Tech Nostalgia: Vertical Integration (Updated) (Premium)

UPDATE: I added a reference section I inadvertently left out at the end of the article. --Paul

Calculator maker Commodore was almost forced into bankruptcy in 1975 when Texas Instruments (TI) directly entered the market with far less expensive products. Incensed by this, co-founder Jack Tramiel discovered that vertical integration was the key to TI's advantage: because TI owned the chips it used its own consumer products, it could aggressively lower prices in ways its competitors could not.

Tramiel was forced to go back to the well: he asked Commodore chairman Irving Gould, who had previously saved the company from bankruptcy due to financial shenanigans in the 1960s, for another cash infusion, this time to purchase chipmaker MOS Technology and secure a regular supply of inexpensive calculator chips for his company.

"You give me the money to keep going, give me the money to buy MOS Technology, and I'll give you all of my [Commodore] stock," he told Gould, effectively giving the financier total control of the company. "If I succeed, you give me back some of my stock. How much you give back is up to you." Irving agreed. And so Tramiel signed over his Commodore stock, Irving gave Tramiel $3 million, Tramiel acquired MOS Technology, and Irving later returned just 8 percent of the stock back to Tramiel, ensuring that Gould, and not Tramiel, would be the final voice on any decisions at Commodore going forward.

This would come back to haunt Tramiel a decade later, but his decisive thinking had saved his company. He had also unknowingly set up Commodore for its entry into the home computer market and a period of chaotic, explosive growth. Key to this success was Tramiel's condition that MOS Technology's lead chip designer, Chuck Peddle, would move to Santa Clara, California and join Commodore as part of the acquisition.

Peddle had previously worked at Motorola on the 8-bit 6800 processor, which never challenged the leading microprocessors of the day---the Zilog Z80 and Intel 8080---in part because of its high price point. (The 6800's successor, the 68000, would fare better and power several popular computer systems in the 1980s.) But when Motorola canceled his project for a lower-cost 6800, he left and joined MOS Technologies in Pennsylvania, where he created the 6501 and 6502 families of 8-bit microprocessors, the former of which was socket-compatible with the 6800, and the latter of which cost just $25, one-sixth the price of the 6800.

Peddle's expertise, the 6502's inexpensive versatility, and Jack Tramiel's aggressive business tactics---plus his seething desire to one day impart revenge on TI---would drive Commodore's next era. Here, the stories diverge.

Peddle claims that he immediately argued to Tramiel that the calculator business was a dead-end and that Commodore needed to expand into home computers. Tramiel's version is that when Peddle told him about his 6502 processor, he said, "You know what you've got here? You've...