DEC Is Changing With The Times -- A Little Late

Information Processing

To catch up with rivals, it's focusing more on workstations and open systems and less on minis

Gary McWilliams in Boston
Business Week

April 9, 1990

A year ago, Digital Equipment Corp., then No. 2 in engineering workstations, boldly predicted that it would overtake Sun Microsystems Inc. and lead the market by now. So how did it slip to No. 3?

Since 1982, the Maynard (Mass.) company had watched customers ditch their DEC minicomputers in favor of workstations, which generally did more for the money and did it better. DEC eventually moved into workstations itself and last year brought out a surprisingly low-priced line of the desktop machines. But, despite some growing pains, Sun extended its lead in 1989, capitalizing on an early shift to ultrapowerful reduced-instruction-set computing (RISC) microprocessors. And Hewlett-Packard Co. has leapfrogged its way into second place by buying Apollo Computer Inc.

On Apr. 3, DEC will try again, unveiling its most powerful workstations ever, the DECstation 5000s, and lots of new software. It has little choice. When Apollo and Sun began selling workstations in the early 1980s, they stole DEC's engineering customers. DEC prospered by snagging lots of new commercial customers such as banks from IBM. Now, even commercial jobs are moving from minis to workstations. And while sales of the larger machines are flat, workstation sales will grow 35% this year--perhaps the fastest pace of any computer segment--to $8.1 billion.

DEC has more than extra sales riding on its new products. They represent a critical test of its ability to move into emerging markets, especially those that compete with its slow-growing but highly profitable minicomputer business. Strategically, about the most important new markets are workstations and so-called open systems. Increasingly, customers who once were content with proprietary computers and software, such as DEC's VAX minis, now seek systems based on ''open'' industry standards such as American Telephone & Telegraph Co.'s Unix software. Says Aaron L. Carter, manager of Hughes Aircraft Co.'s engineering computer department: ''I see a definite trend from minis and mainframes to Unix workstations.''

DEC is playing a costly game of catch-up in workstations and open systems--just when it can least afford it. For the fiscal year ending June 30, analysts predict, revenues will barely exceed last year's $12.7 billion. They expect earnings to drop for the second year in a row--this time by a staggering 70% from 1989's $8.45 per share. The reasons: soft U. S. sales, heavy costs for the workstation drive, and startup expenses for a new mainframe line. DEC's stock now trades in the 70s, down from over 100 last September. While sticking to a no-layoff practice, DEC is cutting overhead with a severance program aimed at removing 8,000 of its 126,000 employees.

JUST THE VAX

DEC's struggle is doubly painful given its long-standing ambivalence toward Unix. Before last year, President Kenneth H. Olsen used to bash Unix as ''snake oil.'' Later, DEC seemed to embrace Unix as an equal to its proprietary software, called VMS. In February, though, Olsen voiced renewed misgivings. ''In time, it will probably be clear you can stick with proprietary systems . . . and never have to go to Unix,'' he told an industry conference.

DEC made its biggest endorsement of Unix and RISC in early 1989, bringing out non-VAX workstations based on RISC chips from MIPS Computer Systems Inc. They were priced low enough to open many eyes--but not many wallets. A lack of software and weak graphics capability, only now being remedied, limited first-year sales to between 5,000 and 8,000 units, analysts say. Sun sold some 40,000 comparable machines in the same period. DEC ''has not achieved the level of support from software vendors that we would have liked,'' says Hughes's Carter. DEC says that there are about 700 packages for its Unix workstations--about on a par with what IBM promises for its new RS/6000 workstations. Sun has 1,700 packages for its Sparc workstations. Indeed, try as DEC might, Sun looks no more vulnerable than it did a year ago. A recent survey of 325 workstation customers by Prudential-Bache Securities Inc. found 35% of those using DEC equipment ''very likely'' to purchase their next workstation from Sun. In contrast, only 18% of Sun customers were equally enamored of DEC. ''It pays to be the established vendor even in the open systems market,'' says Pru-Bache analyst Laura Conigliaro. She and others estimate that the new products will propel DEC's total workstation sales to $1.6 billion this year, up from $1.2 billion in 1989. But two-thirds of those sales in calendar 1990 will still be VAXes, leaving DEC farther behind as the market shifts decisively to RISC.

'SCREWED UP'

As it beefs up the technical prowess of its workstations, DEC needs to work on its marketing, too. Says Cheryl A. Vedoe, director of marketing at Sun: ''We're not seeing the competition from DEC that the industry expected.'' At Bucyrus-Erie Co., DEC didn't bother replying to a request to try out one of its RISC-based workstations. ''They screwed up,'' says chief structural engineer Kenneth V. Johnson. ''I guess they're just not aggressive.'' Last month, Bucyrus-Erie purchased a Tektronix Inc. workstation instead, planning to test the feasibility of transferring all its engineering work from two DEC minicomputers to a network of 28 workstations. Donald A. Gaubatz, DEC's workstation group manager, concedes that the company is still ''in transition,'' as it shifts to the open systems market.

DEC is adapting, albeit slowly--and at great cost. It has lent software developers more than 1,000 of its RISC workstations and is providing low-cost leasing to others. It is paying hard cash to those who translate their software to run with Ultrix, its version of Unix, and gave $150,000 to Progress Software Corp. to fund a version of its data-base management package for Ultrix. At the University of Lowell in Massachusetts, 30 students and professors are under an eight-month contract to Ultrix-ize some 300 engineering and chemistry packages.

DEC has even offered trade-in allowances of up to $4,000 to Sun and HP customers who buy its workstations. Says Donald A. Gaubatz, DEC's workstation group manager: ''It's just another way of working into this business.'' Yes, but given that workstations list for as little as $6,000 apiece, it's an awfully costly one. The preferred method, of course, is for DEC workstations to win customers on their own merits. Perhaps the new DECstation 5000s will do that.

Photograph: U. OF LOWELL STUDENTS ARE CONVERTING SOFTWARE TO RUN ON DEC'S WORKSTATIONS SETH RESNICK Graph: DEC'S WORKSTATION SALES ARE UP... Data: DataquestInc., Sanford C. Bernstein & Co. Estimates Graph: ...BUT ITS SHARE OF MARKET IS NOT Data: DataquestInc., Sanford C. Bernstein & Co. Estimates