Talking Point

Digital Equipment Corp.

By Catherine Arnst
Reuters News

September 2, 1988

BOSTON, Sept 2, Reuter - Digital Equipment Corp's 10-year loyalty to a single set of computer standards is beginning to crack as the company struggles to adapt to new competitive pressures, the changing customer needs and an industry-wide slowdown in minicomputer sales.

Digital's proprietary architecture, VAX, the basis of all its computers, is about to be joined by some powerful new workstations based on a fast new architecture called RISC, for reduced instruction set computing, according to company officials.

And last month the company announced that its commitment to an open software operating system called Unix is now equal to its own proprietary VMS software.

The move toward RISC and Unix is a dramatic one for Digital, which became the world's second-largest computer company (after International Business Machines Corp) by being the first to build all of its computers and software around one set of standards.

But the computer industry is slowly moving towards a standardisation that would allow users to mix and match equipment and software from a variety of vendors.

That move is coalescing around Unix, an operating system designed to work on any size or make computer, and available to all vendors. Meanwhile, mid-size computers, or minicomputers, are under siege from powerful workstations or personal computers networked together.

Sun Microsystems Inc has built a hugely successful business on powerful workstations based on the RISC architecture and Unix software, and is often mentioned now as a leading competitor of Digital. Investors "seem to think that Sun Microsystems and others would do to us what we did to IBM," Olsen has said.

In fact, International Data Corp. consultant Will Zachmann says, Sun has done more damage to other minicomputer companies than to Digital.

But he said that "for the remaining half-decade there is room for some RISC based development in DEC's strategy."

Most computer industry analysts and consultants say that Digital's embrace of RISC and Unix does not indicate a move away from VAX. Instead, they believe the combination of generic standards and the much acclaimed VAX/VMS combination will enable the company to ride out the sea-changes in the industry better than other minicomputer makers.

"The VAX architecture is just not any kind of a negative for Digital," even looking five or more years out, said Barry Willman, minicomputer analyst at Sanford C. Bernstein and Co.

Willman said that VAX, combined with some RISC workstations and strong Unix products, should let Digital suffer less from the current slowdown in minicomputer sales than such smaller competitors as Prime Computer Inc, Hewlett-Packard Co and Wang Laboratories Inc.

"This company is very, very competitive," he said. "It would be a mistake to think they are sliding."

Digital's stock has been sliding as the minicomputer market slows. Its stock is down from a 1987 high of 199-1/2 to a two year low of 92 in recent weeks. Earnings for the fiscal fourth quarter ended July 2 met analysts' expectations but the company has indicated that its revenue growth will slow from last year's 22 pct gain.

For fiscal 1988, revenues grew to 11.48 billion dollars from 9.39 billion dollars and net income increased 15 pct to 1.31 billion dollars or 9.90 dollars a share from 1.14 billion dollars or 8.53 dollars a share a year ago. Analysts expect Digital's fiscal 1989 earnings to be around 10 to 10.25 dollars a share.

Gartner Group analyst Myron Kerstetter confusion in the marketplace over emerging standards may be a factor in the industry's current slowdown.

Digital, he said "is going to have to walk a tightrope" in its research and development efforts. "It has to do more than just pay lip service to Unix by offering acceptable product capabilities on that side, but it must still maintain the strength of VMS."

Digital is already the world's largest vendor of Unix based products, which represent about 10 pct of its total revenues, according to market researcher Yankee Group.

As a result, analysts say, the company is more willing to incorporate both Unix and VMS in its long-term planning.

It has been slower to take on RISC. But analysts said Digital acknowledged the importance of adopting RISC quickly when it abandoned an in-house effort to develop a RISC semiconductor and, for the first time in its history, went outside the company for technology.

Digital bought a RISC chip developed by MIPS Computer Systems Corp and is expected to announce a workstation based on it early next year.

(c) 1988 Reuters Limited