“Dov had amazing timing. It couldn’t have been better,” says one of the former M-Systems employees, recalling the $1.5 billion sale in 2006 of the high-tech company that Dov Moran founded and led.
“Today, the DiskOnKey is technology with a glorious past,” says the former employee, referring to the company’s brand name for its own brand USB flash drive, and an external digital memory device. “On the other hand, how would our lives have been in the 1980s without cassette tapes?” His meaning is pretty straightforward – USB flash drives were a very important and useful product in their heyday, but no longer. But the story for the USB devices isn’t quite considered over. 15 years after they were first invented, USB flash drives continue to be sold throughout the world and the story of M-Systems continues to fuel Israeli high-tech dreams, as proof that Israel can spawn large technology companies. In addition, the proceeds from the buyout continue to finance and generate new startups to this day.
The back story about the inspiration for DiskOnKey is that Moran just wanted to make a PowerPoint presentation, but found that his computer wouldn’t boot when he arrived at the meeting. The experience showed him that people needed some kind of portable device with enough memory to carry a PowerPoint presentation in their pockets – something that portable memory products of the time couldn’t do. Before USB flash drives became available, the main medium for portable computer memory storage was the 3.5 inch floppy disk, with a 1.44 megabyte capacity. Of course, there was also the CD-RW, a compact disc with about 700MB of storage space, but it required special hardware and software to copy data onto it.
The first commercially available USB flash drive on the market came with 8MB of storage capacity. Today, USB devices with 8GB capacity and up, and are sold for around the price of a Big Mac combo at McDonalds. This technology has become such a commodity in today’s market that it’s even given out as a promotional item at conventions and conferences. The USB flash drives storage capacity grew rapidly over the years and continues to go up, while prices continue to fall. Today, some USB drives even sport the 512GB capacity size, the standard memory capacity of many desktop and laptop computers.
Although the technology has improved however and ultimately will become cheaper, the overall value of the product also continues to fall. When the USB flash drive was first introduced, email services are lot more limited as well. The most popular email client at the time was Microsoft’s Hotmail, which provided no more than 2MB of storage. Large files couldn’t be emailed as attached files at all, which opened up a large market for USB flash drives. The DiskOnKey by M-Systems arrived at just the right type to fulfill that need.
The turning point (or downfall depending on how you look at it), came with the public launch of Google’s Gmail. The company claimed its email accounts would accommodate 1GB of memory, 500 times more than Microsoft. It sounded so out of this world that many people assumed for an April Fool’s joke. As things turned out, this would pave the way for Internet cloud computing. Google allowed its users to send email attachments of up to 10MB, which it later increased to 25MB. The storage capacity for Gmail accounts has also escalated.
Dropbox was introduced in 2008, a very popular cloud storage service, quickly followed by other storage providers. The internet cloud industry has been accompanied in recent years by the rise of smartphones and high speed communications networks, rendering physical devices for transferring large files largely obsolete. The M-Systems company was founded in 1989, and registered its USB flash drive patent close to a decade later. They didn’t technically invent flash memory, which had been around for a long time, but it realized that USB connectivity, designed to connect peripheral equipment like printers and scanners, would soon become the future standard feature on PCs and laptops. “Let’s put flash memory on a tiny disc and connect it to USB,” they said at M-Systems. “We’ll create software for the computer to identify the new connection as if it were an additional drive.”
The company’s first product was technically launched in 2000 and was called DiskOnKey and the first computer marker to accommodate it was IBM. The DiskOnKey quickly became a very popular product, something that would travel in the pockets of every office worker and student. In 2004, M-Systems signed a strategic agreement with SanDisk, its largest competitor, and two years later SanDisk acquired the company. SanDisk continues to dominate the flash memory storage device industry in many ways and remains the world’s top vendor of USB flash drives. “The DiskOnKey isn’t dead,” commented Moran. “A year-and-a-half ago I met with SanDisk’s retailing manager and he told me they were having a record year in DiskOnKey sales. I asked him who’s buying them nowadays and he replied that they’ve discovered it in South America.”
“Today there are many headlines about applications being created quickly and sold quickly,” says Moran. “There’s nothing wrong with that, and it also draws attention. But a mix is needed, so that, alongside the small companies, which we have in abundance, there should also be large companies. Small companies provide work for engineers, but work must also be provided for people in logistics, sales and other areas. I don’t get particularly excited when an Israeli company is sold: I’m happy for the founders but not for the country. I would be thrilled if more billion dollar companies would sprout here.”
When asked about his own exit from the industry, Moran says, “I didn’t see the sale as a tremendous achievement.” He also points out that the company had already gone public and was selling its products on a large scale. “This was a company that grew in sales from $1 million a year to $2 million and then $4 million,” he recalls. “In 1999 we scratched up $30 million in sales. There aren’t many such companies anymore in Israeli high-tech.”
“What would have happened if we weren’t sold? That’s hard to say, especially since high-tech underwent a crisis in 2008,” commented Moran. “But at M-Systems we had SSD (solid state drive) technology and agreements for it with companies like HP and Dell. This technology had been neglected but now it’s a fantastic field, where companies involved are sold for billions. I don’t think Anobit Technologies, which was sold to Apple, had anything substantially different from the technology we had in 2006.”
On whether or not he has any regrets, Moran replies, “Of course not. I’m racing forward and hope to produce some substantial successes. The sale of M-Systems allowed me to invest in many more companies. The money, as far as I’m concerned, will go back into the community. I am currently invested in 15 companies and surrounded by wonderful folks. Not everything will succeed, but I see some very nice things sprouting.”