Apr 16, 2012

Sure Things and the Role of Chance

RAM Chips? Snowmobile Rentals? Can't Miss!

If foxes are so sly, then why do so many get hit by cars?

In the early days of the Desktop PC era, a friend of mine thought he'd play the role of Mr Smart Guy. He owned a walk-in/retail computer sales and repair business at the time, one of the first half-dozen or so in the Albany area. Although he had revenue streams coming in from a couple different directions, he was making easy money --- as in making it without really trying --- in one flukey little aspect of the operation. That business was memory chips.

Here's how it was going down: he'd buy 1MB RAM chips, a dozen or so at a time at first. This was back when your typical new PC might come equipped with 64K or 256K or 512K of core memory, mind you. The power users were quickly hitting the wall with such configurations, and off they would skip to my bud's store to add a megabyte or two. His register rang up consistent and healthy sales as a result. So many people were doing this routine all around the USA that all the hacker publications published the weekly price of 1MB RAM chips in each new issue. A new and highly watched commodity market was suddenly upon us.

So, for example, our boy might pick up the phone and order 1MB chip sets for $25/MB each. Don't shake your head: that was the kind of pricing that existed back then. But by the time it got to his shop and onto his bench to get plugged into a customer's motherboard, the published price in those magazines might have risen $10+ at retail. He was making money just by sitting on inventory for a few days. Who said inflation is a bad thing?

This was all the result of a classic supply and demand dynamic at work: the global electronics supply chain was not yet ramped-up for this tsunami of RAM-hungry PCs now hitting both the business and consumer markets all at once. It was caught with its pants down. The manufacturing infrastructure was not in place, demand far outweighed supply, and it was getting more unbalanced by the day. Too much money was chasing a rare good. Prices went up, and up, and up – eventually to $100/MB. Some of the pen-equipped geniuses out there were even predicting $1,000 pricing.

That was music to the ears of one cetain forward thinker. It was at this very point that our hero decided to go all-in, just like the riverboat gambler he fancied himself to be during our week night poker games at his home alongside the confluence of the Hudson and Mohawk. Yes, sir: it was time to spec-u-late!

He had family money, built up by the family's former eponymous business enterprise that had thrived locally for decades. Along with the cash, the family name also granted him easy credit. So, the next thing you know, the RAM chips weren't showing up at his back door in UPS trucks any more; they were coming by the tractor trailer lot. He stacked their boxes in the back room, plopped his feet on the table, lit a cigar and waited for this rocket ship to keep on course into outer space.

Well......., it didn't quite work out the way he had planned. The chip industry, especially Japan, Inc, preced him by a bit with their own all in moves and cranked up the factories to deliver the goods. The roll-up was incredibly fast, and when combined with parallel R&D breakthroughs which were increasing memory scaling by a factor of X, RAM pricing quickly plummeted – quite possibly at a rate not seen since the Amsterdam Tulip Crash of hundreds of years back.

It bankrupted our pal. Those $100 chips in the back were soon were worth $40, then $20, then $10, and then nothing. 1MB RAM sets? You got any 8" floppies to go with that, ha-ha? Today, RAM is as cheap as water. It likely won't give him much solace, but he wasn't alone. Heck, the Japanese industrial machine made the same bet-the-ranch mistake he did, and that simple fact played a major role in that nation's so-called Lost Decade. Intel, on the other hand, made the opposite bet: it clearly saw this burgeoining RAM commoditization trend and decided early-on that it wanted no part of that game. It thereby shifted its resources into central processing unit chips. It won that poker hand.

This old tale came to light in the past week upon my meeting a sad gent who had just made a similar all-in bet. His brainstorm: buy a fleet of snowmobiles in the Lake George area and get into the rental business. Take their credit cards, hand them a trail map and get out of the way before they run you over. Sure enough, he pulled that trigger last autumn, with a big bank loan delivering a dozen shiny new sleds to his rented garage and its attached properly equipped showroom. A P-G (Personal Guarantee) was required by the bank to make this all happen, of course. But what the heck: he couldn't go wrong. Right?

Well........., he could and he did. Apparently, Mother Nature wasn't on his payroll this winter, and the near non-appearance of the white stuff killed him. He related that he didn't even hit 5% of his revenue projections. When I mentioned the concept of weather insurance, he replied “how's that work?” He's now on the ropes, with his home's equity already eaten up and some real soul searching now taking place under its roof. I sensed his wife wasn't a happy camper, either.

Entrepreneurship is not a game that's played in short pants. Still. the thrill of the sport attracts many of us to it But just like other sports have some players that get washed-out in the low minors --- often for reasons beyond their control such as physical injuryg --- it's a game than many of us feel compelled to play, regardless.

"I'd rather fail at my own enterprise than succeed as the VP of someone else's."


1 comment:

Mary said...

I have always admire the courage of people who do it on their own. I myslef am not that brave.