Can DEC Squeeze One Last Blast From VAX?
It's betting on a new chip to stem the exodus to RISC designs
Gary McWilliams in Boston
October 28, 1991
Everyone likes a winner. And for much of the 1980s, Digital Equipment Corp. was a big one as it gained thousands of new customers with its VAX minicomputers. Their powerful software and easy networking were just what banks, manufacturers, and other companies were looking for to replace and extend their mainframe complexes.
But in the past few years, the VAX design, now 15 years old, has been overshadowed. DEC's nemesis, IBM, has staged what even DEC President Kenneth H. Olsen calls a ''brilliant'' comeback in minis with its AS/400 series. Worse, the reduced instruction-set computing (RISC) technology adopted by rivals such as Hewlett-Packard, Sun Microsystems, Pyramid Technology, and IBM -- and a growing host of others -- has left VAX looking overpriced and underpowered. The gap is so wide that DEC's acknowledged superiority in software is no longer enough to keep customers VAXinated. The result: DEC's share of the midrange computer market has slipped from a high of 15.6% in 1987 to 11.9% last year.
DEC has its own plans to adopt RISC technology and marry it to its huge array of software. But the machines to make that happen won't be ready for perhaps two years. In the meantime, the company is maneuvering to get one last blast from the original VAX. On Oct. 30, DEC plans to launch a new line of machines that it says will match RISC machines dollar for dollar in most business jobs. DEC's secret weapon: a VAX processor chip that cranks through upwards of 30 million program instructions per second -- equaling RISC designs from Sun Microsystems Inc. and other suppliers.
If they succeed, the new machines could halt a debilitating sales and earnings slide. DEC's earnings have tumbled, from $ 9.90 a share in the year ended June 30, 1988, to 59¢ in fiscal 1990. And in fiscal 1991, price battles and $ 1.1 billion in charges to eliminate 11,000 jobs left DEC with its first loss as a public company -- $ 617 million, or $ 5.08 a share.
Fiscal 1992 is getting off to a dismal start, too. Analysts weren't expecting DEC's first quarter, ended Sept. 30, to even match the miserable $ 26 million net profit of a year ago. Underlying it all, reckons John B. Jones, a computer analyst at Montgomery Securities: a veritable crash in VAX sales, from $ 3.43 billion in fiscal year 1988 to $ 3 billion in fiscal 1991 (chart).
For years, DEC relied on regular performance boosts and price cuts to keep VAX competitive for new customers. But the performance advantages of RISC have become too compelling. At first, the damage was confined to technical markets where workstation makers such as Sun thrived at DEC's expense. But now, RISC is spreading to the larger commercial market, too: In a standard measure of performance -- namely, how many bank accounts a system can update each second -- HP and IBM RISC boxes score as much as 60% higher than comparably priced VAXs. DEC won't comment on its forthcoming machines, but analyst Robert Vautrain at market researcher InfoCorp figures they will do two to three times better than current VAXs, putting DEC ''back in the race.''
They had better. After pooh-poohing RISC for years, DEC now recognizes how urgent it is to make RISC work for it, too. Yet its efforts to build a so-called RISC-y VAX, code-named Alpha, won't bear fruit until 1993 at the very earliest.
Until then, October's models are the company's best bet to halt customer defections. Ciba-Geigy Corp., based in Ardsley, N. J., has been flirting with RISC technology for two years, purchasing Silicon Graphics Inc. workstations to do jobs that used to be run on VAX minis. Daniel W. Madrid, who oversees Ciba-Geigy's DEC computers, says the new VAXs represent for his company ''an opportunity to stay competitive'' without moving away from the VMS operating system (the VAX's core software), which has been a main draw for Ciba and many other customers.
But DEC is finding that, because of its high prices, VAX software is losing some of its appeal, too. DEC has been charging top dollar for software, especially compared with VMS's main competitor, the Unix operating system from American Telephone & Telegraph Co. When a customer shifts to a more powerful VAX processor, for instance, DEC requires it to relicense all of its DEC-supplied software -- at hefty fees. With the threat of customer defections mounting, DEC says it will now start charging according to the number of people using its software, not processor size.
Regaining growth in mini sales is likely to be further off. At best, DEC's speedy new VAX chips will have only six months before they are leapfrogged by a new RISC system. But by then, the VAX may have regained enough steam to ensure the success of its own RISC-y reincarnation.
GRAPHIC: Photograph, OLSEN, PLAYING CATCH-UP AFTER POOH-POOHING RISC FOR YEARS PHOTOGRAPH BY JOHN S. ABBOTT; Chart, THE VAX SALES SLUMP... Data: Montgomery Securities CHART BY ALBERTO MENA/BW; Chart, ...HAS PUSHED DOWN EARNINGS Data: Company Reports, Paine Webber Est. CHART BY ALBERTO MENA/BW
Copyright 1991 McGraw-Hill, Inc.