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"The most successful product ever marketed in America"

The story of Chester Carlson's invention and development of xerography is a classic tale. A result was the creation of the Xerox 914 plain paper photocopier, which Fortune magazine once described as 'the most successful product ever marketed in America'. The story provides axioms about commercialiation and immunises us against get rich quick schemes. It is essential reading for innovators.

Chester Carlson's path to commercialisation of the photocopier

The inspiration for this article is David Owen's original book on Chester Carlson, the inventor of xerography. It adds considerably to what we know about Carlson and the pre-history of Xerox Corp. The book is titled Copies in Seconds: Chester Carlson and the Birth of the Xerox Machine (Simon & Schuster, New York, 2004).

Carlson's story is also the story of a decent human being. Drawing from Owen's book, this article focuses on the legal and business aspects of the Carlson story, leaving aside the technical and personal.

The structure of this article draws from experience in legal work for inventors, investors, researchers and manufacturers in numerous cases.

If you are new to the concept of commercialisation, a definition may be found here. On the commercialisation path it is vital to know what is important and how and when to deal with each priority, whether it is business or personal. Carlson's path is an instructive story about collaborative entrepreneurship.

Commercialisation Axioms

1. Do what will interest you over the long haul

There is considerable evidence that printing and copying were subjects on Carlson's mind since as early as 1916 when he received a typewriter as a gift from an aunt. Given the length of time and level of effort ahead in his life, Carlson's early interest in printing and copying was useful.

2. Overcome personal obstacles

Gifts were rare for young Chester. He grew up in great difficulty, bearing the burden of his family's invalid father, poverty and uncertain future. By the time he was 12 or 13 he had become his family's principal provider.

His father's ill health dominated Carlson's childhood, and his mother's early death shocked him. Despite setbacks he completed high school and tertiary education, a CalTech science degree in 1930 and a New York Law School degree in the late 1930s.

3. Search for opportunity, think differently

In his career Carlson worked in numerous jobs. They included working at Bell Labs and being a patent attorney in the patent firm of P. R. Mallory and in the patent department of Bell Labs.

In both offices he often witnessed the making of a dozen or more copies of a patent specification by someone writing an original and then others retyping it on a typewriter. Copies were needed to distribute to associates in foreign countries, to companies, to inventors, and others. There were other ways to make copies but you had to leave the office and wait half a day or even 24 hours to get the copy made say with a Photostat or a Rectigraph machine using an outside vendor. Then you had to take the vendor's bill, record the bill information and manage the resulting accounts. Quite a chore.

4. Build knowledge and insights for the opportunity

Xerography had practically no foundation in previous scientific work, except for Carlson's extensive years of research. Dr Harold E. Clark, a Xerox physicist said in 1967 that:

"Chet put together a rather odd lot of phenomena, each of which was obscure in itself and none of which had previously been related in anyone's thinking. The result was the biggest thing in imaging since the coming of photography itself. Furthermore, he did it entirely without the help of a favourable scientific climate. As you know, there are dozens of instances of simultaneous discovery down through scientific history, but no one came anywhere near being simultaneous with Chet. I'm as amazed by his discovery now as I was when I first heard of it."

5. Name everything, including process

In 1938 inventing the process that gave his path direction, Carlson named it 'electron photography' and then 'electrophotography'.

6. Research and test, then research and test again

carlson_astoria

In 1938 Carlson and Otto Kornei, one of his early collaborators, produced the first xerographic image using India ink. Kornei wrote the place and date on it '10-22-38 ASTORIA'. But Carlson was thinking about the need for a copier and brainstorming for it well before 1938.

Ten more years of invention, improvement, testing and product research and development lay ahead.

7. Tell stories, promote effectively

In November 1940, when his first patent was issued Carlson got some runs on the board because The New York Times ran a brief story on the front page of its second section. The article generated several inquiries.

Some years later a New York City patent attorney named Nicholas Langer came across a copy of one of Carlons' first patents and wrote a laudatory article published in 1944 in a technical supplement to a magazine called Radio News. Carlson returned the favour by hiring Langer to work at P. R. Mallory.

Carlson wrote to numerous companies and did numerous presentations, in the process collecting rejection letters from General Electric, RCA, A. B. Dick, The Charles Bruning Company, IBM and others. He was not a showman, he was necessarily the best man to pitch his idea. He was perhaps too reserved in his manner to be an effective presenter.

Image
Electrophotography patent, 1939

Also, in the early years his pitch was hampered by a unperfected or malfunctioning prototype.

8. Legally protect you idea

Carlson's invention ultimately became the subject of almost 40 patents. The first was U.S. patent No. 2,297,691 on 6 October 1942 for electrophotography, later called xerography.

Back in 1938, as soon as he had invented electrophotography Carlson contacted a close friend of his to be present as he communicated it and recorded the information in writing to help document the date and nature of the discovery for patent law purposes.

9. Fund and negotiate research agreements for the invention

By the early 1940s Carlson had no or few funds to invest further; and additionally he had growing responsibilities having become the head of the P. R. Mallory patent department.

His work at his firm resulted in a 1944 presentation by Carlson to scientists and engineers of the Battelle Memorial Institute. It went unusually well.

The institute had been established by Gordon Battelle, a wealthy Ohio industrialist, who never married and left his entire estate of $US1.5 million to the foundation of an institute dedicated to 'education in connection with and the encouragement of creative and research work and the making of discoveries and inventions in connection with the metallurgy of coal, iron, steel, zinc and their allied industries,' among other things.

In late 1945 Carlson and the Battelle Memorial Institute settled a first agreement which Carlson described as 'essentially an agency agreement'. Owen writes (at page 117) of Carlson overview of that contract:

"I appointed them as the exclusive agent for my patents and inventions in this field and they promised to put into the package any inventions they made. They promised to use diligence to obtain licences. They agreed to do some research, although there was no dollar value put on the amount of effort they were to put into research. We were to share any returns on royalties that would come out of the commercial development on a 60-40 basis, 60 per cent for Battelle and 40 per cent to me."

Unfortunately, even with the institute behind him, no interest was attracted from others despite further constant demonstrations, to Eastman Kodak, Harris Seybold Company and others.

Battelle itself spent merely $US702 on electrophotography research in 1944, writes Owen at page 118, which was little more than what Carlson had paid Otto Kornei back in 1938 and 1939. In 1945 research expenditure rose to roughly $US7,000.

10. Negotiate licensing agreements

Nearing the mid-1940s the Radio News publicity came in handy.

John Dessauer, a scientist at the Haloid Company saw a condensed version of the Radio News news article in a monthly technical bulletin published by Eastman Kodak. Haloid produced photographic paper and was interested in developing a new line of business, in a field that was not dominated by a powerful competitor like Kodak was for Haloid. Dessauer thought electrophotography might suit. Dessauer showed the Radio News abstract to Haloid's president, Joseph C. Wilson. Wilson gave the alliance a green light.

Image
Dessaur, Carlson & Wilson

Haloid and Battelle came to a formal agreement, through which:

  • Haloid acquired a non-exclusive licence to manufacture electrophotography-based copying machines intended to produce fewer than 20 copies of an original;
  • for an initial $US10,000, Battelle obtained rights for a year, with options to renews for $US12,500 in 1948, $US20,000 in 1949, $US25,000 in 1950, and $US35,000 in 1951;
  • Battelle would spend this money for research on the fundamental process;
  • Haloid would do its own research on treated papers to improve the process;
  • the two research staffs would work together in their respective areas of responsibility; and
  • Haloid would pay Battelle a royalty of eight per cent on any sales of products embodying the patented principles, once a certain sales volume had been reached.

But the excitement which followed signature did not last. Carlson left his job at Mallory in late 1945, roughly a year after signing his agency agreement with Battelle. Progress at Battelle and Haloid was slow. During all of 1947 and 1948, the first two years of the licensing agreement, Haloid did no electrophotography research of its own.

Finally in 1948 funding for electrophotography research appeared from an unexpected source, the Signal Corps (part of the US military) which agreed to invest $US100,000. Military planners, three years after Hiroshima, had decided that battlefields in the future were likely to be contaminated by thermonuclear radiation and that conventional photography would therefore be useless since silver halide emulsions respond to radiation making film fog.

Unfortunately the contract between Haloid and Signal Corps, while welcome investment, did not attract other new investors or licensees.

11. Do your accounts, financially engineer, and structure contracts

Carlson then came on board as a consultant to Haloid in 1948 on a fee of $US1,000 a month. The way Carlson used his new income is instructive as regards its future impact on Carlson's earnings. Rather than spending the money on luxuries, Carlson sent much of it to the Battelle Memorial Institute.

The reason for this is that his agency agreement with the institute had originally entitled him to 40 per cent of all its revenues from his invention. Once Battelle's total research expenditure reached $US10,000 Carlson's royalty rate fell by one per cent for each $US1,000 that Battelle spent, until the rate had reached the contractual minimum of 25 per cent, below which it could not fall. The Carlson-institute agreement gave Carlson the option of restoring his original royalty rate by reimbursing Battelle, within five years, for half of its spending beyond the original $US10,000. That five year period was now drawing to a close, and Battelle so far had spent $US40,000 - meaning that Carlson could restore his 40 per cent royalty for $US15,000, or $US1,000 for each percentage point.

Owen writes at page 143 that:

"This would ultimately turn out to be an extraordinaryily lucrative investment, since by the mid-1960s each point would be worth millions of dollars. In 1948, though, putting more money into electrophotography seemed recklessly speculative to almost everyone but Carlson - who had just received his first royalty payment ever, a cheque for $2,500, representing a quarter of Haloid's first payment to Battelle. He sent that money back to the institute and, exhausted his own savings and sold $US100 shares in an 'Electrophotography Participation Fund' to 13 relatives, including several of his in-laws - all of whom would become millionaires as a result."

12. Register trade marks

Some light at the end of the research tunnel had appeared back in 1948. A product seemed to be emering. The view was that the process needed a better or more customer-friendly name than electrophotography.

carlson_haloid_logo_pre1937a"Xerography", the word that stuck, was mentioned by a university academic. It comes from the Greek words xeros (meaning "dry") and graphein (meaning "writing"). Carlson's investor was Haloid Corporation (established in 1906, the same year Carlson was born), and now led by Joseph C. Wilson. Wilson had always liked the name "Kodak". Kodak, like Haloid, was based in Rochester, New York and they had been competitors to some degree. Xerox seemed to have similar qualities to the "Kodak" name. A trade mark application for the Xerox name was first filed in 1948 with the intention of using it in the product name. In time Haloid was renamed Xerox Corporation.

Image
Haloid Model A

13. Ship knowing the first version may not be enough to make money

It was only in 1949 that the first xerographic copier, the Model A (see accompanying photo), was introduced by Haloid which had stuck by Carlson through years of substantial investment for a company the size of Haloid.

But Model A was not a roaring success. Owen writes at page 151 that 'The Model A might have disappeared and taken Haloid with it had it not been useful at doing something other than making copies. That something was creating paper masters for offset lithographic printing presses.' One version of the Model A was renamed the "Lith-Master" and revenues from it passed the $US2 million mark by 1953. That kept Haloid afloat to finance further research leading to the Xerox 914's release nearly a decade later.

In his journal in 1953 and 1954 wrote: "May leave Battelle & Haloid... Haloid has an asset which is slipping thru its fingers... Battelle never shown awareness... Heartbreaking to me."

14. Celebrate

Image
Xerox 914

It was not until 1959 when the Xerox 914 was release that things finally really took off. The Xerox 914 (see accompanying photo) was the first automatic, plain-paper office copier.

Each 914 cost roughly $US2,000 to manufacture, a figure which did not include the cost of parts and labour. By the time it was completed Haloid Xerox (as it was then named) had spent $US12.5 million developing it - an investment that exceeded the company's total earnings during the entire decade of the fifties.

Making a copy on a 914 was seductively easy, all you had to do was push a button. Donald Clark, the marketing chief for the 914 said:

"The first thing you have to recognise is that copying at that stage of the game was an inherent, unrecognised need. Once you got the 914 in the office, the narcotic effect began."

Image
1961 ad for the 914

Ahh! Now I understand why lawyers in litigation are addicted to photocopying!

And so began the waterfall of revenues for the Haloid Company, which became Haloid Xerox and then Xerox Corporation:

  • Haloid Xerox's revenues in 1959, the year the 914 shipped, had been $US32 million. The 914 was followed by other successful machines, the 813 in 1963 and the 2400 in 1964 which made 2,400 copies an hour.
  • By 1961 Haloid Xerox's revenues nearly doubled the 1959 figure.
  • By 1965 they reached nearly $US400 million, then $US500 million in 1966, and two years later $US1 billon.
  • In 1959 Haloid was a small manufacturer of photographic paper and some equipment; seven years later it was Xerox Corporation, the 15th largest publicly owned corporation in America as ranked by market capitalisation. It was bigger than RCA, bigger than Bell & Howell, bigger than Chrysler, bigger than US Stell and gaining ground on IBM.
  • A $US10,000 investment in Haloid Xerox stock in 1960 was worth $US1 million by 1972.

In 1968 Fortune estimated Carlson's wealth at $150 million. Carlson wrote a terse correction writes Owen. Carlson wrote: "Your estimate of my net worth is too high by $US150 million. I belong in the 0 to $US50 million bracket." Carlson had been quietly involved in giving his fortune away.

xerox_logo

With Haloid, Xerox and his many other collaborators Carlson worked diligently, lived very modestly and kept his cool despite years and years of struggle realising his dream.

The most touching sentence in the Copies in Seconds appears under a caption to a photograph. It is a photo of Chester Carlson and his second wife, Dorris Carlson sitting outside their modest house in 1965. It quotes Dorris saying of her husband after his death. "His real wealth seemed to be composed of the number of things he could easily do without."


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