. It reminds me of the early days at my computer store.

LITTLE PROBLEMS

Operating a store is just a process of solving lots of little problems. Cash flow, for example, is a strange little problem. It seems like a big problem when you don't have enough cash, but it's also a guiding hand from mother nature to keep mistakes small enough to recover from them. With enough cash, I could have plunged deeply into the wrong projects, and would have gone out of business. The funny thing about cash requirements, is that they go up if business goes up, and go up if business goes down. When sales increase, I re-order big quantities, and need lots of cash for C.O.D. shipments. When business slackens, the credit bills become due, and fixed expenses eat-up cash as well. My advice to entrepreneurs: Get Don Lancaster's book The Incredible secret Money Machine and read it carefully.

Inventory space was another problem. I'm glad I resisted the urge to get proper inventory shelves. We piddled along for seven years with a few cardboard boxes stacked on edge. Not having enough space for inventory kept us lean. That's very important in the computer business where inventory can cost a thousand dollars per cubic foot! Nowadays stores seem to have more resourses. but it was a struggle for us to do $80,000 in monthly turnover with $100,000 worth of inventory.

Another little problem was limiting what we carried. We sold ultraviolet lamps to erase your EPROMS, anti-static carpets to protect your keyboard, cables, connectors, etc. Where could we draw the line? Everything is connected. Somebody needs every possible item - that's why it exists. We refused to sell general electronic parts, and sent prospects elsewhere for bookkeeping software, for example. Some items that customers needed badly, we found hard to sell: Metal cases for keyboards were a huge hassle. A local fellow tried to make them, but couldn't control schedules or quality. Used Teletypes (the Volkswagens of the computer industry) were hard to find, and Teletype dealers were a surly lot. In the beginning, nobody knew what a computer store should sell, so every store decided for itself.

BIG PROBLEM: PROFIT MARGINS

The personal computer industry has always had trouble with profit margins. Because we started with mail order products, the discounts available to dealers started out very low.

My first negotiations with MITS were based on a set of simple pencil-and-paper spreadsheets. I prepared three plans: Optimistic, Pessimistic, and Best-Guess. Since this was a completely new kind of business, it's not surprising that all the estimates were wildly off. I had calculated sales at $450.00 per computer instead of the $2000.00 per computer that would have been a better guess. On the basis of my plan, MITS offered to supply kits on an OEM discount schedule. Original Equipment Manufactures sell products to a reseller (now called a Value Added Reseller or VAR), at a discount that depends on quantity. To avoid being fooled by big promises of future quantities, these deals usually begin with very modest discounts that only get good when the significant volume is actually achieved.This would have made it hard to start a business with limited capital, because profits would be postponed along with the discounts. My first order to MITS was at only a 15% discount from list prices; not enough.

MITS increased the discount, and created a dealer plan when they realized stores like mine would be good for them. They wanted me to succeed. So I placed another order, at 25% off, and we went on to do a lot of business together. Discounts remained at 20% to 25% off list until Apple came along. All dealers complained about these unrealistically low profit margins.

When Apple offered 35% discounts to dealers, I shuddered. It was too good to be true. Sure enough, price wars between Apple Dealers shaved the gross profit margin to 10% - 15%, and I found it harder to make money in the later big business years than in the early years when all the dealers were griping about short margins. Nowadays, dealers are going down the tubes (or, as the Germans have it, "Rorchenhin Unterdurchgang"), trying to do business at 5% - 10% margins, even without paying hackers to provide answers and training. I call this a "Big Proglem" because I don't have an answer yet. The Law of Survival is a good way to separate the weak from the strong, but I've seen too many tough-guy discounters in my neighborhood, Olympic Sales and Computique, have reorganized under Chapter XI. Survival of the fittest, yes, but there should be more to fitness than just price.

BIG PROBLEM: EXCLUSIVE DEALERSHIPS

This almost ruined me. MITS refused to allow dealers to carry competing products. They believed it was an illegal demand, but they made it, verbally, anyway. I started as an ALTAIR dealer, but new products from IMSAI and Processor Technology looked interesting. MITS threatened to cancel the dealership of anyone who carried other brands. The MITS people tried to protect their leadership position the wrong way.

Brand-name competition in iron wasted enormous amounts of time. People would come to The Computer Store to ask, "Why is an ALTAIR better than an IMSAI?" We responded, "Choose a computer that can do a function or solve a problem, don't just choose some brand of iron." I'm sure most people believed we were just defensive about the ALTAIR, but we really believed in solving a problem with software and hardware, rather than selling features of brand-name iron. We could honestly recommend the ALTAIR computer, and we were especially impressed with ALTAIR software, but we grew tired of defending our choice of brands.

Many dealers left MITS because of their prohibition on competitive brands. Finally, we too changed brands and lost the MITS ALTAIR line. I delayed for over a year and finally acted with fear. I fully expected our customers to associate us only with MITS, and expected them to stop dealing with us. I imagined it would be like starting business all over again. After we changed lines, I was astonished: Not one customer left us! Customers understood, after all: Iron is secondary; problem-solving is primary. This was a big problem that ruined MITS, almost ruined my store, and wasted a lot of energy.

BIG PROBLEM: BUILDING RELATIONSHIPS WITH PROSPECTS

IBM Mainframe installations are locked-in to IBM by a huge investment in programs, procedures, training, and momentum. At The Computer Store, we put a lot of effort into before-the-sale problem analysis and planning with the prospect. When we completed this planning process, we developed a list of recommended hardware and software with prices. For our prospect, this became his shopping list! Our effort was always appreciated, but everyone's a price-shopper, too. We tried to think of ways to get "account control", or to sell our consulting services, but we never solved this problem. Neither has anybody else, to my knowledge.

COMPARING TWO ENVIRONMENTS

Working at The Computer Store was an exciting job. We responded to an enormous variety of requests. We designed, recommended, specified, configured, installed, trained, debugged, and fixed computer systems for every conceivable application. Perhaps that is the answer after all; helping people help themselves!

In many ways, operating The Computer Store then and participationg in The Great Peace March now are strikingly similar. In both cases, we operate with inadequate resources and face great uncertainty. Many problems remain to be solved. Solving these problems will offer excitement, and we eventually see the problems as great opportunities.

 

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