Chapter 5 - Data Communications: Market Competition 1969-1972
5.6 Codex Turns the Corner: 1970
Carr knew he had to deliver or his days with Codex were numbered – Cryer had made that abundantly clear. Carr’s ears rang from Cryer’s blistering tirades: “I want to see results and I don’t want to hear again about needing a 4800 bps modem.” Carr understood that Codex faced a cash crisis, one stressing Cryer, but he expected a little empathy for the uphill battles he and his salesmen waged every day. Competition had never been more intense and if rumor had it correctly, Milgo would soon introduce a 9600 bps modem, eliminating Codex’s one truly unique advantage. Carr remembers:
What was happening was Bell people would go around and say: “Look, if 9600 was possible, AT&T would have done it. We have Bell Labs.” Scared the hell out of the customer. Milgo would go out and say: “Don’t buy two of these spooky things, buy four 48’s.
In February 1970, Carr and Pugh scheduled a product-planning meeting to discuss the future of the AE-96. No one anticipated a meeting any different from the many other meetings they had shoe-horned into days routinely stretching into late nights, but history would judge differently, for decisions were made that set Codex on the path to becoming the world’s largest independent data communications firm.
Refreshingly, after so many meetings devoted to yet another AE-96 crisis, the subject concerned the future and what Codex should do as an encore now that they had a product that worked, at least most of the time. After some light-hearted banter, and before the conversation could turn serious, Carr turned crusader once again, arguing that the sales force did not need an improved 9600 bps modem, at least not immediately, but rather they needed more products to sell - specifically a 4800 bps modem. Cryer, stubborn as Carr, repeated the obvious: they had barely enough cash to survive selling the products they had and certainly not enough to develop and launch a new product. He concluded with the now expected speech that the credo of Codex was to advance the state-of-the-art not to mimic the latest products of so-called competitors. And furthermore, how could Codex sell me-too products if they couldn’t even sell the world’s most advanced modem?
Before the meeting could turn into another pointless standoff, Forney, who had become involved with modems again after Holsinger’s departure, suggested that maybe it need not be an either-or choice. He described a new technology being developed by Gallager, code named Modem-X, which was very different than the single sideband technology used in the AE-96 – a technology with which a competitive 4800 bps modem could not be built.20 Forney believed the Modem-X technology, which would become known as Quadrature Amplitude Modulation (QAM), could be the basis for both a better 4800 bps and a significantly improved 9600 bps modem.
After lengthy discussion, Cryer relented, authorizing Forney to lead an effort to build first a 4800 bps and following that a 9600 bps modem using the Modem-X technology. Why did Cryer finally give in? Carr recalls:
Just incessant pressure from me, and the fact that we had a very bad year in ‘69. We were losing money, and had a bad negative cash flow. And I said: “Look, one thing about this, whether it’s challenging to you or not, Jim, I can sell it. I can collect from people for it without umpty-ump months of testing.
Unknown to Carr, Cryer had already concluded that Carr had to be fired. However, he also knew he had to raise more money, and firing the VP of Sales immediately prior to a financing was a sure way to stall investors’ decisions until a new VP was hired, a delay he could not afford. He also did not want to hear potential investors parrot Carr’s insistence on the need for a 4800 bps modem. Fortunately, Forney had proposed a most ingenious solution: a potentially radical new technology to advance the state-of-art of 9600 bps modems, and also a virtually risk-free means to innovate a competitive 4800 bps modem. Carr seemed to win the day, but for reasons he did not yet understand.
Pugh charged off to create both product specifications. Benefiting from the year of selling - and not selling - the AE-96, the specifications would focus on ease of installation, use, and service. Able to specify precise performance and quality measurements, Pugh set technical objectives that would make the new modems significantly better than the AE-96. Pugh also needed to project how many of each modem would be sold. Carr remembers his and the financial officer, Jim Storey’s, reactions to Pugh’s forecast:
I asked John Pugh to produce a forecast for how many 9600’s we could sell, and his forecast was 465 for the life of the machine, and we all sat around my conference table and howled laughing. We thought, and I’ll never forget it, I can see it like it was yesterday – we had sold and made stay 70 some AE-96s, so he was talking something like four times what we had done, and we thought it was so goddamned hilarious. We could believe that kind of a number for 4800’s, and Storey ridiculed the hell out of him. It’s a legend around Codex about this meeting, where we all laughed at John.
Forney had started work immediately, knowing Codex’s future depended on his success. Sales of the existing AE-96 were nowhere near sufficient to support the company financially. Government contracts were a luxury of the past, and financial projections indicated Codex would be out of cash in a few months, and unable to meet their bank’s requirements to borrow money.
Lacking alternatives, Cryer and Storey began discussions with their investment bankers, Kuhn, Loeb & Co., hoping to raise the equity capital needed to finance operations. By the end of March, terms were finalized and the closing scheduled for April 6th. With their money problems soon to be over, management sighed a collective relief.
Carr then left for Hawaii to attend a military conference. He had been trying to sell the military a way to create more communication circuits, or channels, out of existing circuits – the military had a desperate need of more international circuits as a consequence of the Vietnam War. Carr believed if he could sell the “channel packing” concept, it might generate desperately needed revenues and cash flow. Since most of those in the chain of command he needed to convince were attending the Hawaiian conference, he hoped he might pull one more order out of the military, an order that would give Codex breathing room until their new modems were ready.
After encouraging meetings, Carr returned home on Sunday April 5th to be available, if needed, for the closing of the financing on Monday. Tired from the long trip, he was greeted at his front door by an anxious baby sitter with a handful of phone messages marked Urgent. His first call back left him stunned. Earlier that day, Jim Cryer had died from a heart attack while playing tennis. An emergency Board of Directors meeting was to be held the next day.
That Monday morning the shock of Jim’s death crowded out the stress everyone had been feeling. No one knew what to say. The Board members offered their condolences to the staff, and awkwardly drifted into the conference room, trying to collect their thoughts before the meeting began. Kohlenberg, weakened by Hodgkin’s disease, came in, knowing the company he helped found was deep in crisis.
Once the meeting was called to order, the representatives of Kuhn, Loeb & Co. explained that under the circumstances it would be impossible to close the financing. A new investment memorandum had to be written and circulated. Realistically, it would be months before a financing might close. After a few blank stares, the bankers left, and the conversation turned to: Who was to run the company? What was to be done about cash?21 Carr remembers what happened then:
I found out, much to my surprise that day, that I was right at the top of the shit list, that I was about to be fired because the view of the board was that I had joined the company and I had pissed all this money away and not brought in any business, which was accurate, although there were, God knows, an awful lot of other flaws in the company, like the product didn’t work and we couldn’t build it and a few other trivial things like that. But just about every VP of Sales along Route 128 was being fired anyway, in those days. So I was literally within days of being canned when poor Jim dropped dead. So I walked into this board meeting, but hardly anybody was talking to me. And I’ll never forget, Arthur [Kohlenberg] came in that day, because of this tragedy, and the man was shaking like a leaf. He was in terrible shape. He was watching all of this, and after a while – and he was always known as Arthur and I was always known as Art. He said: “You know, there’s something I don’t understand here. Why are you being unpleasant to Art?” The guy that was called the chairman, a fellow named Tom Meloy who was a legend in his own right, launched into this: “He’s pissed away all this money and not sold anything,” and Arthur really lit into him, that they didn’t know what was going on, that you can’t sell something that doesn’t work. He told them about the equalizers that didn’t converge and the whole nine yards, and when he got all done, probably a three or four minute monologue, he was so exhausted that he had to leave, and he said something like: “You stick with this guy. It’s not his problem,” and so on, and he left. That was the last time I ever saw him alive, because he died that July. He was never able to come back to work after that meeting.
The Board elected Jim Storey Chief Financial Officer, or COO. Carr was neither fired nor made to feel welcomed. Carr continues:
The next month after Jim died, the Penn Central [a major railroad corporation] went bankrupt, and the whole spring of ‘70 was sort of the bottom of that whole thing and it was doomsday everywhere.” A few weeks went by and Kuhn, Loeb sent this book up that had no more correspondence to Codex than if I wrote a book [investment memorandum] about whales. We looked at it and said: ‘What the hell is this?’
So the next thing that happened was, they said: “You’re the goddamn salesman, so you write a memorandum, and you go sell some stock.” And Fulton Rockwell, who was individual self-made venture capitalist on the board and investor in the company, he and I were designated by the board to go raise this money. Kuhn, Loeb threw up their hands. They said: “You can see, we not only don’t know anything about the company, we can’t raise the money. We just can’t make these phone calls anymore, and if we’ve got to do it the real way, we don’t know how to do that for a company like this,” so Fulton and I were designated to go raise some money. I didn’t know anything about raising money, memorandums or any of that stuff. So I sat down and wrote this memorandum.
Along about the summer, Fulton and I went out and basically got thrown out of every place we went to trying to sell this sick company for – to get a half million dollars of working capital! Our concept was to go get $600,000, and when somebody told us how many shares we had to give them to get $600,000, that’s what we would do. It was in that state. In the meantime, we didn’t have any cash, because we needed the cash when Jim was going to close it, so every two weeks, Jerry Katzin and Storey and I would go down to the First of Boston, and we would beg for some payroll, and they would tell us that we couldn’t have it. “Get some equity,” and we’d show them the memorandum. This was a regular ritual. “Then sell the company,” and we said we would sell the company to anybody that will buy it, “just give us a couple of weeks payroll,” and that went on every couple of weeks. We offered the company to Raytheon. We offered the company to Damon, who was in the medical lab, blood analysis business; Christ, a rubber company in Muskegon, which made retreaded tires. Anybody the bank wanted to us to talk to we would. We offered the company to Milgo. We met them in New York, and then they came up and they visited the building in Newton.
Forney gave the Milgo executives a briefing and demonstrated the Modem-X, or QAM, technology. He remembers: “But they turned us down anyway.” ADS executives also investigated Codex before passing on the opportunity. (ADS and ESE had used a similar 16-point QAM in their 4800 bps modems as early as 1970.)22 Why ADS was not interested might be understandable given they had a similar technology, but Milgo passing is mystifying with the reasons lost to time.
Meanwhile Forney had a working 4800 bps modem, albeit only a breadboard prototype, one still a long way from a shippable product. But the prototype worked, and given everyone’s somber mood, this success represented a small ray of hope. A working prototype was also the kind of promising news that one would have thought might impress a potential acquirer of the company.
Near the end of August a financing appeared possible. The partners of a new venture capital partnership, the Technology Fund, indicated a strong interest in investing $300,000. Carr remembers the month of September:
In the beginning of September, Becker said they would put $300,000 up if A.) I would take over the company; B.) I would put some of my money in it, which I didn’t have; and C.) we got other investors together for a minimum of $600,000, which is what Cryer was looking for. I looked at all these numbers and everything said I would take over only if we raised a million or more, so we got into this circle problem. So the guy, a fellow named Higgins that Rockwell turned up, agreed to match Becker, so now we had $600,000, and then Kuhn, Loeb skinnied around and found enough other people. We actually raised $1,250,000. I had Fulton Rockwell sign a note for me at the bank and I borrowed $25,000 and put up my $25,000, which I wish was $50 or $100,000. I remember my wife asking: “Why are you going to do this thing?” And I said: “If I do it, we’ve got a shot. If I don’t do it, we’re all out of work. I’ve been betting on myself for years, I might as well do this.” She said: “What are the chances?” I said: “This thing looks like a destroyer, but it behaves like a submarine. That’s all I can tell you.”
Storey had to step down from COO, and he and I worked out an arrangement the board OK’d. He was made Exec VP. He and I had a meeting the night before we signed the papers for this million-two, and shook hands on the deal, where I’d be one and he’d be two and we’d not let each other down, even if this thing went astray. We had been basically enemies up until that time because he was really trying to hang me out to dry. But it was a great exercise in emergency behavior. So we raised the money. I took over September 26, 1970. What we did is I cut the place back. We had, I don’t know, probably 135 or 145 people. We cut it down to about 90. We concluded that all of us had to go back to do what we had done five years earlier to get maximum productivity. What we did was, we kept the higher priced people, took as many people out as we had to get the burn rate right. Storey and I became a team that September, and that team was inseparable for the next fifteen years.”
In December 1970, at the fall Joint Computer Conference trade show in Houston, Texas, Codex introduced their 4800 bps modem based on the QAM technology. They boldly named it simply the – “4800,” as if setting the standard to which all others had to conform. It was an immediate hit. Once they began demonstrating the 4800 on customer telephone circuits, it seemed no matter how bad the circuits were, the modem worked perfectly, from the moment it powered up without any need for adjustments or tuning.23 Codex began shipping the 4800 in January 1971, and couldn’t build units fast enough to meet demand.24 Which was good, for sales in 1970 were only $1.1 million, down nearly 50% from 1969. They lost $3 million. If Forney had not succeeded, Codex would surely have gone under.
Milgo, which had sales of nearly $14 million in 1970, its second straight year of high double-digit growth, would be the most impacted by Codex’s success. Milgo’s sales in 1971 would drop 35%.
Carr remembers Modem-X as: “It was intended to create a modem consistent with Codex’s theory, something way beyond 9600 bits per second, whatever that was. Nobody knew what it was. Since we now were making a 96 that kind of worked when the red light blinked, we’re now going to take on this new challenge thing.”
Codex had reverted to an earlier stage of development, arguably even pre-Collective, for new executives had to formulate a vision to affirm or replace the one of the founders, and the new management had to prove they could lead the organization.
G.David Forney, Jr., Robert G. Gallager, Gordon R. Lang, Fred M. Longstaff and Shahid U. Qureshi, “Efficient Modulation for Band-Limited Channels,” IEEE Journal on Selected Areas in Communications, Vol. SAC-2, No. 5, Sept. 1984, p.632
Pugh remembers: “We took it out on lines that nobody could run on, and that modem would run 10 to the eighth. It would never make an error. It was so resilient to all the parameters– I remember I came back from the first demonstration, it was a circuit that was out at Interdata in Waltham. They were a financial timesharing service of some kind. And they had a line that nobody could run on. And we took that modem out and measured the parameters on it and put the modem on it and [snaps fingers] just like that, it ran. And the guy out there was a guy by the name of Norm Daggett. He could not believe it. He became one of our major references that we would subsequently use for getting more money. And also, he spread the word around that if you got a tough circuit, the only place to go is with Codex. When I brought the modem back that day, and I talked to Forney, I said, “You know, this thing ran perfect.” And he said, “What were the parameters?” And I told him, and he said well, “Naturally, I would expect it to.” It was no surprise to him. [Laughter] So the 4800 was an immediate success. We just couldn’t build it fast enough. And it was going primarily into applications of RJE terminals.”
In pricing the 4800 at $5,575, slightly below Milgo’s 4800 bps modem at $5,885, Codex intentionally tried not to provoke a price war. Codex’s actions mimicked those of Milgo, which months earlier had priced their 9600 bps modem, the 5500/96, at $11,500 compared to then pricing of the AE-96 at $13,975 – Codex had lowered the price from $16,000 in anticipation of Milgo’s entry. In acting prudently and realizing neither had to use price to compete, both Codex and Milgo protected their product margins, which helped them achieve and maintain profitability. (Management of both organizations held the same rule-of-thumb of pricing modems for one dollar a bit, or $4800 and $9600, as the eventual goal.) Product pricing information is from Datapro reports unless otherwise stated.