Xerox Stalks the Automated Office

By Andrew Pollack
The New York Times

May 3, 1981

When C. Peter McColough, chairman and chief executive officer of the Xerox Corporation, addressed financial analysts last week, he barely mentioned a seemingly important subject - copiers.

Instead of talking about the business that accounted for $6 billion of his company's $8 billion in revenues last year, the business that has made the name Xerox virtually part of the English language, Mr. McColough talked almost exclusively about a business that accounted for only $300 million in revenues, one in which Xerox has never turned a yearly profit and has suffered a number of embarrassing setbacks.

Yet it is that business - office automation - in which Xerox says its future lies. The company that grew from tiny photographic paper maker to industrial giant by developing a simple way to duplicate paper documents is now embarking on a metamorphosis to prepare itself for the age when paper pushing will be replaced, in part at least, by moving electronic blips on computer terminal screens.

''We really have two companies here, a copying company and an office automation company that will someday down the road become simply an office automation company,'' Sanford J. Garrett, an analyst with Paine Webber Mitchell Hutchins, said.

To be sure, Xerox is not abandoning copiers, its bread and butter and a business in which its revenues grew last year by more than 14 percent and operating profits by 7 percent. Xerox has embarked on an aggressive campaign to counter the Japanese competition that has been squeezing its margins and steadily eating away at its market share. ''Reprographics is the mainstay of our strength and resources and will be for a long time,'' Mr. McColough assured the analysts.

Rather, he said, as paper gives way to electronics, the copier will evolve into the electronic printer, a device that is capable of printing out data stored in a computer as well as duplicating pages. When that transition is complete, which is not likely to occur for at least a decade, Xerox's copier business will be subsumed by its newer, and faster growing, office automation business. In the meantime Xerox wants to become a leading supplier of word-processors, terminals and other office automation equipment.

Not everyone, though, is confident Xerox can pull it off. The copier giant has made some costly mistakes in diversifying and its office products effort has consistently lost money. Meanwhile, companies a fraction of Xerox's size, such as Wang Laboratories and the Datapoint Corporation, have already carved out successful, fastgrowing businesses.

''If God himself came down, dressed in a junior businessman's suit, worked his head off, and got lucky, in three years he'd put that organization in the same position we are in today,'' scoffed John F. Cunningham, executive vice president of Wang Laboratories.

''Talk is cheap,'' Daniel A. Hosage, vice president in charge of the office systems group for Datapoint, said of Xerox's plans. ''Let's see where the execution is.''

Suddenly, however, Xerox has come forth with some sophisticated products that, combined with the company's size, could vault it to the forefront of the industry. ''Conceptually, it looks better than what anyone else is doing,'' said David G. Jorgensen of Dataquest, a West Coast market research firm.

The most recent product, unveiled last week, was a computer terminal designed to be ''friendly'' to engineers, analysts and other professionals with an aversion to typing. The $16,500 device allows the user to create documents and charts, send messages and retrieve files stored in the computer by moving a pointer on the screen rather than by typing commands.

Xerox has also come to market with a system called Ethernet, designed to connect various electronic office machines together and allow them to communicate. The company has tried to rally the industry behind Ethernet and create a bandwagon effect - even before, critics point out, the product was really ready for market.

''They have definitely pulled a coup in suggesting they have something that everyone can coalesce around,'' said Wayne Martson, director of marketing of Sytek Inc., a company that makes a competing network. ''Xerox has not done earth-shaking things in communications, but right now they're on the lips of everyone who is interested in the topic. The guys at I.B.M. are basically smoldering over this thing right now.''

The office of the future is a nebulous term. It is generally expected to include word processors, computers, printers and telephones linked together in a big network. Users would be able to create and edit text and graphics and send them electronically to others in the same building and across the nation. They would be able to call up files that would be stored in computer memory instead of in a drawer.

Such systems might be capable of keeping a calendar for each employee, so that if a meeting had to be arranged among eight persons, the computer could quickly find a time when everyone was free. To cut down on time wasted trying to reach a colleague on the telephone, a worker would be able to speak his message into the phone and have the phone system re-dial the number and transmit the message at a specified time. Video teleconferencing, in which people in different locations could see and hear each other, is also expected to be part of the future office.

The basic idea of all this is to improve the productivity of white collar workers. Since such workers now account for more than half the work force, yet have hardly been affected by automation, the new market is expected to be a vast one, perhaps tens or hundreds of billions of dollars a year. With so much at stake, the companies that now manufacture one or more pieces of such a system are all scrambling to extend their scope. The phone companies want to be able to handle data as well as voice. I.B.M. has moved into communications and copying.

To move from copiers to computerized data systems, a fairly substantial leap, Xerox has acquired expertise from the outside. It started its diversification in 1969, when the company still held a near-monopoly in plain paper copiers, by paying more than $900 million in stock to acquire Scientific Data Systems, a small computer company. But its attempts to compete in the computer market met with disaster, and in 1975 Xerox abandoned its computer efforts and took an $84.4 million writedown in earnings.

Its attempts at developing its own products also met with little success. Its electronic typewriter, the 800, introduced in 1974, was late getting to market. Xerox's first word processor using a cathode ray display screen, the 850, was a poor product because it could not be easily upgraded, and the company had to eventually scrap it in favor of the 860.

Then in 1978, Xerox announced that it was planning to enter the telecommunications business using satellite and microwave towers to beam data around the nation in competition with the phone company.

Since then, the project has been scaled back. Mr. McColough says the project, in which Xerox has invested $30 million so far, is still under development, but concedes it may never be brought to market.

Robert E. Verrando, a founder and former vice president of Xerox's office systems division in Dallas, recalls that the office automation business at Xerox lacked a clear direction and was marked by intramural competition between the Dallas group, a research laboratory in Palo Alto, Calif., and the remnants of the Scientific Data computer staff in El Segundo, Calif. The copier unit, the king of the mountain, questioned whether Xerox should be getting into the new field at all.

''They were the great money makers, and we were the money losers,'' said Mr. Verrando, who left in 1978 amidst a big reshuffling and is now at the A.B. Dick Company.

While all this was happening, Xerox began losing share of the copier market as the Japanese competitors moved in aggressively at the low end. From a near monopoly in 1970, Xerox now controls less than 50 percent, according to Dataquest, the market research firm.

Xerox also made some good acquisitions in the 1970's, however. They include Diablo Systems, which manufactures high-speed printers using a daisy wheel, in which letters are arranged on the petals of a flower-shaped element rather than on the surface of a golf ballshaped element; Shugart Associates and Century Data Systems, which make disk systems for data storage; Versatec Inc., which makes electrostatic printers and plotters, and most recently Kurzweil Computer Products Inc., which produces machines that can ''read'' text electronically and automatically enter it into a computer, eliminating typing.

In 1979 Xerox reorganized its office products group as a separate division and placed it under the direction of Donald J. Massaro, a founder and president of Shugart Associates.

At 37 years of age, Mr. Massaro is the youngest Xerox executive officer by six years. ''He's a real fireball,'' said Brian Fernandez, who follows Xerox for the First Manhattan Company. ''He is an entrepreneur and you really don't find an entrepreneur in a big corporation. He's right there in the curl of the wave.''

With the blessing of top management, Mr. Massaro runs the office products division with more autonomy than other executives run their units. ''Massaro has taken almost a cavalier position in the way he runs the division,'' Mr. Verrando said.

Last week, for instance, Mr. Massaro boldly predicted that his division would be profitable in 1982. Asked about the comment the following day, David T. Kearns, Xerox's president, said it would be a tough goal to meet. ''We'll be dancing in the streets if that happens,'' Mr. Kearns said. The division did briefly poke its head into the black for the first time in the fourth quarter of 1980, although it has since fallen back into the red.

Xerox's strategy has been to offer a broad range of products that can connect together and are easy to use and to market to the largest corporations. In addition to the new terminal and word processors, Xerox offers printers and an electronic file cabinet that can connect to its cable network, Ethernet.

Though there are many different schemes for tying office machines together, the chief attribute of Ethernet is that no central computer is required to control traffic on the cable. Each of the machines has the intelligence to decide when to transmit or receive a message, a significant fact because Xerox is weak in computers while strong in intelligent terminals and printers.

The company has said it will allow other companies to design devices to hook onto the network in the belief that business in general, and Xerox's business in particular, will be enhanced if companies wanting to install office automation systems know they would not be bound to one vendor.

Xerox has also tried to win industry support and allies to establish Ethernet as a standard. The Digital Equipment Corporation, the minicomputer manufacturer, and the Intel Corporation, the chip maker, have backed Ethernet and are designing systems for it. A few other companies have united behind it, but I.B.M. has not.

Critics, however, say that Xerox is trying to establish a standard through advertising and by pretending Ethernet is ready when it is not. The first five systems are only now being installed. A chip made by Intel that will greatly cut the cost of connecting machines to the cable has yet to be marketed. Nor has Xerox given out enough information to allow other equipment vendors to design products for Ethernet.

Xerox, under Mr. Kearns, a former I.B.M. marketing executive who is willing to acknowledge Xerox's past mistakes, has also taken aggressive steps to compete with the Japanese in copiers. It has begun a program to cut overhead, improve productivity and market through low-cost outlets.

''Xerox is trying to drive them back into the sea,'' Mr. Fernandez of First Manhattan said. ''Prices for copiers are dropping like a rock. The battle is really getting bloody at the low end.''

While analysts like Mr. Fernandez seem to have a favorable outlook for Xerox in both copiers and office automation, investors have yet to be convinced, as its stock is selling at only eight times earnings.

Yet Xerox is confident about its future in copiers and in office automation. Said Mr. Kearns: ''The race is just beginning and it will get more and more competitive, not less. When the dust settles, there will be fewer competitors than there are today and we wil be among the leaders.''

''We have to succeed in the automated office,'' Mr. Massaro said. ''We have no choice.''

Illustrations: Graph of Xerox Photo of C. Peter McColough