The Ten Biggest Tech Failures Of The Last Decade

bearSeveral of the best-funded and most-publicized tech launches of the last ten years have ended in failure. Many large technology companies which had significant market share and product advantages in large industries lost those advantages.

24/7 Wall St. looked at both start-ups and products introduced by companies that did not survive to create a list of the most colossal tech failures of the last decade. To make the list, a product had to be widely recognized and widely available to customers. It had to be aimed at a large global market. It had to be technologically equal to or superior to its competition. It had to be a product or new company that had the possibility of bringing in billions of dollars in revenue based on the sales of similar or competing products. Finally, it had to clearly miss the mark of living up to the potential that its creators expected, and that the public and press were lead to believe was possible.

1) Microsoft (MSFT) Vista was released worldwide on January 30, 2007. It was the most recent generation of the flagship product of the world’s largest software company. Vista was created to improve the security of the most widely used PC operating system in the world. The securities features were not much better than the previous versions of Windows based on most reviews of the software.  Vista was also not compatible with a number of older PCs which limited the number of users who were likely to upgrade from the earlier version of Windows, known as XP. Many analysts claim that Vista also ran more slowly on PCs than XP. All of these factors prevented Vista from being viewed as clearly better than its predecessors. According to research site Net Applications, as of last month Vista’s global share of PC operating systems was less than 24%. Windows XP had 62% of the market and Apple’s (AAPL) OS X product had over 9%. When Vista was launched, PC Magazine said, “Call it a nice-to-have product rather than a must-have.” Microsoft recently announced its first quarterly revenue drop in 23 years. The day of the earnings release CNNMoney observed, “Microsoft’s Vista operating system, which was released in early 2007, never took off like the company had hoped. Sales in the division that produces Vista fell 16% in the previous quarter. User satisfaction has been underwhelming, and IT departments have largely opted to stick with Vista’s predecessor, Windows XP.” The company is rushing Vista’s replacement, Windows 7, to market and hopes to have it out by the end of the year.

2) Gateway was founded in 1985 and was one of the most successful PC companies in the US. Its sales quadrupled in 1990. By 2004, it was No. 3 in US market share behind Hewlett-Packard (HPQ) and Dell (DELL) and had 25% of the retail PC business. But, by 2007 Gateway was in such poor shape that Acer was able to buy it for $710 million. Gateway’s failure has been blamed on several things, primarily its reluctance to enter the laptop business. Its share of the desktop business was strong through the early part of the decade, but it did not shift to portable computers as fast as its major competitors did. Gateway was also slow in entering the business of selling PCs to enterprises, a formula which drove most of the growth at Dell for many years. Gateway tried to diversify by moving into consumer electronics, but the profits were poor and this decision only hurt the firm’s margins. GigaOm wrote when Gateway was sold, “The $710 million price tag is quite a comedown from the mid-1990s, when Gateway and Dell (DELL) were spoken of in the same breath and commanded mega-billion dollars in market capitalization.”

3) HD DVD was one of two formats for high definition DVDs. The other format was Blu-ray. HD DVD specifications were put in place in 2002. Negotiations among consumer electronics companies to have only one product for playing high definition discs ended when there was no consensus about royalties. HD DVD was primarily funded and marketed by Toshiba and NEC and was first released as a consumer product in 2006. When HD DVD was first launched, it had a sales lead over Blu-ray.  Industry analysts say that Toshiba lost almost $1 billion supporting the format before abandoning it in 2008. There are a number of reasons that the HD-DVD format lost out to Blu-ray, which was championed by Sony (SNE). The most commonly cited explanation is that Sony did a better job convincing major film studios to release high definition editions of movies for Blu-ray. Sony may have had an advantage because it owns one of the largest studios. Analysts believe that when Sony got Warner Brothers to adopt Blu-ray exclusively, it won the battle against HD DVD. Toshiba had several explanations for the failure of its product.  One of those that it mentioned most often was that the digital video download business hurt sales of physical DVD players. That argument does not carry much weight because downloads should have hurt Blu-ray just as much. The final blow to HD DVD was probably when Wal-Mart (WMT) decided to stop offering the format in favor of Blu-ray. There has been no compelling analysis as to why Blu-ray survived and HD DVD did not. One thing is certain. Sony was willing to continue to spend money even though the future of high definition disks was not assured, and that risk is not over. Blu-ray is still not a staple in most consumer entertainment systems.

4) Vonage (VG) was the grandfather of voice-over-IP (VoIP). It is now hardly a footnote in the growth of the industry which is currently dominated by products from cable companies and free services, primarily from Skype, which had 405 million registered users at the end of 2008 and produced $551 million in revenue. eBay (EBAY), Skype’s parent, plans to take the VoIP company public next year. In the first quarter of this year, Vonage did little better than breakeven on revenue of $224 million, which was flat compared with the same period a year earlier. The predecessor company to Vonage began operating in 2000. The company faced early legal challenges, but cleared a hurdle when a federal judge ruled that it could not be regulated as a traditional telecom company. Using venture capital, Vonage aggressively marketed its services as an inexpensive alternative to standard dial up phones. The firm was successful enough that it raised $531 million through an IPO in May 2006. The offering price was $17. By December, it was trading at $1 a share due to pressure from cable competitors and poor earnings. Vonage also faced lawsuits over some of its intellectual property.  Settlements cost the company tens of millions of dollars. Vonage is no longer growing. In contrast, cable giant Comcast (CMCSA) now has 6.8 million VoIP customers and added almost 300,000 in the last quarter.

5) YouTube is the largest video sharing site in the world. According to comScore, 99.7 million viewers watched 5.9 billion videos on in the US during March 2009. In November 2006, Google (GOOG) bought YouTube for $1.65 billion. There is a fairly good chance that the search company will never get a return on that investment. YouTube has not come up with a model to make money by either selling advertising or charging for premium content, even though it has an a enormous audience and library of content. Most of the video content placed on YouTube is of such low quality that marketers are reluctant to marry it with their messages. Google has said, in regulatory filings, that YouTube revenue is “not material.” Forbes estimated that the site’s 2008 sales were $200 million. Bear Stearns put YouTube’s 2008 domestic revenue at $90 million. Recently, Credit Suisse estimated that YouTube will lose $470 million this year primarily due to the costs of the storage and bandwidth required to run the website. The same analyst said that YouTube will bring in $240 million this year, but that is only up 20% from 2008. If this analysis is even close to correct, YouTube would have to triple its revenue to breakeven. The New York Times recently wrote that “while YouTube, along with other new media properties like MySpace, Facebook and Twitter, is seen as leading the challenge against traditional media companies, the company itself is struggling to profit from its digital popularity.” YouTube is big, but that has not made it a success.

6) Sirius XM (SIRI) satellite radio was supposed to be one of the most successful consumer electronics devices of all time. A subscriber would be able to listen to more than 100 stations coast-to-coast in either a moving vehicle, or using a portable version of the device. Initially, the service planned to run no commercials. One of the two companies that would eventually be the merged Sirius XM was XM Satellite Radio which launched its service in September 2001. At the end of the year, the company had almost 28,000 subscribers, a figure that jumped to about 350,000 by the end of the 2002 and 5.9 million by the end of 2005. Over this period, the company accumulated hundreds of millions of dollars of debt in order to cover capital expenses, operating deficits, and sales and marketing costs. Analysts expected the company to be extremely profitable once it reached subscriber levels of more than 10 million. The business was growing so quickly that this goal seemed a foregone conclusion. Rival Sirius launched its service in July 2002. Over the next five years, it would have fewer subscribers than XM but would grow nearly as fast. Sirius also took on tremendous amounts of debt to support its operations. As both companies ran low on money, they announced a merger on February 17, 2007. The FCC reviewed the request for thirteen months while the companies were bleeding cash. Subscriber growth had slowed, most likely because of new and more popular consumer electronics devices like the Apple iPod and multimedia cellular handsets. Shares in Sirius, which had traded at $63 in 2000, dropped to $.05 earlier this year. In the first quarter of 2009, the number of subscribers for the combined service declined by 400,000 from the previous quarter to 18.6 million. Neither Sirius nor XM ever made a dime.

7) Microsoft’s (MSFT) Zune was launched in November 2006. The world’s largest software company believed that it could compete with the Apple (AAPL) iPod, which had been in the market since 2001 and dominated the multimedia player and music download business around the world.   Apple had sold well over 100 million iPods, when the Zune was launched. Microsoft was able to get the four largest music labels to sign licensing agreements with the company.  Sales were dreadful during the first several months after the launch. Bloomberg Television said that between the launch date and mid-2007 only 1.2 million Zune players were sold. In May 2008, Microsoft said that it had sold two million players since its launch. The Wall Street Journal reported that revenue from the Zune player was $85 million during the 2008 holiday season compared to $185 million in the same period in 2007. Apple’s iPod revenue during the last quarter of 2008 was $3.37 billion. Microsoft, which had access to as much hardware development expertise as any company in the world and the capital to support a massive marketing budget for new products failed completely in its attempt to get a large part of the iPod market.

8) Palm (PALM) produced both a portable wireless device and an operating system for portable hardware devices and desktops. Palm launched its Palm Pilot hardware device in 1996 as a personal organizer. In 1999, it released its Palm V. The Palm Treo smartphone was developed by Handspring which Palm acquired. In the quarter that ended in September 2005, Palm sold 470,000 Treo units, up 160% from the same quarter the year before. At that point, three companies dominated the smartphone market: Palm, Research-In-Motion, maker of the Blackberry, and cell phone giant Nokia (NOK). By the September 2007 quarter, Treo sales had only moved up to 689,000, but sales of the Blackberry hit almost 3.2 million and the newly launched Apple (AAPL) iPhone sold more than a million units during the same period after it debuted on June 29 of that year.   Palm, one of the earliest makers of smartphones,  was unable to follow up its success in the personal organizer business.  Analysts pointed to the fact that the company was slow to realize that consumers wanted wireless voice and data from the same device. According to ZDNet, “Palm just couldn’t find the formula for over-the-air synchronization with Microsoft Outlook, which business users demand and RIM nailed with its BlackBerry device.” Palm also suffered from multiple product delays. The company will launch the next versions of its hardware, the Pre, later this year. Palm’s stock traded for $669 late in 2000. Today, the shares trade for $11. Shares in Apple and RIMM are up between 200% and 300% over the same period. Palm could not translate its lead in one form of consumer electronics device to another.

9) Iridium, the global satellite phone company backed by Motorola (MOT), filed for bankruptcy in 1999, after the company had spent $5 billion to build and launch its infrastructure of satellites to provide worldwide wireless phone service.  At the time, it was one of the 20 largest bankruptcies in US history. To work properly, the system needed 66 satellites. The creation of this enormous system forced the company to default on $1.5 billion of debt. The service had been such a failure that it only had 10,000 subscribers. This was, in part, due to technical difficulties with Iridium’s first handsets. According to a Dartmouth Tuck Business School case study on the history of Iridium in 1998, the company forecast that it would have 500,000 subscribers by the following year. But, the service was expensive for customers, and the cellular phone business had started to take hold as its infrastructure was built out in most of the large developed countries. An Iridium handset cost $3,000 and talk time was as much as $5 a minute. Cellular service was not as broadly available, but it was far less expensive.Technology difficulties also made the service unpopular. Because Iridium’s technology depended on line-of-sight between the phone antenna and the orbiting satellite, subscribers were unable to use the phone inside moving cars, inside buildings, and in many urban areas.

10) The Segway two-wheel personal transportation vehicle was launched in 2002. When the product was launched, the head of Segway said it “will be to the car what the car was to the horse and buggy”. Famous venture capitalist John Doerr said that Segway sales might hit $1 billion as fast as any company in history. The company spent about $100 million developing the product. Segway did not understand that its price point, well above $3,000 for most models and $7,000 for some, was too high to draw a mass consumer base. The other major unforeseen problem is that the Segway was classified as a road vehicle in some countries requiring licensing, while it was illegal to use on roads in other nations. From 2001 to the end of 2007, the company only sold 30,000 units of its two-wheeled scooter.

Douglas A. McIntyre

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