On April 7, 1964, a special train pulled out of Grand Central Terminal carrying several hundred writers up the Hudson to Poughkeepsie. IBM had invited them to watch it announce a new family of computers. It did not trust a single room to hold the moment. That same day, more than 100,000 businessmen sat through simultaneous presentations in 165 cities, and the system was announced in more than eighty countries. Watson called it "the most important product announcement in the company's history."The New York Times account, which is unsigned, names him only as "Watson." IBM's chairman in 1964 was Thomas J. Watson Jr.; his father had died in 1956.
The product was the System/360. It came in six processor models, numbered 30 through 70. A customer could rent the smallest for $2,700 a month or the largest for $115,000 a month. IBM's Fred Brooks described bulk storage of 8 million characters. Deliveries were set for 1965 and 1966.
IBM's competitors read the next morning's papers and tried to look calm. RCA's E. S. McCollister told the New York Times something no executive should ever say about a rival's launch: "I was relieved in fact when I found out about it."
He shouldn't have been.
Those rental prices tell you what kind of business computing was in 1964. You didn't buy a computer. You rented one from IBM, by the month, and you built a room for it. The room had to be cooled and wired and guarded, because the machine inside it was the most expensive thing the company owned that didn't have a smokestack. The machines got bigger, the rooms got bigger, and over the next quarter century the corporate computer room became an institution, with its own staff and its own budget. The industry came to call it the glass house.I have not found a period newspaper article that uses the phrase "glass house" for the corporate computer room. The term is in common use in the industry's later histories, and it runs through this book as shorthand for the centralized, company-owned computer room.
This book is about the buildings that hold the world's computers. The story starts here, decades before anyone said "data center" with a straight face. Except they did. In 1965 the New York Times was already writing about the "data-center industry."
In this chapter we'll meet the people who figured out, in the 1960s, that most companies didn't want to own a glass house at all. Ross Perot built EDS by running other people's computers. Tymshare, General Electric and a swarm of imitators rented computer time by the hour, which is the cloud's business model forty years early. Sam Wyly rode that idea to a stock-market valuation larger than Western Union's, and then rode it back down. In the 1980s, Comdisco and SunGard sold companies a spare glass house in someone else's building, in case theirs burned down. Then the personal computer arrived and convinced everyone the glass house was finished.
It wasn't. It never is.
IBM—Thomas Watson Jr.#
For most of the glass-house era, the landlord was IBM.
The numbers are almost hard to believe. By 1968, IBM had built an estimated 70 percent of the computers in use in the United States. Computer makers had taken in more than $6 billion in 1967 from leasing and selling machines. And most of IBM's business came as rent. Customers signed up for a machine and paid for it every month, year after year, so each January the company started with most of the year already sold. Years later, the Wall Street Journal reported that under the old rental model IBM had "80% to 90% of the year's business locked up before the year even started." Tom Watson Jr. once made his annual sales quota on January 2.
That's the kind of business I spent my career chasing: recurring revenue. IBM had it in 1964, with a machine in a room.
The System/360 was designed to lock that model in for a generation. The six models shared one design, so a customer could start small and trade up without rewriting its software. Every trade up meant a bigger machine, a bigger monthly rent and, usually, a bigger room. The glass house grew with the computer.
IBM also learned early that renting someone time on a computer was a business in itself. Its Service Bureau Corporation ran about eighty data centers by 1965, processing other companies' work on IBM machines. By 1968, IBM's "Call 360" service linked customers in thirty-four cities to IBM computers in Los Angeles, San Francisco, Chicago, Cleveland, Philadelphia and New York. The minimum was $100 a month, not counting the terminal and the phone line.
Rivals hated it. IBM sold the computers, then rented time on the same computers in competition with its own customers. "Time-sharing gives IBM a foot in the customer's door," one of them told the Wall Street Journal in October 1968. That month, the Journal reported that the Justice Department was weighing a move to force IBM out of the time-sharing service business entirely.IBM's position in services was already constrained by its 1956 antitrust consent decree, which is why the Service Bureau Corporation operated as a separate unit. The Justice Department's 1968 deliberations came against the backdrop of the FCC's Computer Inquiry, opened in late 1966, which asked where computing ended and regulated communications began. Three weeks later, IBM moved its time-sharing business into a subsidiary to blunt the antitrust pressure.
Keep that tension in mind. The company that owns the machines also wants to rent them out, and its customers worry about competing with their landlord. That tension never goes away.
EDS—Ross Perot#
Ross Perot started Electronic Data Systems with $1,000. According to the New York Times, "He used the money to lease time on other companies' computers."The New York Times (June 29, 1984) is the source for both the $1,000 and the time-leasing origin. EDS was incorporated in 1962 (EDS Form 10-K, 2003). Perot had joined IBM in 1955 and quickly became a top salesman (Associated Press, July 9, 2019).
Read that again, because it is the whole business model of this book. Perot didn't own a computer. He rented time on someone else's machine and sold the results to customers who needed data processed and didn't want to build a glass house to do it. Over time EDS went further and ran whole data-processing operations for its customers under long contracts. Today we'd call it outsourcing. In the 1960s it was a Texan who understood that most companies wanted the answer, not the machine.
The answer paid well. EDS's earnings in 1968 were eighty-five times what they had been three years earlier.
The IPO
The Wall Street Journal summed up the offering in two sentences: "When he went public in September 1968, buyers snapped up 650,000 shares at $16.50 a share-or 118 times fiscal 1968 earnings. The stock soared to $40 by January." Perot kept 81 percent of the company.
One hundred eighteen times earnings. In 1968. For a company that ran other people's computers.
By March 1969 the stock traded at about 300 times earnings, and EDS had a Market Value "close to half a billion dollars." Its annual sales were $8 million.
The Cold Cheeseburger
On March 24, 1969, Perot was thirty-eight years old and on his way to Richard Nixon's first White House state dinner. Before he left, he announced the boldest move of his career. EDS would swap stock worth $65 a share for up to 82 percent of Collins Radio. Collins had $440 million in sales. EDS had $8 million.
This was the 1960s version of a move I watched many times during the Bandwidth Boom: use your richly valued stock as currency to buy a real company many times your size. Perot called it "the classic take-over-a real financial coup."
Arthur Collins did not see it that way. He refused to meet Perot, and his smoking rose to more than three packs a day. Perot was blunt about his target's founder. Over a cold cheeseburger, he told the Journal: "His job is to conduct the symphony, but all he does is play the drums, leaving no one in charge." The institutions that owned Collins stock, led by Chase Manhattan, sided with management. After five weeks, Perot withdrew. His explanation was pure arithmetic: "It just wasn't worth more than 1.5 for 1."
Sam Wyly, whom we'll meet shortly, had been approached to come in as a white knight. He "bowed out when his own company's stock fell." Hold that thought.
The $445 Million Day
On April 22, 1970, EDS stock fell 50 points, from 150 to 100, in a single day of over-the-counter trading. The New York Times headline the next morning was "Perot's Stock Falls $445-Million in Day." The arithmetic was simple. EDS had about 11 million shares outstanding, and Perot owned about 81 percent of them.
Let's do the rest of the math. At $150 a share, EDS had a Market Value of about $1.65 billion. By the close it was worth about $1.1 billion. EDS's secretary said he knew of no reason for the drop. Earnings were fine: nine-month earnings per share had risen to 42 cents from 17 cents. A broker offered the only explanation that ever matters in a falling market. Dealers held back because there "are so few buyers."These are prices on the over-the-counter market. EDS had about 11 million shares outstanding in 1970, against 650,000 sold in the 1968 offering. I have not compared the 1970 prices with the $16.50 offering price because my sources do not say whether the shares were split in between.
Perot was spending much of his time then on a private campaign for the return of American prisoners of war in Vietnam. Later that year he led a group that put $15 million into the Wall Street brokerage F.I. duPont, and a firm he controlled won the right to acquire duPont-Glore Forgan. In April 1971, the Journal reported another paper loss for Perot, this one $50 million. Wall Street was a costly detour. EDS itself kept hiring. In January 1970 the astronaut Frank Borman announced that he was leaving NASA to join a Perot firm.
General Motors
Fourteen years after the $445 million day, the top U.S. automaker walked in the door.
On June 29, 1984, the Wall Street Journal reported "GM to Acquire EDS in Transaction Valued at as Much as $2.55 Billion." EDS had about $800 million in revenue, roughly 1 percent of GM's. GM had more than $9 billion in cash. Perot and his family owned about 45 percent of EDS and would collect $900 million to $1.1 billion.GM offered EDS holders a choice: $44 in cash per share for about 58 million shares, or $35.20 in cash plus one-fifth of a share of a new GM Class E common stock, tied to EDS's performance. The all-cash value was $2.552 billion. GM guaranteed a minimum value for the Class E shares that rose to $125 at seven years. The Journal also reported that the deal would dilute GM's earnings by 99 cents a share for five years, and that the Class E structure might force the New York Stock Exchange to change its voting rules or delist GM. The Times described the price as $2.5 billion; I use the Journal's $2.55 billion, which matches the all-cash value and the October 1984 closing report. GM completed the deal that October.
The Journal soon reported that GM was considering moving 10,000 of its own employees onto the EDS payroll. That is outsourcing in its purest form. The top U.S. automaker decided that running its own computer rooms was not its business, so it bought the company that would run them and handed over the staff.
Perot had his own explanation of how he built the place. "Eagles don't flock," he said. "You have to find them one at a time."
Here's the peak-to-trough device run in reverse. In April 1970, EDS was worth about $1.65 billion at the open and $1.1 billion at the close. Fourteen years later, after enormous growth, GM paid about $2.55 billion. The stock market of 1970 had priced in a decade and a half of success before it happened. We'll see the same thing happen to every Gold Rush company in Chapter III.
Time-Sharing—Tymshare, General Electric and the Computer Utility#
On April 4, 1965, the New York Times opened a story on an executive in Garden City, Long Island, in an Oxford-gray suit. He sent his company's data to a computer forty miles away, at ITT's new Subscriber Data Processing Center in Paramus, New Jersey, and got his answers back. He didn't own the computer. He didn't need to see it.
The Times gave the idea a name: "the computer center as a public utility." Computer service centers had existed for about six years. The industry already had more than 600 firms. "They range from one-room loft shops to multimillion-dollar businesses," the paper reported. ITT's Robert A. Leonard predicted that time sharing and data communications would lift what he called the "data-center industry" from $300 million a year to more than $1 billion by 1970.
The technology behind that prediction was time-sharing. As I wrote in Bandwidth, John McCarthy of MIT envisioned time-sharing of computers, and in 1962 BBN demonstrated it with one operator in Washington, D.C., and two in Cambridge. Later that year BBN installed a time-sharing system at Massachusetts General Hospital, so that doctors and nurses could create and read patient records from terminals. For the first time, users could work with a computer in real time instead of submitting a stack of punched cards and waiting hours for a printout.
Time-sharing made the expensive machine in the glass house divisible. A big computer could serve dozens of users at once, each typing at a teletype terminal over a phone line, each believing the machine was theirs. Divide the machine, and you can rent out the pieces.
By the Hour
By 1968, customers paid "$10 to $20 an hour for computer time, depending on the service," according to Jerome B. Weiner of Mandate Systems, quoted in the Wall Street Journal. A typical customer had two or three teletype terminals, used them about two hours a day and spent about $600 a month per terminal, not counting the phone bill.
That's the line I want you to remember from this chapter. In 1968 you could rent a computer by the hour. You didn't buy it, you didn't house it, and you didn't cool it. You dialed in, you computed, and you paid for the time. When we get to Amazon Web Services in Chapter VI, you'll see the same idea come back with a credit card attached.
General Electric was the giant of the business. By late 1968, GE said it had more than 50,000 customers in seventy-five U.S. cities using terminals linked to thirty-one GE time-sharing computers. One GE 635 could serve up to about 800 customers, though no more than about 200 at once. A smaller machine gives a sense of the operator's economics. The GE 420, announced in June 1967, handled thirty users at once, leased for about $17,000 a month and sold for $760,000. GE predicted "that within five years, millions of persons will be using such systems."
The Frenzy
Wall Street fell hard for the computer utility. In 1968, Western Union and Computer Sciences planned to merge into one. Western Union's stock ran above 50 when the talks were announced. Computer Sciences peaked near 64 that June. The regulators were baffled. The FCC's Bernard Strassburg described the problem created by "this mating of computer and communications," and AT&T suspended a sale of its TWX service to Western Union over the deal. The Journal cited a forecast that 60 percent of the nation's computers would be linked to the communications system by 1970. By August 1968 the merger was off, and Western Union had fallen to about 35.
The forecasts got bigger every month. In October 1968, EDP Industry Report projected that time-sharing revenue would double 1967's $50 million in 1968 and reach $900 million by 1972. More than seventy companies offered the service. A trade group of eighteen to twenty members, the Time Sharing Venders Association, was forming. Tymshare's president, Tom O'Rourke, wanted IBM's Service Bureau divested: "We could compete on an equal footing."
And the futurists were out in force. Crystal-ball gazers, the Journal reported, predicted "housewives one day will send bank deposits and cash checks by punching data into home keyboard terminals." In February 1969, the New York Times headlined "Computer Time Sharing Grows Up." An Auerbach Corporation survey put the 1968 market at about $70 million, with forecasts of $140 million for 1969, $240 million for 1970 and $1 billion within five years. About thirty firms were in the field full-time in May 1968. By October there were more than fifty. GE's Information Service Department held about 40 percent of the market, IBM's Service Bureau about 19 percent, Call-A-Computer 7 percent, Com-Share 6 percent, Tymshare 5 percent and Allen-Babcock 3 percent.
The early believers were thrilled. "I told you so, I told you so," the Times had them saying. The goal, the paper reported, was "The computer in every kitchen, easily accessible and simple to use by every housewife and plumber."
They weren't wrong about the kitchen. They were thirty years early, and the computer ended up in the kitchen rather than at the other end of the phone line. Being early in a Boom costs the same as being wrong.
University Computing—Sam Wyly#
No company rode the computer-utility mania higher than University Computing Company of Dallas, and no one rode it harder than its chairman, Sam Wyly.
Metz called UCC "a leasing outfit in Dallas," and by 1968 it was thinking about networks as well as computers. The New York Times's Robert Metz opened his May 9, 1968, "Market Place" column with a line I wish I had written: "WHEN University Computing, a leasing outfit in Dallas thinks big, it thinks Texas big."
How big? UCC had $17 million of revenue in 1967. It tendered $44 a share for 750,000 shares of Western Union, 10 percent of the telegraph company and the legal limit. Western Union had $337 million of revenue. But UCC's stock sold at "well over 100 times 1967 earnings," and so the stock market valued the little Dallas leasing company above Western Union. A group of banks led by First National City lent UCC $44 million in Eurodollars, with $48 million more on standby, through a loophole in the Federal Reserve's Regulation U.Regulation U limited how much banks could lend against stock to finance purchases of stock. Borrowing in Eurodollars, outside the U.S. banking system, was the workaround (New York Times, May 9, 1968).
Think about that the way Metz's readers would have. A company with one-twentieth of Western Union's revenue was bidding for a piece of it, with borrowed money, because its stock was worth more. Business Week put its finger on the engine in May 1969: a "price/earnings ratio that bounced as high as 100 gave Wyly the leverage."
Wyly used it. In August 1968, UCC bid for Gulf Insurance. In January 1969, it closed a $240 million merger with the insurer. A computer-services company had bought an insurance company with paper. UCC also set up its own data-transmission business, and in November 1970 that unit took a complaint against AT&T to the FCC. Wyly was betting on a data network of his own, two decades before the commercial Internet. As we'll see in Chapter II, the idea was right. The timing and the balance sheet were not.
The Slip
The Boom ended the way they always do, slowly and then quickly.
On August 29, 1969, the day UCC was to list on the New York Stock Exchange, its president, Charles J. Wyly Jr., held to a forecast of about $15 million of 1969 net income, or $2.50 a share, on revenue of about $100 million.Charles J. Wyly Jr. was Sam Wyly's brother; the two started UCC together. UCC reported 1968 net income of $8.5 million, or $1.55 a share, on revenue of $57.1 million. A January 1969 Journal snippet refers to "Wyly, president of University Computing" without a first name. The numbers sounded great. But the forecast had already been cut twice that year, from $3.50 to $4 a share in February, then to $3 in June. Part of the blame went to a subsidiary, Computer Leasing Co. The rest went to "curtailed expansion of the company's computer network facilities, due to high interest rates."
Remember that phrase. A capital-hungry company building a network on borrowed money hits a rise in interest rates and has to stop building. That sentence will come back in this book more than once.
Then came the lawsuits. In February 1970, an $87 million suit was filed against LTV, LTV Aerospace and UCC over UCC's 1969 purchase of a company called Computer Technology from LTV. In May 1971, UCC reported first-quarter net income of $1.5 million and restated its profit for the year-earlier quarter.
In May 1972, Metz was back in the "Market Place" column with less flattering material. UCC had reported first-quarter net income of $11.8 million. But $10.6 million of it was capital gains realized at Gulf Insurance. The computer operations had an operating loss of $95,000, against operating income of $3.1 million a year earlier. Metz took UCC to task for comparing its results with "restated and knocked-down prior quarters." The stock closed at 24 3/8. The insurance company was carrying the computer company.
In August 1972, UCC agreed to sell a division to Harris-Intertype for $20 million and planned to take a $15 million capital loss. Then, in November, came the bottom. UCC lost $38.9 million in the third quarter of 1972 on revenue of $26.4 million. The charges included $21.2 million of losses on the sale of two subsidiaries, $7.2 million of other write-downs and a $9.7 million write-down of the company's own computer equipment.
That last item is the one I want you to notice. The computers had been the asset. Now they were a write-down. In Chapter IV we'll watch the same thing happen to raised floors and generators all over the country.
Here's the peak-to-trough. In 1968, the stock market valued UCC, with $17 million of revenue, above Western Union, at well over 100 times earnings. Four years later, UCC lost more in a single quarter than it took in.I have not found UCC's peak share price or a 1970 low. The stock closed at 24 3/8 on May 1, 1972.
UCC was the data-center industry's first mini Boom and Bust, and it followed the script Bandwidth readers will recognize: a real idea, a forecast that ran ahead of it, a stock price that ran ahead of the forecast, acquisitions paid for in paper, and then rising interest rates and write-downs.
The Shakeout—Keydata, GE and Tymshare#
UCC was not alone. The whole time-sharing industry went through the same cycle at the same time.
In August 1970, the New York Times ran a piece called "Keydata, Time-Sharing's Phoenix." Its writer, William D. Smith, captured the Bust better than anyone. Two years earlier, he wrote, firms had entered the business "at a rate of more than one a week" until about 200 were in the field. Three years earlier, if you mentioned time sharing in a Wall Street bar, bankers would offer to buy you a drink "and give him a million dollars." By 1970, "you are just as likely to have a beer mug come crashing down on the bar on top of your fingers."
The business had become "a revolving door of high promises and dismal performance."
The industry was then about $200 million a year, still forecast to reach $2 billion or more by 1975. A report from Quantum Science predicted that scientific time-sharing would stall at about $400 million a year after 1973, with thin margins. Compare that with the $900 million that EDP Industry Report had forecast for 1972, two years earlier. In the time-sharing Boom, as in every Boom since, the forecast was the asset.
Keydata itself was the survivor in the headline. Founded in Watertown, Massachusetts, by John T. Gilmore and Charles W. Adams, it launched in November 1965 as the first commercial time-sharing venture, was jammed with users by the summer of 1966 and had its first profitable month in May 1970. Four and a half years to a profitable month. That's what the survivors looked like.
The casualties came in clusters. Com-Share of Ann Arbor, with 6 percent of the market at the peak, was in financial distress by 1970 and needed new financing. Saul Steinberg's computer-leasing conglomerate Leasco reported a $30.8 million loss for its 1970 fiscal year. Computerworld said it plainly in June 1972: "For service companies 1971 was a 'shake-out' year."
General Electric
Even the market leader turned out to have been losing money all along. In August 1970, Honeywell's proxy for its purchase of GE's computer business disclosed GE's computer results for the first time. GE had lost $39.6 million in 1965 on revenue of $179.1 million, then $55.8 million in 1966, $42.5 million in 1967 and $11.4 million in 1968. It finally earned $4.7 million in 1969, on $411.6 million of revenue. Honeywell's chairman, James H. Binger, assured shareholders: "We are satisfied that the period of severe losses from these causes is over."
GE took about $237.5 million in Honeywell notes and stock and got out of building computers. But it kept something. GE held its U.S. and Canadian time-sharing services out of the deal.By 1985, GE's time-sharing business had become GE Information Services Co., known as Geisco, of Rockville, Maryland (Washington Post, October 21, 1985). GE had decided it didn't want to make the machines. It wanted to rent them.
Tymshare
Tymshare of Palo Alto came through the Bust cheaper, and alive. In September 1970, it sold 600,000 shares to the public at $6 each, raising $3.6 million. By late afternoon the shares were quoted at $6.25 bid and $6.75 asked. Burnham & Co. and Hambrecht & Quist were the underwriters, and the money went to repay debt and finance "increasing levels of receivables." Two years earlier, UCC had traded at more than 100 times earnings. Tymshare's IPO was a small, cheap offering in a slump.
The customers kept coming anyway. In November 1971, the New York Times described the controller of Inland Steel planning the company's five-year profit plan from his desk in Chicago. "A desk console in Mr. Borst's Chicago office is connected with a real-time computer at Tymshare in Palo Alto, Calif." The software came from On-Line Decisions, 30 percent owned by Inland Steel, which sold "what-if" simulations over time-sharing to Ralston Purina and Public Service Co. of New Mexico as well.
A steel company's finance chief in Chicago, running his numbers on a computer two thousand miles away that he would never see. That's the cloud, in 1971.
CompuServe—Jeff Wilkins#
The time-sharing company with the longest second act started as a way to use an insurance company's spare computer.
According to Elliot King's history of online journalism, Jeffrey Wilkins "founded Compu-Serv Networks, a computer time-sharing company, in 1969 primarily to make better use of the DEC PDP minicomputer used by his father-in-law's company, Golden United Life Insurance based in Columbus, Ohio."The CompuServe origin story comes from later books rather than period news coverage: Elliot King, Free for All (2010), p. 97; Sasser, Hart and Heskett's Harvard case collection (1991), p. 247; and Michael Banks, On the Way to the Web (2012), p. 15, which identifies Golden United Life as a subsidiary of Golden United Investments. H&R Block agreed in November 1979 to buy CompuServe for about $23 million in cash and stock, with completion set for early 1980 (Standard & Poor's, December 14, 1979). The insurer owned a computer it didn't use all the time. Wilkins sold the time it didn't use.
Hold on to that idea, because it reappears in this book under another name. A company builds computing capacity for its own peak, discovers that the machines are idle much of the day, and sells the leftover capacity to outsiders.
By 1985 the leftovers had become a consumer business. "H&R Block's Compuserve" competed with Reader's Digest's The Source, Dow Jones and Knight-Ridder's Viewtron, and in October 1985 GE joined them. GE Information Services, the descendant of GE's 1960s time-sharing business, launched a home service called GEnie at a flat $5 an hour during evenings, weekends and holidays. These services had more than half a million subscribers and about $70 million a year in revenue, though barely 100,000 regular users.
GEnie's manager, Bill Loudin, explained the economics to the Washington Post in two sentences. "We'll be using our excess capacity," he said. "Ninety percent of our computers just sit there at night and do nothing."
Twenty years before Amazon Web Services, GE was renting out its idle computers by the hour.
Comdisco—Ken Pontikes and SunGard#
By the early 1980s, the glass house had a new worry. What happens if it burns down?
The question created a new business, and two companies led it. One of them came out of the market for used IBM machines.
Comdisco
Kenneth N. Pontikes ran Comdisco, of Rosemont, Illinois, outside Chicago. In 1982 the New York Times called it "the largest independent leasing company dealing in I.B.M. computers." Comdisco's home market was used IBM equipment. IBM had long sold from a fixed price list that, one observer told the Times, "was like the Sears or Montgomery Ward catalogue."The speaker of the catalogue line and of "The steamroller is beginning to roll" is not identified in my notes on the article. Everyone knew IBM's price, so everyone knew how to undercut it. "They've basically been sitting ducks for everybody in the industry for years," Pontikes said.
That changed in 1982. In January, the government dropped its thirteen-year antitrust suit against IBM. IBM began to offer volume discounts and to negotiate "special bids." Analysts expected IBM's revenue to grow from more than $29 billion to about $50 billion in five years. "The steamroller is beginning to roll," the Times reported.
By then Comdisco had found a second business, built on the fear of disaster.
The Mountain
In August 1983, the New York Times took its readers inside a cave in the Catskills. The site had once been called Iron Mountain Atomic Storage. Behind a seven-ton steel door stood twelve buildings. One held a computer room that waited, lit and empty, with a "raised floor, air-conditioning, telecommunications hookups - in short, everything but the computer."
That room is the most important image in this chapter. Everything but the computer. A raised floor, cooling, power and telecom connections, ready for someone else's machines. Strip away the cave and the steel door, and you're looking at the product the entire data-center industry sells today.
The Times reported that the leaders in these "hot sites" were Comdisco Disaster Recovery Services, with four, and Sungard Services of Wayne, Pennsylvania, with three. Customers paid up to $7,500 a month for the right to move into a hot site if disaster struck. Empty "shells," with space but no equipment, cost $200 to $1,000 a month. Comdisco's president, Raymond R. Hipp, said the hot sites had been used for real twice. Customers drilled anyway, some flying as many as 150 people to Sungard's Philadelphia site to practice.
The sales pitch wrote itself. A University of Minnesota study estimated how long a company could survive without its computers, a figure it called the "maximum time to belly up." Banks could last two days. Insurers could last 5.6 days. Experts estimated that only 10 to 25 percent of heavily computer-dependent companies had adequate plans. "This is the place to come if you want to stay in business," the Times was told.
Here's why this matters to the rest of the book. For twenty years, the glass house had been something a company owned and kept on its own premises. Comdisco and SunGard sold companies a second glass house, in someone else's building, shared with other customers and paid for by the month. They sold insurance, but the product was real estate: a powered, cooled, connected room. The colocation industry of the 1990s grew from the same idea.
SunGard
SunGard Data Systems, the "Wayne, Pa., computer-service concern," went public on March 13, 1986. It sold 2.3 million shares at $11. The shares traded as high as $12.50 and closed at $12 over the counter.SunGard was created in 1983, when Sun Oil (Sun Co.) sold its disaster-recovery business and several investment-support businesses (SunGard investor presentation, 2004).
The Wall Street Journal mentioned it in a story about a different company. On the same day, a software company priced its shares at $21 and closed at $28. That was Microsoft.
I can't think of a better pair. The company that would put an operating system on every desk and the company that ran back-office computer rooms went public on the same day. We all know which one became bigger. But neither the desk nor the computer room was going away.
Comdisco, for its part, had cash to burn. In the October 1987 crash, its arbitrage unit, Comdisco Equities, lost $100 million, half its capital, before making back $20 million. Its head, Martin A. Weinstein, told the Times: "I was John Wayne and Rambo all at once." Making money from computer rooms and losing it in the stock market is a pattern we'll see again.
So is Comdisco. A dozen years later, when a startup called Equinix built its first Internet exchange in Ashburn, Virginia, Comdisco lent it part of the money for the build-out.The Equinix prospectus describes the Ashburn financing as Comdisco loans of $3 million "hard" and $4 million "soft," at 7.5 and 9 percent. Equinix accepted its first customers in Ashburn in July 1999. The company that rented out spare glass houses helped pay for one of the first neutral ones.
Dracula's Crypt
One more scene from the 1980s belongs here, because it points straight at Chapter II.
In January 1986, an entrepreneur named Paul Catalano opened DataPort, a three-acre vault 100 feet below the World Trade Center, in an old railroad terminus he leased from the Port Authority for forty years. He invested $3.5 million. Of the space, he said, "it smelled like Dracula's crypt. I fell for it right away." By August 1986, DataPort held 70,000 tapes for seventy-five clients. It had a hookup to Teleport's fiber network, and Catalano planned what he called "electronic vaulting," backing up data over the wire instead of by truck.
About 200 firms offered off-site storage then, with revenue of $100 million to $150 million that some thought could pass $1 billion in the 1990s. The competition was not impressed. Iron Mountain's Richard Reese called Catalano "a master of hype."
Maybe so. But look at what Catalano had: a secure vault, in lower Manhattan, wired to fiber. A decade later, buildings a few blocks away with the same three ingredients would become some of the most valuable real estate in the Internet business.
The Personal Computer—Katherine Hudson and the Kodak Deal#
While Comdisco and SunGard were selling backup glass houses, the main glass house was being emptied from the inside.
On November 23, 1987, the Wall Street Journal ran a front-page story headlined "Big Blues: Mainframe Slowdown And Stiff Competition Put Pressure on IBM." Mainframes supplied about 60 percent of IBM's profit. IBM held about 85 percent of the market for IBM-compatible "big iron." The paper's glossary defined a mainframe for its readers as "roughly the size of a refrigerator and typically costing more than $1 million."
The trend lines were brutal. The industry trade group CBEMA forecast that U.S. mainframe sales would grow only 3.3 percent a year from 1986 to 1996, against 8.8 percent for minicomputers and 14 percent for personal computers. It expected the PC market to pass the mainframe market in 1989 and to be more than twice its size by 1996. Users told the Journal that processing power could cost "as much as 150 times more on a mainframe than on a personal computer."
The customers were moving out. Hospital Corp. of America bought tens of millions of dollars of NCR minicomputers. The brokerage Edward D. Jones bought $30 million of DEC PCs and minicomputers for more than 1,300 branches. NBC's Olympics software cost about $30,000 to build on minicomputers, against more than $80,000 on a mainframe. "People can't even use the [mainframe] horsepower that's out there," said David Turner of National Advanced Systems. "I think you'll see more processing power deployed at the local level," said Thomas Cato of Hospital Corp.
I saw a small version of this from the bottom of the Bell System. As I wrote in Bandwidth, my first job out of college was at Illinois Bell, part of Ameritech. In Ameritech's planning groups I built Lotus 1-2-3 spreadsheets and Harvard Graphics presentations on a personal computer, while the thirty-year veterans I worked for stuck with their Texas Instruments calculators. They didn't know what to make of me. My dad spent his career as an engineer at AT&T. I spent my first job with a PC on my desk.
Cartons in the Hallway
Kodak's Katherine Hudson saw it more clearly than most, because she had to walk past it every day.
Hudson was Kodak's director of corporate information systems. For years she walked past a PC storeroom at Kodak's Rochester headquarters with cartons of equipment spilling out into the hallway. In 1989 she decided Kodak would stop running its own computers.
On July 26, 1989, the Associated Press reported that IBM "will run a large part of the data-processing operations of the Eastman Kodak company." IBM would build and operate a data center at Kodak's headquarters in Rochester, taking over work then spread across three Rochester centers and one in Windsor, Colorado. Terms were not disclosed. The Kodak employees who had run those centers would become IBM employees.The two Journal accounts disagree on the headcount. The July 26, 1989, item said 300 Kodak workers would become IBM employees. The August 15 page-one story said 275. UPI reported on July 25 that about 275 would be offered IBM jobs. I have used neither number in the text. Hudson hired Businessland to run Kodak's PCs. That fall, Kodak gave its voice and data network contract to Digital Equipment.The Wall Street Journal reported on October 26, 1989, that Digital Equipment had beaten IBM for Kodak's "voice and data communications needs," even though IBM held "an unusual contract to manage all of Eastman Kodak Co.'s data-processing needs." Kodak split its outsourcing: the data center to IBM, the network to DEC.
Hudson told the Journal she was looking at outsourcing software and telecommunications as well, and that more than 1,000 people could move off her payroll. She sent pink socks to the IBM team. Many of the Kodak employees moving to IBM put "Welcome to IBM Country" signs on their desks.
The Wall Street Journal put the story on page one in August 1989, under a headline that summed up the decade ahead: "Calculated Move: Computer Firms Find Service Is What Sells, Not Fancier Hardware." Hudson, the paper reported, "wants to be able to plug into a wall and have data come out," the way Kodak bought electricity from the power company and dial tone from the phone company.
Twenty-four years earlier, the Times had called it "the computer center as a public utility." Now a Kodak executive was saying the same thing about her own company's computers. The utility idea had come all the way around.
And Kodak was not alone. Hibernia Corp. signed a Kodak-like deal with IBM, and its spokesman called it a utility contract, "almost as if we were buying power or phone service." The federal Transportation Department already had Unisys running its Washington computer center. The research firm Input forecast that outsourcing of computer operations would grow from about $4 billion in 1988 to $11.9 billion in 1993, 20 percent a year.
The glass house wasn't dying. It was changing owners. The companies that had built their own computer rooms were handing them to someone else to run. That someone, in 1989, was still the company that built the computers. It wouldn't stay that way.
The Sword
The landlord itself was in trouble.
On December 6, 1989, the Wall Street Journal ran another "Big Blues" story on page one. IBM would take a $2.3 billion restructuring charge and cut 10,000 of its 216,000 U.S. jobs. Gartner estimated that rivals would take 17 percent of the $35 billion market for IBM-compatible mainframes in 1989 and 24 percent by 1991, where they had rarely held more than 10 percent. Nearly a third of the IBM customers surveyed had won mainframe discounts of 15 to 25 percent, and more than a third had won discounts above 25 percent.
The old rental model, with the year's business locked up by January, was gone. Customers had learned to negotiate. The Journal described how George DiNardo of Mellon Bank got a better price from IBM: by "taking a big Japanese sword (he actually keeps one in his office), waving it over his head and yelling the name of one of IBM's Japanese competitors."
Twenty-five years after the special train to Poughkeepsie, a customer was waving a sword at IBM.
The Dinosaur#
By 1990, the mainframe looked like a dinosaur. The money was moving to the desk. The PC market was passing the mainframe market. IBM was writing off billions and cutting jobs. The most forward-looking companies in America were handing their computer rooms to outsiders and asking to plug into a wall.
Step back, and the first thirty years of this story already contain the whole book in miniature.
Computing started in a room that one company owned. Entrepreneurs figured out that most companies didn't want the room, they wanted the answer. Perot sold the answer under contract. Tymshare and GE sold it by the hour. CompuServe and GEnie sold the leftover hours at night. Comdisco and SunGard sold a spare room in someone else's building, with "everything but the computer." Each idea came back, bigger, in the decades that followed.
The capital markets had already run their first experiment, too. Time-sharing had a Boom, with forecasts of $1 billion and 200 entrants and a stock in Dallas worth more than Western Union. It had a Bust, with a beer mug on your fingers, a $9.7 million write-down of the computers themselves and a long, quiet shakeout. The survivors, like Keydata and Tymshare, were still standing when the music stopped, and Tymshare went public cheap. I would see the same cycle in fiber. You'll see it twice more in this book, in data centers.
But something was missing from all of it. The time-sharing companies of the 1960s needed the phone network to reach their customers, and the phone lines were billed on top of the computer time. When Sam Wyly tried to build his own data network, he ended up complaining to the FCC. Was the computer utility of 1965 simply early? I think so. The network it needed did not yet exist.
By 1990, the PCs on millions of desks were starting to want to talk to each other, and to the computers in other companies' buildings. Nobody in the glass house was watching that. Nobody at Kodak or IBM, in the hot sites or in the cave in the Catskills, saw what the network was about to do to computing.
The network was about to arrive. And it would need a room.