Digital Research: Trying to Write New Programs for Success

Information Processing

Software

The Fallen Industry Star Has Possibilities -- But Can Management Make Them Hits?

By Richard Brandt in Monterey, with Deborah C. Wise in San Francisco
Business Week

August 5, 1985

Like Icarus, a high-flying company sometimes finds that the higher it soars, the greater the risk of a precipitous fall. Take Digital Research Inc.: The Monterey (Calif.) company was one of the original success stories of the fledgling microcomputer software industry until heavy competition rocked it in mid-flight. Now it is making a last-ditch effort to break its rapid fall. But its flurry of activity may be too late to pull it up anywhere near its former heights.

Digital Research's survival strategy is to dominate the market for graphics based software. The idea is to develop products that give personal computer owners the easy-to-use graphics that Apple Computer Inc. has programmed into its Macintosh. The company has taken some drastic steps to make this plan work. A month ago laid-back co-founder and Chairman Gary A. Kildall turned over the title of CEO to John R. Rowley, who has been president since 1981. Rowley is enticing Northern Telecom Inc. and Motorola Inc. to invest a total of close to $10 million for a stake of nearly 15% each in the privately held company. By Sept. 1 he plans to cut annual operating expenses by 50%, to $26 million, partly by halving the company's work force from a peak of 600 in 1984.

But Digital Research still has a long way to go. A new program by rival Microsoft Corp. called Windows (BW -- July 22) and a similar package from International Business Machines Corp. -- an upgraded version of its TopView -- may match the graphics capabilities of Digital Research's new program, called GEM. And the company still faces serious marketing and management problems. "They're a secondary company, and I don't see that changing," says Richard Sherlund, an analyst with Goldman, Sachs & Co. "GEM is a distant third."

TO THE TOP

The company's transformation into an also-ran is mostly a story of bad management. Kildall concedes as much: "We had too many levels of directors and managers," he says. Founded in 1976, it climbed to the top of the market with its CP/M operating system, the software that controls how computers manipulate information. CP/M became the closest thing the industry had to a software standard for early personal computers. By mid-1983 company sales had climbed to $37.4 million, more than double those of the year before.

But trouble had started brewing in 1981, when IBM went looking for a supplier of an operating system for its next generation Personal Computer. Digital Research was so disorganized that it lost the business and IBM went to Microsoft instead. Digital Research's hold over the market gradually disappeared. By 1984, admits Rowley, "we were walking toward a cliff." Now, Digital Research's sales are falling off that cliff. Rowley acknowledges that sales for fiscal 1985, ending Aug. 31, will be in the range of $35 million -- down from about $56 million last year. The company's last profitable year, he says, was 1983, though he adds: "There's no imminent cash crisis."

Rowley is pinning his hopes for profitability on two new products. One is a family of operating systems called Concurrent DOS, which allows computers to run programs written for the company's old CP/M operating system, as well as for rival Microsoft's, and also lets personal computers run more than one program at once. But it is the second program, GEM, that Digital Research hopes will really pull it out. Like Apple's software, it responds to a hand-held "mouse," which a computer owner can attach and use to point to symbols on the screen, instead of typing commands.

ERRATIC BEHAVIOR

But while both products have won good review's from technical analysts, it's uncertain whether Digital Research can have them hits. Rowley, who came from Intel Corp., is an impressive salesman. But he has been slow to focus the company since its original market started fading. "He's a motivator, but I'm not sure he's the right guy to give direction," says Robert M. Lefkowits, director of software research with market researcher InfoCorp.

In fact, some company insiders blame Rowley for much of Digital Research's erratic behavior. He invested millions pursuing a myriad of projects that were later shelved -- including a super-sophisticated operating system named Otter and a slew of home computer programs. "Priorities changed on a daily basis," says Thomas R. Lafleur, a manager for three years who left the company about 10 months ago. "There was no long-term planning."

Even GEM began haphazardly, starting out simply as one programmer's pet project. "It almost came up as an accident," says Lafleur. Alan Cooper, a software writer who left the company last year after 18 months, agrees: "From the genesis of GEM, it's amazing that they're now betting the company on it."

Rowley admits that the company was slow to find its new calling. But, he insists: "We'll enter early, we'll enter with force, and we'll stay targeted." He will not comment on rumors that he may agree to let IBM combine GEM technology with its Topview program. But if GEM doesn't pan out, Digital Research's future looks bleak indeed, unless another of the company's bright programmers has a new trick up his sleeve.

GRAPHIC: Picture, CHIEF EXECUTIVE ROWLEY: BY 1984, "WE WERE WALKING TOWARD A CLIFF", ED KASHI