Special Report

The Microprocessor

New competitors in the computer market

Business Week

March 19, 1979

The cost of computing is falling at an incredible 30% annually, thanks to the technological revolution that is packing more power and a more complete system on a single, tiny chip of silicon. And so, just as the minicomputer radically changed the computer business in the 1970s, the microcomputer will transform it in the 1980s.

Even now, the microcomputer is accelerating the shift to distributed processing and communicating networks. And already obsolete is the conventional wisdom that the microprocessor -- the heart of the microcomputer -- is not fast or powerful enough for general-purpose data-processing systems.

On Mar. 9, for example, Digital Equipment Corp. (DEC), the world's largest minicomputer maker, introduced a new microcomputer priced as low as $1,800 and capable of handling data-processing that formerly required much larger and more expensive minicomputers. As Andrew C. Knowles, DEC's marketing vice-president, puts it: "The performance of a midrange minicomputer is now available at the price of a microcomputer."

But such developments are also spurring tough new competition for the computer makers. The semiconductor manufacturers, who made the minicomputer industry possible in the first place by supplying ever more powerful and less costly circuit components, are launching their own powerful microprocessors and single-board microcomputers. Previously, they were able to compete with the computer makers only at the very low end of the data-processing market, in simple applications that required little software and support. Now these companies are looking ahead to the mid-1980s, when complete mini-computer-size systems will be fabricated on a single chip, and they are beginning to invest heavily in systems design and software. "The only way you get a return on that investment," says David N. Martin, who heads the Computer Products Group at National Semiconductor Corp., "is to integrate forward into the systems business."

Defending the turf

At the same time, however, the larger minicomputer makers are beginning to develop their own semiconductor manufacturing capabilities. Computer makers "will lose too much value-added" if they do not get into the semiconductor business, says John R. Hanne, who heads minicomputer development at Texas Instruments Inc.

DEC and Data General Corp. are now making all the processor chips for their microcomputers, while Hewlett-Packard Co. (HP), the No.2 minicomputer producer, now turns out 10% of the semiconductor parts that it consumes. "The differences are disappearing" between the semiconductor and minicomputer companies, acknowledges Lawrence J. Lopp, research manager at HP's Cupertino (Calif.) semiconductor manufacturing facility. He sees producers such as Intel Corp. becoming "more a computer company".

These encroachments will not occur without a struggle. "Architecture is not the strength of the semiconductor manufacturers -- architecture is the home base of the minicomputer makers," declares Paul C. Ely Jr., who heads HP's Computer Systems Group.

On the other side, Robert N. Noyce, founder of Intel, by far the leading microprocessor builder, believes that semiconductor companies have already established that designing computer systems is a legitimate activity for them and that minicomputer and mainframe computer companies will eventually have to leave such work to his industry. Only the semiconductor companies, he says, have the high-volume technologies that will allow them to make low-volume microprocessors with the latest manufacturing processes. "This is a technological base that will never be given up to the [computer] industry," Noyce declares.

Intel's corporate strategy is based on its belief that nearly all computers will eventually be manufactured from standard integrated-circuit building blocks. Thus, the role of the computer company will become one of marketing systems, writing software, and providing services, and Noyce is not sure that a semiconductor company can move that far into the computer market. But, he says, "my feeling is that Burroughs could buy all its computers from National Semiconductor and be just as well off."

Such a challenge is nothing new to the computer industry. A decade ago the minicomputer companies were the brash challengers, offering smaller, cheaper, albeit less powerful, products than the established mainframe manufacturers, and they succeeded in carving out a significant share of the hotly competitive market. Most observers agree that the surging microcomputer market will be big enough for everyone. "There's plenty of market for the key players," says W. Joseph Watson, assistant vice-president at Texas Instruments.

Still, many experts believe that the minicomputer makers may gradually lose market share at the low-price end of their offerings. Minicomputer makers are determined not to let that happen. Rather than following the example of International Business Machines Corp., which for years ignored the minicomputer challenge, DEC and Data General are trying to beat the semiconductor makers to the punch. Both have offered microcomputer products for several years. And with each new microcomputer announcement, the crosstown rivals are leapfrogging one another with faster and cheaper machines.

The latest round of announcements began on Feb. 20, when Data General unveiled two additions to its three-year-old MicroNova line. One model slashed the company's price for microcomputers by a third, while the other offered a threefold improvement in performance. Now, less than three weeks later, DEC has come out with its powerful machine -- what it calls the "second generation" of its LSI-11 microcomputer series. The new machine offers a 250% improvement in performance over its predecessor, as well as four times as much main memory. What is more, it will be the first microcomputer, DEC says, to allow several users to run their programs at the same time. "This product effectively erases the differences between minicomputers and microcomputers," says DEC's Knowles.

With such products, the mini makers contend that they have effectively preempted their semiconductor competition. Officials at Data General, No. 3 in the industry, point out that 85% of a microcomputer system's price resides outside the processor chip -- in areas where semiconductor makers have little or no experience. "There are four major elements to a computer system -- silicon, peripheral equipment, software, and service," says Edson D. de Castro, president, "and we have a commanding advantage in three of the four."

A move to semiconductors

Everyone agrees that the mini maker's most important lead is in their superior experience with software. "Software is a cumulative investment," says DEC's Jack MacKeen, microcomputer product line manager. "Semiconductor makers will be surprised when they realize the software investment that they lack." Moreover, the software offered by the mini makers will run on their main lines of minicomputers, enabling new microcomputer customers to move up to larger systems as their needs grow.

Meanwhile, all three of the largest minicomputer companies are moving heavily into the design and production of integrated circuits. DEC lagged both HP and Data General in making the plunge into semiconductors, but it is now moving in high gear. The company plans to consolidate all of its semiconductor operations shortly in a new facility in Hudson, Mass.

Data General, a pioneer among minicomputer companies in chip manufacturing, is in the process of tripling the size of its six-year-old semiconductor plant in Sunnyvale, Calif. An in-house ability to produce customized microprocessors is essential for gaining a "competitive edge" in microcomputers, stresses Jeffrey C. Kalb, vice-president and plant manager. Unlike the standard processors from the semiconductor makers, which are designed, Kalb says, for "broad-based market appeal," Data General's microprocessors are "optimized" for data processing. "We're able to focus our design and architecture efforts," he says.

For the most part, Hewlett-Packard has avoided the very low end of the minicomputer market, but it, too, has invested heavily in semiconductor capabilities developing a high-performance "silicon-on-sapphire" technology. "We'd like two chances to win, so we're in both faces," says HP's Ely.

Smaller minicomputer makers, however, cannot afford to enter both races and may be forced out of some parts of the market. computer Automation Inc., for one, felt the heat and decided to expand its markets. The Southern California computer company now offers large commercial EDP systems in addition to its low-end products.  

GRAPHIC: Picture, DEC's Knowles: A product that "erases the differences" between minis and micros. Ira Wyman

Copyright 1979 McGraw-Hill, Inc.