Joseph Wilson was loosing the battle to Kodak when he discovered the xerography machine. Then he made it sellable.
Dave Young:
Welcome to the Empire Builders Podcast, teaching business owners the not so secret techniques that took famous businesses from mom and pop to major brands. Stephen Simple is a marketing consultant, story collector and storyteller. I’m Stephen’s sidekick and business partner, Dave Young. Before we get into today’s episode, a word from our sponsor, which is, well, it’s us, but we’re highlighting ads we’ve written and produced for our clients. So here’s one of those.
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Dave Young:
Welcome to the Empire Builders Podcast. I’m Dave Young and that’s Stephen Semple. Welcome to the Empire Builders Podcast. I’m Dave Young and there’s Steve Semple. Welcome. Oh wait, I got stuck making copies of copies. See what I did there?
Stephen Semple:
You’re so clever.
Dave Young:
You know what I did there, right? Yeah.
Stephen Semple:
I saw it, yeah.
Dave Young:
Today we’re talking about Xerox.
Stephen Semple:
Talking about copies of copies.
Dave Young:
Copies of copies of copies.
Stephen Semple:
Oh, and back in the day there were a lot of copies. A lot of copies.
Dave Young:
Oh man. I have copier stories. Yeah.
Stephen Semple:
I bet. I think those of us of our genre-
Dave Young:
Honestly, so Xerox, and we’re going to learn the story of the Xerox corporation and we’re going to… I don’t know their whole story, but I can tell you this, the photocopier or before there was something else before that. There was carbon paper.
Stephen Semple:
Yes, yes.
Dave Young:
But nobody owned a printing press.
Stephen Semple:
Correct, yeah.
Dave Young:
And so I would make the case that a photocopier was the first social media meme sharing engine.
Stephen Semple:
Oh, because we could photocopy our butts and share it the office.
Dave Young:
No, no, no, no, not your butt. I mean, I don’t know what you do in Canada. Here, I remember as a kid going to coffee, but my dad, small town, small town America, and he went to coffee twice a day with his buddies, 10 o’clock and three o’clock. They’d go down to the local cafe and they’d sit around a table and have coffee, eight or 10 of them. And somebody would always have a copy of a copy of a copy of a copy of a joke.
Stephen Semple:
Right.
Dave Young:
A cartoon, a usually off color story and they’d pass it around and then somebody would take it and make another copy of it and share it somewhere else. But you couldn’t do that if you didn’t have a copier.
Stephen Semple:
Well, that’s true.
Dave Young:
So thank you, Xerox.
Stephen Semple:
For making our lives richer.
Dave Young:
And now we can just electronically copy stuff and shoot it off as a text and a meme.
Stephen Semple:
One of the things you’re going to love about this story is it involves a fire extinguisher. So I’ve got your attention.
Dave Young:
Oh, I am all in.
Stephen Semple:
You’re all in. And Xerox is still pretty big. They do 7 billion in sales, but back in the early ’70s, Xerox was a monster. It’s estimated that over 10 billion copies a year were being done.
Dave Young:
10 billion.
Stephen Semple:
That’s a lot of copies of copies of copies-
Dave Young:
Yeah. Once people had it, they were like, “I’m a printer.”
Stephen Semple:
Of copies. Yeah.
Dave Young:
I’m a publisher now.
Stephen Semple:
Yeah. In 1973, they did 3 billion in sales, which would equate to about 20 billion today. And they were close to 90% of the copier market with profit margins close to 20%. That’s just huge. It was one of the most valuable companies in the world.
Dave Young:
Until there started to be some competitors, Xerox became the generic word for a photocopy.
Stephen Semple:
Correct.
Dave Young:
“Give me a Xerox of this.”
Stephen Semple:
Yeah. So our story starts back with Joseph Wilson in Rochester, New York, which as we also know, is the home of Kodak. And Joseph was the new president of a company called Haloid, which was a Rochester based company doing photographic paper that was founded in 1906. And frankly, they were getting killed by Kodak, which at that point was 90% of the industry. And so Joseph’s trying to make headway in the photography paper business and basically is just like get nowhere. No matter what he does, he just cannot seem to create traction.
Dave Young:
One of his problems, Stephen?
Stephen Semple:
Yeah.
Dave Young:
Haloid.
Stephen Semple:
Yeah, maybe.
Dave Young:
That’s not a good name.
Stephen Semple:
Yeah, maybe. But what he decides to do is look for new opportunities. He’s actively searching through the National Patent Archive. So meanwhile, we got to think about this. It’s the mid ’40s. World War II has recently ended and the GI Bill is out there and it’s really fueling the growth of service-based industries. Banking, insurance is exploding. White collar is becoming now the thing to do. The American office is now basically the new engine of the US economy, but it’s still pretty primitive and labor-intensive. You think about going back to your whole thing, how did you copy and share information? Things were typically retyped or it was typed with a carbon paper, which meant you had one copy or a single document.
Dave Young:
Yeah, like a mimeograph sort of a thing maybe.
Stephen Semple:
Yeah, yeah. Single document could take an hour. And secretaries were manually retyping documents using carbon paper which created smudges or like as you said, the mimeograph machines, which were clunky
Dave Young:
Or send it, I mean, if you need more of that, you send it off to a printer. You send it off to somebody that can load it up on a printing press.
Stephen Semple:
Yeah. And for the people who don’t remember mimeograph machines, because I barely remember them, they stank.
Dave Young:
They smelled wonderful.
Stephen Semple:
Oh God, they were foul. They were this like, oh my God.
Dave Young:
The teacher would come in with a stack of stuff and hand it out and everybody would smell it. You just put it up your face and inhale.
Stephen Semple:
It was instead of glute.
Dave Young:
Weird, weird purple-y ink. I don’t even know how it worked, but yeah.
Stephen Semple:
So anyway, so Joseph is searching through patent archives and he comes across this invention by Chester Carlson, who’s a physicist who has got really bad arthritis and was looking for a better way to make copies. And Carlson had created, I got to read this, created an electrophotographic apparatus for dry writing. A process he turned xerography.
Dave Young:
Xerography, yes.
Stephen Semple:
There we go.
Dave Young:
And Haloid finally has a better name.
Stephen Semple:
Exactly. But the prototype was clumsy. It was large. It had been rejected by lots of people, but it caught Wilson’s eye. He could see the potential to revolutionize the office. And so it’s 1946 and he makes this big gamble. He purchases the patent for $10,000.
Dave Young:
Wow, okay.
Stephen Semple:
At that time, Haloid’s annual revenues is just a little over 100 grand.
Dave Young:
All right, man.
Stephen Semple:
So that’s a big bet.
Dave Young:
Huge.
Stephen Semple:
And the challenge was he had to turn this clumsy prototype into a viable commercial product. And there were a lot of challenges including the high heat from the fuser. It’s basically a toaster oven inside of a unit that bakes toner onto paper.
Dave Young:
Yeah. It puts a hydrostatic image of whatever’s on the paper on a blank piece of paper and little tiny particles of toner stick to that image and then you bake them in.
Stephen Semple:
Yeah.
Dave Young:
The little tiny microplastic things.
Stephen Semple:
And yes, it can catch fire. More on this later.
Dave Young:
Yeah. That’s why when you’re done making a bunch of copies, it all comes out warm.
Stephen Semple:
Yeah, exactly. So to raise money, Wilson sold some personal stock. He downsized a factory, did a bunch of things, raised about $12 million, which would be equivalent to about 140 million today and put it into development. So in 1954, after nine years of development, he has the first copier. It weighs 650 pounds.
Dave Young:
Sure.
Stephen Semple:
And it’s called the Xerox 914 because it used 9×14 paper.
Dave Young:
9×14, that’s a choice.
Stephen Semple:
Right.
Dave Young:
Okay.
Stephen Semple:
So in addition to the $12 million that they invested, they’ve also got millions of dollars in debt.
Dave Young:
I’m stuck on the 9×14, Stephen. I’m thinking it’s the size of an accounting ledger, something like that.
Stephen Semple:
I didn’t look into why that size or… Because again, a lot of times what becomes standards change.
Dave Young:
Yeah. But see, that’s why you do what you do on this podcast and I do what I do. I’d have gotten stuck researching this into the 9×14 and followed that off into the woods and it would be a whole different podcast.
Stephen Semple:
It would be. It would be probably better.
Dave Young:
Oh, I don’t know about that. Anyway, I interrupted you again.
Stephen Semple:
So they’ve invested all this money. They’re millions in debt. They finally got a prototype and they basically say, “Okay, here’s what we got to do. We got to find a production partner to make this happen because we’re not going to produce this thing.”
Dave Young:
600 pounds, yeah.
Stephen Semple:
Because that’s not what we do. So Wilson approaches IBM who basically at that point is a rising tech leader.
Dave Young:
Sure.
Stephen Semple:
And a lot of people don’t realize how old IBM is. I’ve got a picture of an old IBM cheese cutting machine.
Dave Young:
Yes, yeah.
Stephen Semple:
They were around forever. But anyway-
Dave Young:
I did a college internship at IBM.
Stephen Semple:
Oh, did you really? Wow.
Dave Young:
Where they made copiers. Yeah, I got copiers.
Stephen Semple:
Oh yeah. Oh, this comes back.
Dave Young:
Yeah, yeah.
Stephen Semple:
So IBM’s being run by Thomas Watson Jr. and he rejects the idea because basically it’s going to be about a $10,000 price tag and it’s going to fill a room all just for copying. He thinks this is a really, really bad idea. So Wilson doubles down, mortgages everything to make it themselves and they’re still facing these huge challenges. They meet a guy who works with equipment manufacturer AMF who’s developed this brand new sales strategy that he’s using for selling bowling alley equipment.
Dave Young:
Oh, is this the lease purchase?
Stephen Semple:
Yes, sir. Yes. So this is this brand new idea. What they decide to do is to lease the Xerox 914 for $95 a year and it would include 2,000 copies plus a nickel for each additional copy.
Dave Young:
Okay. So they’re selling copies, not machines. Yes, yes, yes.
Stephen Semple:
Right.
Dave Young:
Yeah.
Stephen Semple:
Here’s where it gets funny. It’s September 1959. The Xerox 914 makes its public debut in Manhattan. And during the demonstration, the machine bursts in the flames.
Dave Young:
Perfect. I’ll take three.
Stephen Semple:
Well, here’s the funny thing is it becomes this spectacle. It attracts onlookers and in fact the event is a resounding success.
Dave Young:
Yes, because the smart people will go, “Oh, they’ll fix that.”
Stephen Semple:
Right.
Dave Young:
Look, the copies came out, but they’ll fix the fire thing.
Stephen Semple:
Here’s what they did. Instead of re-engineering the device, remember, this is the late ’50s. The world’s a different place. Instead of re-engineering device, Wilson’s team ingeniously packages it with a fire extinguisher that they rebrand as the scorch eliminator.
Dave Young:
Hell yeah.
Stephen Semple:
Honest to God, I cannot make this up. The scorch eliminator. Oh, instead of re-engineering it, we’ll just give everybody a free fire extinguisher.
Dave Young:
That’s fantastic. I love that. So you could fill the paper tray with dough and pizza would come out the other end. These guys are geniuses.
Stephen Semple:
It’s a year later. It’s the 1960s and the machine is now available nationwide and it’s like a resounding earth-shattering success.
Dave Young:
Stay tuned. We’re going to wrap up this story and tell you how to apply this lesson to your business right after this.
[Using Stories To Sell]
Dave Young:
Let’s pick up our story where we left off and trust me, you haven’t missed a thing.
Stephen Semple:
It’s a year later. It’s the 1960s and the machine is now available nationwide and it’s like, a resounding earth-shattering success. Production basically started at 50 per month and quickly went to 100 a day. At the end of the first year, they leased 200,000 [inaudible 00:14:32].
Dave Young:
Well, this whole story, this is proof of what a good idea it was.
Stephen Semple:
Oh, absolutely.
Dave Young:
People don’t care if it catches fire as long as I get some copies out of it.
Stephen Semple:
Yeah. And the copier room becomes a new social hub. It becomes the way we share jokes.
Dave Young:
You want to make sure it has some overhead sprinklers.
Stephen Semple:
Well, you’ve got the scorch eliminator. You’re good. The company gets officially renamed Xerox Corporation and really it launches the information revolution. The stock quadruples, revenue soared at 250 million. Now, remember IBM?
Dave Young:
Oh yeah, they come around.
Stephen Semple:
The guys who rejected the idea. So the number of copies being made annually in the United States surges from 20 million to over 9 billion with Xerox basically dominating. And IBM, remember, took a pass, but they decided to enter the business in the early 1970s. They create their own copier. Now-
Dave Young:
They figured out that they were the biggest customer of Xerox.
Stephen Semple:
Yeah, essentially. Yeah.
Dave Young:
Yeah.
Stephen Semple:
Now, Joseph had a choice at this point. He knew they were leveraging his technology, but he also knew that it would be hard for him to win on legal grounds alone. So what he decided that he needed to do was to out innovate them.
Dave Young:
Okay.
Stephen Semple:
And so what Joseph Wilson envisioned was an office of the future because he saw computers coming. Remember, this guy was a visionary. He saw computers coming.
Dave Young:
Oh, yeah. I love this guy.
Stephen Semple:
But the problem, computers were large, difficult to use, but he was like, “I saw what happened with the photocopier, it went from being massive to small. Computers, same thing’s going to happen.”
Dave Young:
Yeah, yeah.
Stephen Semple:
So he decided to invest the equivalent of $20 million to establish PARC, the Palo Alto Research Center. Now, he hired a top computer scientist from ARPA, Robert Taylor, and gave him a clear mandate, “Pull together the brightest folks and create the next technological revolution.” The goal was for it to be this visionary think tank to leapfrog everybody. Here’s what they created. Gary Bernier and I did another podcast on this, which talked about this failure of Xerox. And there’s something I didn’t realize until doing this research, which kind of filled in a blank. So I actually recommend people go back and listen to that podcast. But here’s what they created, networking, the mouse, and the graphical user interface. If Xerox had developed that today, Xerox would be the giant of the industry. Could you imagine?
Dave Young:
Did they also figure out printing to like laser printing?
Stephen Semple:
I’m not sure whether it was laser printing-
Dave Young:
I’m sure who-
Stephen Semple:
But they did invent the whole idea of what you see is what you get, like that whole idea that the screen… But I’m not sure whether it was laser or not.
Dave Young:
Basically, when I was at IBM, that’s what they were making, were photocopiers that were also laser printers. You could go photocopy something by standing at the machine or you could send a document to it and have it printed.
Stephen Semple:
And so here’s the interesting thing because I’d always wondered why did these things not get to market? And here’s what actually happened. Before these things were finally created in terms of prototype level, Wilson died and the executives who were basically under him took over and they didn’t have the vision and they saw the paperless office as cannibalizing their business. Kind of like Kodak. Remember Kodak developed all the stuff for digital cameras and went, “Oh, well, we can’t do this because it’s going to cannibalize our business.”
Dave Young:
Yeah. WYSIWYG, mouse. That’s not the business.
Stephen Semple:
Right. Well, and remember we did an episode a little while ago where we were talking about the iPhone and the brilliance of Steve Jobs. He was willing to cannibalize their own business to make that happen. When you’re unwilling to cannibalize your own business, you got a problem. This is the same thing that killed Kodak. It’s the thing Jobs overcame to create the iPhone. So speaking about Jobs, the idea for the Mac came from a visit at PARC. In 1979, Jobs negotiated a tour of PARC in exchange for allowing Xerox to invest in Apple’s pre-IPO stock. And basically Jobs saw all this stuff, saw the mouse, saw the graphical user interface and went, “Holy crap, this is the future. This is the future.” So again, when Gary and I did this episode talking about Xerox and the failure of Xerox and the success of, har, Palo Alto, I never realized the timing of the death of the founder.
Dave Young:
Yeah.
Stephen Semple:
And it explains so much in terms of the execs not getting the idea. He would’ve. Joseph would’ve.
Dave Young:
Oh, I think so. Yeah, for sure.
Stephen Semple:
He would’ve been all over it. And Xerox would be a different company today.
Dave Young:
Yeah. Pretty amazing.
Stephen Semple:
But the things that I really loved on this is, again, Joseph was looking, he saw this world trend. He was in the photo paper business and he saw this whole idea of a copier, but also greater than that, it wasn’t just the idea of the copier. He saw what was the importance of the office and what was going on in office space. And the other part that I loved, and then proactively went looking for innovative ideas. And the part that I really love the most is they didn’t let the fire stop them.
Dave Young:
I do. Yeah, that’s so great. I don’t know. Yeah, some people say that’s a negative, but here’s a fire extinguisher.
Stephen Semple:
Right. Now granted, it was the late 50s, early 60s, different era.
Dave Young:
Here’s the thing, Stephen, offices can be kind of boring. And if you can introduce the prospect that there’s going to be a fire down in the copy room every now and then, there’s something to talk about while you’re standing around the water cooler. So when I worked for-
Stephen Semple:
It’s a whole different thing of lighting a fire under people’s ass.
Dave Young:
Oh yeah, yeah. I keep an emergency bag of marshmallows in my desk drawer in the hope that the copier catches fire. I did my college internship at IBM. It was a paid internship. So I can legitimately say I worked for IBM back in the day. It was back in the day when they actually manufactured stuff. IBM made machines. Now they just… I don’t even know what they do. They consult? Do they-
Stephen Semple:
There’s still a lot of IBM technology in the backgrounds, like with servers and things along… How much they manufacture versus just license, that I don’t know.
Dave Young:
So they’re a software and consulting company and felt all of that. But in 1984 they were still manufacturing, I worked for their Boulder, Colorado plant and it was 5,000 people working there.
Stephen Semple:
Amazing.
Dave Young:
And they made floppy drives and printers and printer/copiers. So you could buy a photocopier/printer the size of a large deep freeze and they’d install it. And I think they probably same thing, probably same business model. You’d pay by the copy, you’d rent the machine. One of the coolest things was that they had a laboratory at that facility. And in the laboratory, they had a copier lab where they had Xerox and Canon and all the other competitors, they had machines installed. They would call Xerox and say, “Hey, we need a machine, bring it here, install it in the lab and we want the usual maintenance agreement. So you got to send a Xerox guy to come maintain this thing.” And they would run that machine all day long making test patterns. They would print test patterns all day long and then evaluate them, put them under the microscope, see where that machine was performing and how it performed against theirs. I mean, it was kind of a cool lab. Who does that?
Stephen Semple:
So the other thing I just want to add on Xerox before we finish off, because I forgot to mention this as one of the lessons and this is actually probably the most important lesson. And that is, they looked at the guy selling bowling alley equipment and did the leasing. That was brand new, but they did an interesting twist to it that I think can be overlooked in terms of the real power of what they did. Because sure, leasing made it easier to purchase, but there’s two additional things that they did that made it easy to purchase 2,000 copies included. Which meant immediately if you’re going, “I’m leasing this for 100 dollars a year, 2,000 copies. Oh, that means my copy is so many cents a copy.”
Dave Young:
And if I never make another copy, yeah.
Stephen Semple:
Right away I’m saving money. So it allows for the financial justification becomes really easy. But here’s the other thing that becomes wild is, when I put the machine in, I’m not saying to people, “Hey, be careful how much you use this.” My goal is I want 2,000 copies to happen. Once I create the habit of people creating copies, it’s now embedded in the business.
Dave Young:
And then you have bean counters that tell you… Yeah.
Stephen Semple:
Well, could you imagine how different it would be is if it was less money, $50.05 a copy, you’d be telling everybody, “Now be careful how often you copy.”
Dave Young:
Yeah, but even then they were.
Stephen Semple:
Right, no, but the point is it allowed the habit. It allowed the habit to happen. It was just because you wanted to use up the 2,000, 2,000 copies. So anyway, I just think there was brilliant, especially for brand new technology, a brilliance in terms of how they structured that lease.
Dave Young:
They found an interesting business model to copy-
Stephen Semple:
They did.
Dave Young:
In a completely unrelated field.
Stephen Semple:
They did.
Dave Young:
And that’s the benefit of getting outside of your category to look for innovation.
Stephen Semple:
And then put a twist on it that eliminated friction of using that equipment because the first 2,000 copies were free. Anyway, I just thought it was brilliant. I just wanted to point that out.
Dave Young:
Yeah. I love, what was his name again, Wells?
Stephen Semple:
Joseph Wilson.
Dave Young:
Wilson. Well, I know there’s a W in there. Joseph Wilson.
Stephen Semple:
Yeah, Joseph Wilson. Yeah.
Dave Young:
All right. It was a good he didn’t name it Wilsonography. But I love it. I love the Xerox story. Thank you, Stephen.
Stephen Semple:
All right. Awesome. Thanks, David.
Dave Young:
Thanks for listening to the podcast. Please share us, subscribe on your favorite podcast app and leave us a big, fat, juicy five star rating and review at Apple Podcasts. And if you’d like to schedule your own 90 minute empire building session, you can do it at empirebuildingprogram.com.
