5 innovative tech companies that got it wrong in the end

Looking back at Digital, WorldCom, Netscape, Nortel and General Magic

Successful for a time, but failed in the end: looking back at Digital, WorldCom, Netscape, Nortel and General Magic.

Tech companies are usually divided into two groups: successes and failures. But some that failed in the end created innovative products that pushed the IT industry forward, and in some cases dominated their respective market segments for many years.

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Over 25 years covering the tech industry, Network World has seen many companies swept into the dustbin of history. Here's a look at five that, while successful for a time, ultimately got it wrong.

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Digital Equipment Corporation

While it's no longer around, Digital was one of the most innovative technology companies in the industry's history. Founded in 1957 in an old New England mill, Digital sold minicomputers as an alternative to IBM's mainframe, as well as various servers, workstations and terminals. With the rise of the personal computer bringing Digital down to Earth, the company began laying employees off in the early 1990s and was ultimately acquired by Compaq in 1998.

In 1978, Digital boasted that 90,000 of its computer systems were in operation, making it "the largest manufacturer of interactive minicomputers," and that it was raking in a billion dollars a year. By 1986 Digital revenues were seven times that much and Fortune Magazine described co-founder Ken Olsen was as "arguably the most successful entrepreneur in the history of American business." Digital "changed the way people use computers" and was "IBM's most serious challenger," the magazine said.

But while IBM still sells the mainframe, for the most part the market for mainframes and minicomputers "just died," says Forrester analyst Henry Dewing. Companies like Data General and Prime Computer also fell victim to the demise of minicomputers.

Olsen took heat for a 1977 quote in which he said "There is no reason for any individual to have a computer in his home." The criticism is probably undeserved, Dewing said. Olsen wasn't referring to a personal computer we know today. He was talking about futuristic home automation systems that would perform tasks like controlling temperature and preparing meals.

But Digital did not make the transition to the personal computing age dominated by Windows and Macs, and Dewing says for all of Olsen's dedication to building good technology he was not a savvy marketer.

"What Ken Olsen didn't understand was marketing wasn't a dirty word," Dewing says.


The name WorldCom is now almost synonymous with accounting scandals, so it's easy to forget that at one time this company had some good ideas.

Founded in the early 1980s as Long Distance Discount Services, WorldCom went through a couple of name changes and rapid growth through acquisition, including the 1998 purchase of MCI Communications.

WorldCom essentially used shady accounting tactics - counting operational expenses as capital expenses - to boost its stock price and help fuel the acquisitions it needed to grow, says Gartner analyst Eric Paulak.

"By boosting their stock price they were able to go out and buy whatever they wanted which helped them become a bigger company," Paulak says. "But they were also a darling of Wall Street that everyone thought could do no wrong."

WorldCom drove down the price for data and voice communications, and used its 1996 acquisition of UUNET to boost the use of the Internet for data communication, Paulak says. All the while, WorldCom was showing deceptively high profitability despite undercutting the marketplace and forcing competitors from their comfortable positions.

"AT&T and MCI, and certainly Sprint, they were nowhere near this," Paulak says of using the Internet for data communication. "All of a sudden you're competing on price when AT&T never had to do it before."

The big technology piece that WorldCom missed was wireless, Paulak says. And of course, WorldCom's own financial fraud brought it down, forcing it into bankruptcy in 2002. WorldCom changed its name to MCI, CEO Bernie Ebbers went to prison for 25 years, and MCI is now a subsidiary of Verizon Communications.

"Even though they imploded because of the fraud, they changed the industry for good," Paulak says. "Quite frankly, they got everybody off of their very comfortable position. We would not be as far along as we are in terms of data communications if not for the way WorldCom was pushing the marketplace."

Netscape Communications

Netscape took the emerging Internet world by storm in the mid-1990s with its eponymous Web browser, which easily outpaced rival Mosaic but fell victim to the power of Windows. Netscape's downfall began when Microsoft created Internet Explorer and bundled it into the world's most widely used operating system.

By some counts, Netscape had more than 80% of the browser market in 1996. But Internet Explorer was already closing the gap and by 2002 Microsoft had captured 95% of browser users. Netscape was purchased by AOL in 1998, but development on the browser stagnated and AOL dropped support in 2008.

Although Netscape's downfall may seem inevitable in hindsight, there were mistakes made and Netscape didn't handle growth well, said Jeff Treuhaft, one of the company's first 20 employees.

"We made, clearly, our own mistakes," Treuhaft told Network World in 2009 after he founded a cloud storage firm named Zetta. "Egging them [Microsoft] on was not smart, I would say. And I'd say we grew really fast. We grew from 20 people to 2,000 people in, I don't know, a year or two. Human nature means it's very difficult to hire that many people and organize them in a fashion that will get something done."

Microsoft reportedly offered Netscape a deal in which Netscape would agree to keep its browser off Windows in return for some technology help from Redmond. Netscape refused. Microsoft would go on to push competitors out of the browser market, and the U.S. Department of Justice stepped in to hand Microsoft an antitrust judgment.

Although Netscape the company failed, the Mozilla project it started led to the creation of Firefox, which is now the world's most widely used browser that doesn't come with Windows. Netscape pushed the Web forward with technologies like SSL, RSS, JavaScript and cookies, and Treuhaft says he remains proud of Netscape's innovation.

Nortel Networks

Nortel Networks, founded in 1895, had a long and successful run as a maker of telecommunications equipment and business products, but since declaring bankruptcy in 2009 the company has been selling off all of its business units.

Originally known as Northern Electric and later as Northern Telecom, Nortel shipped its first digital switching system in 1975, launched the DMS-100 supporting up to 100,000 lines in 1979, and was the second-biggest supplier of telecommunications equipment in North America by 1982. By 1999 Nortel was boasting the "world's fastest, highest capacity Internet technology," but the company's expensive acquisitions before and during the dot-com boom helped seal its downfall.

Nortel purchased Bay Networks, a rival of Cisco in the router and switch market, in 1998 for $9.1 billion, and spent another $16 billion in 2000 to buy four more companies just as the bubble burst.

In the next few years 55,000 layoffs followed, and CEO Frank Dunn was fired after an accounting scandal in 2004. Nortel teamed with Microsoft on a big VoIP and unified communications partnership in 2006, but it wasn't enough to stave off bankruptcy.

By March 2011, Nortel reported to investors that it had "sold substantially all of its businesses generating approximately $3.2 billion in net proceeds for the benefit of its creditors."

Sales included Ericsson buying Nortel's CDMA/LTE division for $1.2 billion and Avaya purchasing the enterprise business for $756 million. Nortel's bankruptcy was recently extended until June 30, 2011 as the company continues to sell off assets, including its patent portfolio, which has attracted interest from Google

General Magic

General Magic was a company built for 2011 but founded in 1990. Too far ahead of its time, General Magic folded in 2002.

"They had great technology and great ideas, but were always skating just ahead of market demand," Dewing of Forrester says. "They are a classic case of a bunch of guys with great ideas that never quite figured out how to get to market."

Founded by Apple employees Bill Atkinson, Andy Hertzfeld and Marc Porat, some of General Magic's ideas seem like precursors to the iPhone. In 1998, General Magic announced a service letting users access e-mail, address books and calendars, and access news and stock information from a cell phone or Web browser. Sound familiar?

The service was to be offered through telecom providers and resellers of phone services. General Magic also built early versions of the PDA, with its own "Magic Cap" operating system, signed a licensing deal with Microsoft and helped build the OnStar service still used today in General Motors vehicles. General Magic also created a software modem for set-top boxes and other devices, which was spun off as a new company called SoftModem in 1997.

General Magic veteran Tony Fadell would go on to become senior vice president of Apple's iPod division, while Andy Rubin, who also worked for General Magic, went on to create Google's Android.

The e-mail service for cell phones developed by General Magic, called Portico, isn't quite what we'd expect today. It relied on a voice recognition technology, rather than displaying the actual text of an email as today's smartphones do.

Unfortunately, cellular carriers weren't willing to pay enough to make the service profitable, and general purpose processors were just barely able to perform some of the software tasks General Magic designed, Dewing says. But General Magic showed its foresight in several areas, including the Internet-connected set-top boxes, now a staple of video-on-demand services.

"They were ahead of their time," Dewing says.

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Copyright © 2011 IDG Communications, Inc.

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