Digital's Bid For A Comeback

By David E. Sanger
Special to the New York Times

Concord, Mass. -- May 13, 1985 -- Not too many years ago, a small start-up computer company with only $70,000 in seed money stunned competitors with an inexpensive, versatile machine that introduced computers to thousands of new users.

But the company was not Apple, the place was not Silicon Valley, and the product was not the personal computer. Instead, the place was a suburb of Boston nearly 30 years ago, the runaway success was the minicomputer - a smaller, simpler, more economical machine than the expensive mainframes - and many thought that bigger, lumbering competitors would never catch up with the Digital Equipment Corporation.

They were wrong. Now, after a painful four years in which Digital saw profit margins shrivel and the personal computer revolution largely pass it by, the world's second-largest computer maker is attempting a powerful comeback. One of the most important pieces of its strategy will fall into place Tuesday, when the company introduces its Microvax II, a computer that puts one of Digital's most successful minicomputers on a chip.

The machine is a desktop version of the VAX 780, the star of Digital's minicomputer line. It will sell for a base price of about $20,000 - less than a fifth of the price of its older cousin. It is the second major VAX introduction in six months: Digital's new Venus machine, really a small mainframe, has sustained the company's earnings when other minicomputer makers have suffered mightily.

The Microvax II will extend the VAX line in the opposite direction, toward desktop users rather than mainframes. A specialized version has been made for the computer-aided design market, now dominated by Apollo Computer Inc., Sun Microsystems and others. The new machine's biggest selling point is that it runs hundreds of programs available for the larger VAX machines, winning it enthusiastic reviews from engineers and scientists, long Digital's most loyal following.

The question, however, is whether the new VAX machine, which can perform more than a million instructions a second, will attract a host of new users. If so, it will compete in the office market, a stronghold of the International Business Machines Corporation and Wang Laboratories. If not, it may simply cut into sales of Digital's more profitable minicomputers.

''It's dangerous; there are a lot of things we don't know,'' Kenneth H. Olsen, Digital's 59-year-old founder and chairman, acknowledged in an interview here today. Speaking at a company office set amid farmhouses and rolling hills off Route 128, Boston's high-technology corridor, he added, ''We know that in the long run, this is the direction Digital has to go.''

The strategy that Mr. Olsen outlined today runs counter to that of Digital's nemesis, I.B.M. While I.B.M. is exploring a host of new ventures and computer designs - opening new markets, but often making it nearly impossible to link different systems - Digital is quickly committing the whole product line to the VAX architecture.

''We didn't go after digital watches, hand-held calculators, home computers,'' Mr. Olsen said, ticking off a litany of electronic failures. ''We are committing ourselves to picking the best projects, the toughest problems. Growing any faster,'' he said, rocking back in his chair, ''would be suicide.''

Analysts who a year ago openly voiced concern for Digital's future say they are cautiously optimistic about the new approach. ''We have seen DEC reverse itself completely in the past few years,'' said Frederic G. Withington of Arthur D. Little & Company, a Cambridge consulting and research firm. ''They have gone from selling just low-end machines to full networks, based on VAX. They are coming out pure - but slim.''

Mr. Olsen, an M.I.T.-trained engineer, seemed unperturbed at the thought that the days of Digital's spectacular growth may be over. He insisted that Digital's role, at a time when small computers have fast become commodity items produced in vast quantities, is to sell advanced work stations and sophisticated, if uncomplicated, networks.

''Our contribution from the beginning has been to make very simple, fast computers,'' Mr. Olsen said. ''That was the M.I.T. approach, and it worked. The problem for us now is that computers are getting too easy to make. Anybody with a collection of integrated circuits and an instruction book could screw them together,'' he added, in a jab at I.B.M.'s use of off-the-shelf components to build its PC. ''What we have decided to do is far harder: a single, integrated system.''

While that might be the approach, it was not always the plan. At one point Digital had a dizzying panoply of products, each designed separately by as many as 38 development groups. The result was a range of approaches, which was one reason the company failed in the personal computer market. (Most of those groups were cut out in a reorganization two years ago that prompted many disgruntled executives to leave.) While the company has had several personal computer-like products, its best known, the Rainbow, was its most disastrous. It was never fully compatible with I.B.M.'s model, and it has been all but withdrawn from retail shelves. Mr. Olsen acknowledged today that the Rainbow was ''probably never profitable.''

''I was beaten up unmercifully in the press about our PC's, because they thought I was too old to understand the future,'' he said. ''But our real problem was that we made the Rainbow too expensively. We worried about putting the quality there, but for once people didn't care about quality. They bought on price alone. We didn't anticipate that.'' Future Products In the future, Mr. Olsen says, personal computers will be just a ''tool'' connected to bigger VAX machines -including the Microvax II - for communications and specialized processing. While Digital executives decline to talk in specific terms about future products, they hint broadly that the next model of their computers will be an inexpensive desktop machine -analysts look for a $5,000 model -that will use two processors to run both I.B.M. Personal Computer software and the range of VAX programs.

''People are disillusioned about PC's right now,'' Mr. Olsen contended. ''The machines are great for working alone. But the future is in making them work together.''

Digital's more immediate problem, though, is to make up for lost time with the Microvax II. While the company insists that the computer is on schedule, the industry expected it last year. And in the meanwhile, a host of competitors have sprung up.

The traditional ones include Apollo and Sun, specialists in ''work stations'' designed particularly for engineers with needs for high-resolution graphics, used in modeling everything from airplane wings to machine tools. I.B.M. is also becoming a potent threat in that area, as it attempts to build on its PC architecture, among others.

Because the Microvax is also intended as an office machine - up to 21 terminals can be attached directly, more through a local area network -Digital is fighting office automation leaders like Wang. ''That could be the toughest,'' predicted Fred Cohen, who followed Digital for L.F. Rothschild, Unterberg, Towbin. ''Those are markets where VAX has not been strong before, and DEC has to break in.''

A surprise element of Digital's Microvax announcement will be the industry's first compact optical disk reader, making it possible to store the contents of two complete sets of the Encyclopedia Brittanica on a disk about five inches in diameter.

The disk looks exactly like the compact disks now used for high-quality music recordings. Like those systems, the disk is read by a laser. Because so much information can be packed on the disks, publishers are viewing them as a way of distributing multivolume legal reference books, large encyclopedias and dictionaries, and telephone directories.

But unlike the magnetic floppy disks now used in personal computers, information written on an optical disk is there to stay: it cannot be updated.

Digital's disk stores 600 megabytes, or more than 600 million characters of information. That is about 200,000 single-spaced typewritten pages, and about 600 times more information than can be stored on the most densely packed floppy disks. The disk reader is priced at $2,195.

Digital is hardly the only company readying the technology. I.B.M. is rumored to be working on a similar device that could be marketed with its PC II computer when that is introduced this summer. The Atari Corporation said earlier this year that it would sell a $500 optical disk reader, but it has yet to show the device.

GRAPHIC: Chart of Digital financial data; Graph of DEC's Place in the Medium-Scale Systems Market (NYT/May 14, 1985); Photo of Kenneth H. Olsen, chairman, with the Microvax II

Copyright 1985 The New York Times Company