What Xerox salvaged from its big mistake

Computers

Business Week

August 4, 1975

The cost of keeping up with computer technology, developing complex systems, and selling against giant International Business Machines Corp. has knocked another corporate giant out of the computer race. This week, after a six-year effort that won it less than 1% of the market, Xerox Corp. retired from the mainframe computer field, and Chairman C. Peter McColough explained why: "To stay alive and reach the breakeven point by 1980," he said, "would have taken a substantial investment -- between $150-million and $200-million."

Xerox clearly was not prepared to wager that kind of capital on what has proven to be a losing hand. "The mainframe [computer] is not at the heart of what we want to do," McColough now says. "If it were, we would have had to stomach out losses." But in 1968, computer capability was very much a part of Xerox's market strategy for the 1970s. In 1969 it laid out stock then worth more than $900-million to acquire Scientific Data Systems, Inc., a West Coast scientific computer maker. The price was not only too high, but McColough now also acknowledges that the acquisition was a mistake.

SDS had little experience in business data processing, which particularly interested Xerox, and the copier giant itself was thoroughly green when it came to computers. The result was a series of reorganizations and management changes while losses piled up. This year Xerox will have a $44-million loss in its mainframe computer operations, McColough says, which is "more or less" what losses have been running for the past few years. Revenues are around $70-million, which is about where they stood in 1969.

Digital technology

Although Xerox's abrupt departure from the mainframe field was dramatic and raised concern among some Wall Street analysts that the company would be losing its digital electronics capability -- the shift probably will have little effect on Xerox's direction. The big copier maker never really tried to take on IBM across the board as a mainframe maker; it hardly spent $20-million annually on computer development. More important to it in the SDS acquisition was the digital technology that came with the deal. It has essential applications in the "office of the future market" that Xerox covets. The SDS experience, McColough says, gave Xerox "a good deal of digital capability that we are retaining."

Indeed, Xerox has been building up a sizable electronic base. Its research centers already have built new mini-computers for office systems, a micro-electronics center is being set up in El Segundo, Calif., and an advanced development laboratory there is working on all types of digital products.

With Xerox still intent upon the office systems market, a collision is clearly building now with IBM, and it could develop into a three-way fight, with Burroughs Corp. entering the fray. Xerox and IBM are attacking the office-of-the-future market with nearly opposite strategies: IBM's approach is based on the big mainframe computer center, while Xerox believes in decentralization of office processing systems.

Burroughs, meanwhile, is putting together the pieces for integrated office systems. Earlier this year it acquired Graphic Sciences, Inc., of Danbury Conn., a facsimile equipment maker. And this week it added another major segment by agreeing in principle to acquire Redactron Corp. of Hauppauge N.Y., which builds and sells word processing systems -- text-editing typewriters. Pressed for cash on which to grow, Redactron accepted a $9-million stock exchange to be acquired by Burroughs.

One industry analyst watching Burrough's entry into Xerox's targeted market predicts, "Competition will get very fierce in the noncopier end of the office systems business." He adds: "Who knows? Burroughs might acquire a copier maker."

GRAPHIC: Picture, McColough: The experience gave Xerox "a good deal of digital capability."