Digital's Surprising Revival

By David E. Sanger
Special to the New York Times

Maynard, Mass. -- September 2, 1986 -- In the giant red-brick woolen mill where the Digital Equipment Corporation moved in as a start-up company nearly 30 years ago, the chatter in the hallways and offices keeps returning to one question: How long can Digital's remarkable revival last?

''We talk about it every day,'' acknowledges William C. Hanson, the lanky, baldish chief of Digital's manufacturing operations. ''We can't believe our own snake oil. But this is more than just temporary - we're riding a new wave.''

The wave carrying Digital is one that virtually all its competitors -most notably the International Business Machines Corporation - have missed.

Quarter after quarter, with the industry in the grips of the biggest computer slump in a decade, Digital has reported gains in revenues, earnings and operating margins that have repeatedly surprised Wall Street and offered a steady stream of new, easily connected products that appear to have worsened the angst at I.B.M.

A Long-Awaited Model

The latest of those products will be introduced Thursday, a long-awaited personal computer - Digital's first since the failure of its Rainbow two years ago - that provides the link between I.B.M.-compatible PC's and Digital's own line of VAX minicomputers. Far more significant, in the eyes of many industry experts, is a new hardware-and-software kit also making its debut, that allows users of I.B.M.'s own PC's to retrieve data instantly, and painlessly, from VAX computers of all sizes. Digital hopes that product will expand its market considerably, easing VAX machines into companies where I.B.M. PC's occupy most desk-tops.

Because of major differences in circuit designs and operating systems, that is a significant technical feat. I.B.M. is still struggling to connect the PC to its own minicomputers, much less anyone else's, and finding a way to integrate millions of desk-top personal computers has long been considered essential to Digital's strategy of pushing companies to build computer networks of immense scale.

This strategy has been mapped out chiefly by Digital's quirky, sometimes contradictory 60-year-old founder, Kenneth H. Olsen, who freely admits he is gambling much of Digital's future growth on the accuracy of his vision.

After 30 years of designing some of the industry's most innovative midsized computers, and after watching the PC revolution pass Digital by, Mr. Olsen now maintains that American companies need a ''theological conversion,'' in which they buy computer networks first, and add the usual array of processors, printers and disk drives later on.

A 'Backwards' Approach

''The problem is that everyone's been going about this backwards -buying lots of computers and then trying to connect them together,'' Mr. Olsen said the other day at one of Digital's largest facilities, in Merrimack, N.H. ''We have to start thinking of the computers as peripherals. You start with the network, then you hang the computers on later.''

That strategy, which one of Mr. Olsen's colleagues refers to as ''Ken's single-minded passion,'' crystallized after a plunge in 1983 of Digital's earnings and a shake-up of its top management left many wondering whether the company would be trampled under I.B.M.'s feet.

Mr. Olsen's plan has unfolded piecemeal, as Digital focused virtually all its attentions on rebuilding its VAX line, from the $1 million VAX 8800, which is rivaling some of I.B.M.'s most profitable mainframes, to its remarkably successful MicroVAX II, a year-old $20,000 technical work station that has been embraced on university campuses and in corporate laboratories.

Indeed, so far, much of Digital's recent success appears to have little to do with networks at all, but with its cycle of new products. The company's biggest customers, computer users who are found more frequently in laboratories and on manufacturing floors than in offices, were thirsting for more computing power, and Digital provided it with its new machines.

New customers have also been attracted by the fact that all of Digital's VAX offerings run the same operating system, compared with the several different systems used in I.B.M.'s midrange computers, and all connect to the company's reliable, if sometimes slow, Ethernet local area networks. Those two features make it easier to add on to Digital systems in building-block fashion without investing in new software, large corporate users say.

Concern About Hassles

''When you study the accounts where D.E.C. is winning against I.B.M.,'' said Carol E. Muratore, technology analyst for Morgan Stanley, ''you discover that people are really beginning to care about having one operating system and networking that usually works without hassles.''

Miss Muratore is among a growing number of computer industry insiders who have embraced Mr. Olsen's vision for Digital. ''If you look back at the 1960's,'' Miss Muratore said, ''I.B.M. gained control of the customer by controlling the mainframe,'' which was the centerpiece of all computing activity. ''Now that mainframes are just one more element of the system, Ken Olsen realizes that in the next decade, whoever controls the network will also control the customer,'' she added.

But I.B.M. recognizes that, too, but more in theory than in practice so far. Its executives increasingly talk in the same terms as Mr. Olsen, though their language is usually less colorful. And while I.B.M.'s networking products are still in considerable disarray, the giant computer maker has greatly improved its communications technology in the last year, while consolidating midsized computer offerings.

As I.B.M. makes headway, Digital may need to look for yet another edge.

''D.E.C. is still suffering the fact that it is heavily oriented toward the scientific and engineering environment, and not toward mainstream office computing,'' said Frank Gens, who follows the company's products for the International Data Corporation, a consulting group based in Framingham, Mass. ''When you look at their software offerings in insurance, or in transportation, or in sales and marketing, you don't find many applications that run on the VAX's. That's going to hurt.''

Greater Competitiveness

In recent years, however, Digital has bolstered its competitiveness in many ways, slashing its manufacturing staff and lifting productivity and profit margins. The size of the manufacturing staff, for example, has fallen by more than 5,000, to about 27,000, through reassignments and attrition. And revenues from hardware sales, per manufacturing employee, have risen from $125,000 in 1984 to about $200,000 in the fiscal year that ended in June, Still in some disarray, however, is the company's marketing staff, which customers say has never matched I.B.M.'s in professionalism or persistence. That may prove a large impediment as Digital unrolls its networking strategy: Inherently complex, those networks are usually sold only after convincing sales pitches, backed up with presentations by company engineers. But Mr. Olsen has always eschewed glitzy marketing, saying it mostly involved ''selling people things they don't need.''

''When marketing is what wins, we are always behind,'' he said. ''But when product is what the customer buys, that's when we do wonderfully.''

It was that attitude, critics say, that doomed the Rainbow, Digital's late entry in the personal computer race, which died along with a host of other non-I.B.M. compatibles. The VAXmate, the new personal computer to be introduced Thursday, will be sold primarily as part of larger VAX systems, rather than as a stand-alone machine in a retail store. At $4,045 for a basic VAXmate system, it is an expensive version of I.B.M.'s basic PC AT, though it is already rigged for connection to a local area network.

For Digital users, the most important advance lies in the accompanying software, which goes a long way toward breaking down the barriers between I.B.M.'s and Digital's incompatible operating systems. In the past, it was difficult - if not impossible - to use an I.B.M. PC to call up data stored in a VAX. With the new program, that can be accomplished easily; in fact, the user may not know if the data she is using was stored in the I.B.M. or in the Digital computer.

But Mr. Olsen, who is known for rambling through D.E.C.'s offices, trading ideas and acerbic reviews of Digital's own hardware with designers and production personnel of all levels, says he is not satisfied with small victories.

''Getting people adjusted to the idea of building open computer networks, networks that everyone has access to, is strange, and a lot of people frankly don't like the whole idea,'' said Mr. Olsen, who prefers to sell equipment he thinks computer users need rather than the equipment they want. ''We're going to change them.''

Digital's earnings rise ... as new products are introduced

Major new products introduced at Digital that have been popular because of their compatibility with previous products. Fiscal years end in June.

(Source: Digital Equipment Corporation)

GRAPHIC: Photo of Kenneth H. Olsen (NYT/Mark Lennihan); Graph shows that Digital's earnings have risen since 1983 (Source: Digital Equipment Corporation)

Copyright 1986 The New York Times Company