Digital Resources Driven By Success Into Major Changes

Special to the New York Times

September 15, 1981

Pacific Grove, Calif. -- When Gary Kildall inspects his company's production floor and shipping dock, he walks through a kitchen, out to a patio where the company cat is sunning itself and into a former carriage house.

There, Digital Research Inc. stockpiles its product - magnetic disks that contain software that International Business Machines has selected to operate its new personal computer.

From headquarters in a yellow Victorian house in this quiet seaside village 125 miles south of San Francisco, Digital Research and its president, Mr. Kildall, function in a casual manner that belies the concern's leading position in the fast-paced microcomputer industry.

Changing Structure

But now, to cope with increased competition and larger contracts, such as that with I.B.M., Digital Research must change. It is formalizing its management structure, accepting venture-capital financing, altering its pricing policies and even planning to expand into a 16,000-square-foot modern office building, with a view of the ocean, of course.

All this business, quite frankly, is more than Mr. Kildall cares to deal with. ''Basically I am a gadget-oriented person,'' the jeans clad Mr. Kildall said. ''I like to work with dials and knobs. I'm not a very competitive person. I'm forced into it.''

Pacific Grove, a picturesque town near the artists colony of Carmel and a two-hour drive from California's Silicon Valley, seems an unlikely place for a computer concern. But there, in a small cottage near Monterey Bay, Mr. Kildall invented in the early 1970's what is now Digital Research's main product, an operating system.

Computer Traffic Policeman

Acting like a traffic policeman, an operating system is a type of software that directs a personal computer's activities. For example, if a user wants access to certain information, the operating system tells the computer how to retrieve it.

In 1975 Mr. Kildall licensed what has become the leading operating system for microcomputers. It is called CP/ M, for Control Program for Microcomputers. The operating system was selected by the Xerox Corporation for its Xerox 820 office system and by I.B.M. as an option for its personal computer, set for delivery in October.

Despite his preference for the laboratory over the board room, Mr. Kildall, who holds a Ph.D. in computer science, has built his company to 50 employees in six years. For the year ended Aug. 31, the privately held concern had sales of about $6 million, and Mr. Kildall expects $10 million in revenues this fiscal year.

''They're doing terrific; they must be smiling from ear to ear with the I.B.M. contract,'' said Ulric Weil, an analyst with Morgan Stanley & Company. Optimistic About Sales

''Within five years, I think sales will be $100 million,'' said Dorothy McEwan, Mr. Kildall's wife and high school sweetheart of 19 years ago. She has handled the financial and marketing aspects of the business since the two started Digital Research in a 10-foot-by-13-foot playroom at their first Pacific Grove home, a cottage a few blocks from the ocean.

But the expansion has become too much for Mrs. McEwan to supervise. ''The company grew so rapidly that we had gone from small-time to a big-time operation, and we had to have professional managers,'' she said.

After having venture capitalists knocking at his door for three years, Mr. Ki ldall recognized earlier this year that he should let them come in. Mr. Kildall said he did not need their money, but wanted their expertise so he would not need to ''take chances'' with business decisions.

Last month, giving up only a small share of ownership, he brought in four: T.A. Associates of Boston, Hambrecht & Quist of San Francisco, Venrock Associates of New York and Page Mills Partners of Palo Alto.

Changed Licensing Methods

Under their counsel, Digital Research changed the structure of its sales agreements. In the past, the concern licensed its CP/M software to microcomputer makers for a one-time fee of $50,000. The simple arrangement was a bargain for manufacturers, said David Crockett, senior vice president of Dataquest Inc., a Cupertino, Calif., market research concern.

Since Sept. 1, Digital Research has required graduated payment based on the number of computers sold by the manufacturer. Details of the contract with I.B.M. were not available.

The simple arrangement bought CP/M market penetration, however. About 300 computer makers use CP/ M, which means that Mr. Kildall's operating system is driving some 250,000 microcomputers, according to Digital Research. These computers range in price from $1,000 for home systems to $30,000 for small-business systems.

At least 300 companies supply more than 1,000 software packages based on CP/M. Apple Computer Inc., the No.1 maker of personal computers, uses its own proprietary system, but users can purchase a plug-in peripheral card to adapt their Apple computers to CP/ M, thus making more applications software, especially business packages, available to them.

Competition from Bell

CP/M's strongest competition may come from Unix, an operating system developed by Bell Laboratories for 16-bit microprocessors. ''Unix is competition at the higher end,'' said Mr. Weil of Morgan Stanley.

Unix will likely be used most by universities and by the Bell System, Dataquest's Mr. Crockett said, while CP/ M ''will own the rest of the world.''

Previously, CP/M was used in the slower, eight-bit computers. Now, Digital Research has developed CP/ M-86, ordered by I.B.M., for 16-bit machines.

Digital Research plans to branch into programming languages for computers. Just last week it purchased for an undisclosed amount Compiler Systems Inc., a small southern California concern that develops languages.

''The company has a lot of potential,'' the soft-spoken Mr. Kildall said. ''I want to let the potential loose.'' He also said that he expected having a larger team would allow him to spend more time where he most likes to be -at a computer terminal.

Illustrations: Photo of Dorthy and Gary Kildall