Commodore International Ltd. Business Information, Profile, and History

History of Commodore International Ltd.

Commodore International Ltd. produces the Amiga multimedia line of computers, a range of PC-compatible computers, and the entry-level Commodore 64 system. It is incorporated in the Bahamas but has its main office in West Chester, Pennsylvania. Commodore's primary market is Europe, where, especially in Germany, it is a leading brand.

Commodore was founded by Jack Tramiel, an autocratic Polish-born Canadian who had survived the German Nazi concentration camps of World War II. Tramiel incorporated Commodore on October 10, 1958, as the Commodore Portable Typewriter Co., Ltd., a Canadian corporation that Forbes referred to as "a typewriter repair shop in the Bronx."

In the succeeding four years Tramiel successfully moved Commodore first into the assembly and marketing of typewriters and mechanical adding machines and then into the manufacture of electromechanical typewriters and adding machines. In February 1962 he changed the company's name to Commodore Business Machines Ltd.

Tramiel's initial success was soon overshadowed by controversy about his business methods. In 1965 it was revealed that he and C. Powell Morgan, Commodore's chairman and president of the bankrupt Atlantic Acceptance Corporation, had, according to Forbes, issued misleading financial statements, used inside information to bolster share prices, and profited from dummy companies that borrowed money from Atlantic and re-lent it to Commodore. Tramiel was never indicted and, in response to these charges, which were made in the report of the Canadian Royal Commission investigating the collapse of the Atlantic Acceptance Corporation, he claimed he was merely following orders. Convinced otherwise, however, was Ontario Supreme Court Justice Samuel H. S. Hughes, who wrote, according to Forbes, that Tramiel "was not, and probably never had been the man who appeared, on his own showing, to be the dutiful and helpless instrument of Morgan's schemes."

The financial fallout from the Atlantic bankruptcy plunged Commodore itself near bankruptcy. In need of new capital, Tramiel turned to Canadian investor Irving Gould, who in 1966 paid less than &Dollar;500,000 for control of 17.9 percent of Commodore's stock.

Once in control, Gould reduced Commodore's debt and sold company assets, including manufacturing facilities. He brought Commodore's designs to low-cost producers in Japan, where he and Tramiel also saw early electronic calculators. Impressed by these devices, he and Tramiel became convinced that the future lay in electronics and subsequently contracted Casio and others to manufacture calculators for sale in North America.

Sales and profits increased rapidly in 1968 when Commodore introduced the first of these calculators. Between that year and 1970 sales rose from &Dollar;4.1 million to &Dollar;9.4 million while profits expanded from &Dollar;130,000 to &Dollar;700,000. In 1973 Commodore made &Dollar;1.3 million on sales of &Dollar;32.8 million.

Taking advantage of the economic climate, Tramiel and Gould moved to take control of manufacturing and introduce new products. In 1969 they arranged to begin manufacturing calculators using semiconductor chips made by Texas Instruments. In 1971 they introduced the C106, the first mass-market compact electronic calculator for consumers. In 1973, in response to exploding demand, they opened manufacturing plants in Palo Alto, California; Bristol, Virginia; and Eaglescliff, England.

By 1974, although sales increased to &Dollar;49.8 million, earning began to fall due to a surplus of calculators on the market. Prices spiralled downward and the glut of products led to massive returns by retailers. The situation worsened in 1975 when the swiftly-evolving electronics industry left Commodore with &Dollar;6.5 million in obsolete inventory. As a result, the company reported losses of &Dollar;4.4 million on sales of &Dollar;55.9 million.

To avoid similar future disasters, Tramiel cut costs. He phased out the Bristol plant, moved Japanese headquarters closer to its assemblers' facilities, sold only to volume buyers who paid promptly, and reincorporated as Commodore International Ltd. in the tax-free Bahamas. Most importantly, he decided to tackle the actual manufacturing of chips so that Commodore could govern its own supply.

In pursuit of this "vertical integration" he and Gould acquired several small companies, the most important of which proved to be MOS Technology. Unbeknownst to Tramiel or Gould, MOS had developed the 6502 microprocessor--the chip that Commodore used to build its first computer and which Apple and Atari used to build their early home computers.

By 1976 management realized that the calculator market had reached maturity and Commodore needed new products. They put together a prototype of a small computer and exhibited it at a trade show. The prototype generated so much excitement that Tramiel decided to manufacture a stand-alone home computer. To develop the product, though, Commodore needed a bank loan and banks, mindful of the Atlantic Acceptance episode, refused to loan Commodore the money. In the end, Gould was forced to personally guarantee the &Dollar;3 million note.

While the computer was being developed, Tramiel struggled to keep Commodore in the black. He divided the company into four divisions, each of which he hoped would devise new products and sell them through international distributors: the consumer products division would handle electronic calculators and watches; the components division would market semiconductor components and watch modules; the metal products group would deal in steel office furniture; and the systems division would sell personal computers and small microprocessor systems.

In 1977 Commodore's systems division unveiled the Pet, Commodore's first home computer and one of the very first home computers on the market. By the standards of the mid-1990s, the Pet was primitive, with little practical use. In 1977, however, it had tremendous novelty value and, at &Dollar;795, was the first stand-alone home computer priced under &Dollar;1,000. The Pet did well, but in the United States its low price made financing its promotion difficult. Due in part to the lack of promotion, its share of the market fell to just 10 percent in 1981, compared to 23 percent for Apple and 16 percent for Tandy. In Europe, where Commodore's distribution facilities were intact and the Pet's price was significantly higher (&Dollar;1,295), the computer did much better. This disparity between European and American sales would become a trend for Commodore, which would ultimately garner more than 90 percent of its sales earnings outside North America.

Commodore grew quickly, especially in its systems and metal products divisions, the latter of which had been bolstered by the acquisition of Nortex Products and Gildon Metal Enterprises. Sales for 1978 reached &Dollar;50.1 million, and profits hit &Dollar;3.4 million. In 1979, a year when Commodore made &Dollar;6.5 million on sales of &Dollar;71.1 million, stock prices bolted from 5 1/2 to 48 7/8 before a 3-for-2 split.

Throughout the late 1970s and early 1980s Commodore continued to issue new products, including the CBM, which was aimed at the small business market and priced just under &Dollar;5,000. Its next real success came in late 1980 when it introduced the Vic 20, the first home computer priced under &Dollar;300. More advanced than a video game machine and less powerful than the personal computers that would soon appear, the Vic 20 was extremely successful and established Commodore as the leading microcomputer manufacturer in Europe and a top manufacturer in North America.

Fueled by the success of the Vic 20 as well as the giddy atmosphere surrounding the personal computer industry, Commodore's share price rose to 138 1/4 before a 3-for-1 split in 1981. By 1982 Commodore was selling 800,000 Vic 20s a year as well as a large number of semiconductor components to other manufacturers. That year the company reported profits of &Dollar;40.6 million on sales of &Dollar;304 million.

With the introduction of the Commodore 64 in August 1982, Commodore again placed itself at the leading edge of the personal computer market. Intended as an alternative to the Apple I, its base price of &Dollar;600 was &Dollar;400 less. According to Forbes, the price differential was made possible by "having chip and equipment designers working hand in hand." The 64, like the Vic 20, proved extremely popular. Profits were so high that management declared a 50 percent stock dividend. Even so, Commodore continued to have problems on the domestic market. Only 30 percent of the company's 1982 sales came from the United States.

In the 1984 fiscal year Commodore made &Dollar;143 million and reported sales of &Dollar;1.27 billion. Both Tramiel and Gould, however, could see that the company's future fortunes were uncertain. While Apple was trying new products and IBM had entered the race for home computer dollars, Commodore had nothing to replace the 64. Given the situation, Gould's forced out a whole cadre of top management, including Tramiel, who departed that January.

As his new president, Gould chose Marshall F. Smith, a professional manager who had previously headed the diversified industrial company Thyseen-Bornemisza, Inc. Smith repopulated Commodore's management ranks with professionals from Apple, Nabisco, and other firms. He and Gould also focused on finding a next generation computer to compete with the Macintosh and IBM's rapidly improving offerings. Smith and Gould found their new computer in the Amiga Corporation, a small Silicon Valley start-up that they bought for &Dollar;25 million in December 1984. Amiga would provide Commodore with 27 new engineers and a computer chip essential to the development of a line of computers touting greatly advanced graphics capabilities.

Commodore was then sued by Jack Tramiel, who, after his ouster from Commodore, had bought the computer game maker Atari Corporation from Warner Communications. Atari filed suit against Commodore alleging that Amiga had pledged to sell its chips only to Atari.

Despite the lawsuit, Commodore went ahead with the deal and in July 1985 introduced the Amiga. Priced at &Dollar;1,295 and based on the Motorola 68000 microprocessor as well as three custom chips, the Amiga was superior to the Macintosh in several respects. It displayed in color, worked faster, and could perform several computing jobs at once. The Amiga was oriented toward video, audio, and graphics. Douglas Cayne of the Garttner Goup said in Fortune that "The Amiga is absolutely the most spectacular, most wonderful, most powerful machine for the home market today." The reviews of the machine, however, were not universally positive. An anonymous reviewer in Byte described it as "so poorly documented that many features were as confusing as bugs." The operating system, AmigaDOS, was incapable of running DOS-based software, and software writers were frustratingly slow in writing programs specifically for it.

Commodore also failed to define the Amiga's niche in the video and sound portion of the marketplace and didn't actually deliver it to stores until mid-November of 1985, missing much of that winter's holiday shopping season. Because of Amiga's slow start, Commodore's cash flow, according to Forbes, "dried to a trickle." The company lost &Dollar;113 million in 1985 and &Dollar;127 million in 1986.

The losses brought Commodore close to bankruptcy. Smith cut costs by closing a semiconductor plant in Costa Mesa, California, and a computer assembly plant in Corby, England. In mid-1985 the company went into technical default and it s banks set a deadline of January 31, 1986, for the renegotiation of loans. The deadline was successfully negotiated but a month later Smith resigned. It was speculated that the resignation was part of Commodore's agreement with its banks.

Thomas Rattigan, a former PepsiCo vice-president who had become Commodore's president in 1985, succeeded Smith as chief executive officer. In the summer of 1986 Rattigan returned Commodore to profitability. He introduced a line of IBM-compatible PCs and presided over continued successes in Europe, where the Amiga became a leading computer for business. Rattigan and Gould, however, clashed over the poor United States sales, which continued to account for just 30 percent of revenues. The conflict became a question of board loyalty and in April 1987 Rattigan resigned amidst suits and countersuits.

With Rattigan gone, Gould left the presidency vacant and took over as chief executive. In April 1988 he presided over the introduction of the Amiga 2000. The 2000 improved the Amiga's performance in areas the computer already dominated, such as desk-top video. It was more rugged and expandable than the 1000, and Commodore gave it an optional bridgeboard that would allow it to run DOS-based programs. The 2000 and its lower priced cousin, the Amiga 500, were lauded by the computer press and found a niche among sound and video enthusiasts. But they did not really enter the mainstream and did not threaten Apple or IBM.

Nevertheless, the combination of the Amiga, DOS-based PCs, and the surprisingly large sales of the veteran Commodore 64 system led to reasonable profits. In 1988 Commodore made &Dollar;48.2 million on sales of &Dollar;871.1 million. In 1989 it cleared &Dollar;50.1 million on sales of &Dollar;939 million. Commodore did run into trouble with the IRS, however, which disagreed with Commodore's tax tactics and claimed it owed &Dollar;74.1 million for the years 1981, 1982, and 1983.

While profits continued, Amiga technology advanced. The company introduced the Amiga 2500, which Forbes lauded for its ability to capture video and overlay it with text, graphics, and four channel sound. The 2500 model, which was well supplied with software and conformed to both the United States and European television standards, was better with video than most computers and ideal for computing's burgeoning role in training and business presentations.

Despite this technological advance, Commodore reported losses in the first two quarters of fiscal 199---losses Forbes magazine placed at the feet of Irving Gould. Forbes criticized Gould's penchant for hiring and firing executives and described him as an absentee landlord who, as a Canadian citizen, could spend no more than three days a week in the United States without paying American taxes. One analyst told Forbes, "Irving tries to minimize taxes, hates the day-to-day stuff and doesn't like to push the product."

In April 1990 Commodore introduced the Amiga 3000. Released in the midst of an industry buzz about the possibilities of multi-media systems--a concept Commodore had been pushing since its beginning--the 3000 retained Amiga's edge. It cost thousands less than competing systems and Byte called it "the most capable multimedia platform you can get in a single box." It also came with an authoring system that, according to the Wall Street Journal, made "it rather easy to pull together a multi-media presentation." Moreover, according to Byte, Commodore had "finally defined a focus for the Amiga line and staked its claim to the emerging multimedia market." Perhaps because of this, Commodore convinced many retailers--some still smarting from the company's mid-1980s decision to sell to discount chains--to carry the system.

In fiscal 1992 Commodore sold more than one million Amigas, pushing that computer's installed base to well over 3.7 million. Nevertheless, overall sales fell from &Dollar;1.04 billion to &Dollar;911 million, primarily because of lower peripheral sales, a discontinuation of lower end MS-DOS based PCs, price reductions on the ever-surprising Commodore 64 (650,000 units sold), and disappointing sales of CDTV, a new system that combined compact disc sound and video with interactive Amiga technology. As a result, Commodore reported a loss for its fourth quarter and yearly profits that fell to &Dollar;27.6 million from 1991's &Dollar;48.2 million.

Commodore continues to enjoy great success in Europe, where it accounts for the great majority of its sales. Its historic position as a major player in that market remains unchanged. The company continues to struggle for market share in the United States, however, and its sales in Asia and Australia have not been as substantial as the company hoped. The remainder of the decade will no doubt prove interesting for Commodore as it continues its many-fronted battle in the computer industry.

Principal Subsidiaries: Commodore B.V. (Netherlands); Commodore Electronics Ltd. (Bahamas); Commodore Business Machines Ltd. (Canada); Commodore Business Machines Inc. (U.S.A.); Commodore Business Machines Inc. Ltd. (New Zealand); Commodore France S.A.R.L.; Commodore Business Machines, U.K. Ltd.; Commodore Business Machines Pty. Ltd. (Australia); Commodore Buromaschinen GmbH (Germany); Commodore Japan Ltd.; Commodore AB (Sweden); Commodore AG (Switzerland); Commodore Amiga, Inc.; Commodore Data A/S (Denmark); Commodore Computers Norge A/S (Norway); Commodore Italiana S.p.A. (Italy); Commodore Computer N.V./S.A. (Belgium); Commodore Business Machines Ltd. (Hong Kong); Commodore Semiconductor Group; Commodore European Support and Coordination Company (Netherlands); Commodore S.A. (Spain); Commodore Computer GmbH (Austria); Commodore Protuguesa Electronica, S.A. (Portugal).