The Deconstruction of Digital

July 1994

Digital Equipment Corporation is in trouble. The company that invented minicomputers and rode their engineering creativity to the top has foundered on the shores of changing times. Digital's woes have been a long time in the making and no single factor has brought them to this time, but rather a combination of bad decisions, bad luck, and changes in customer demand.

• Digital's fabulous success with the VAX architecture and the VMS operating system -- and the thousands of applications developers created for it -- convinced Digital to wait too long to introduce a new architecture. That new processor architecture, based on Digital's 64-bit AXP processor, has had a troubled introduction to the marketplace:

(1) It was late to the market, arriving at a time when Digital's fortunes where already down from their 1989 peak.

(2) It has failed to attract significant hardware partners who would use the AXP as the basis of other important product lines. (The AXP does, of course, have hardware partners, but they tend to be small, specialty users.) This contrasts sharply, and unfavorably, with the PowerPC processor which starts with both IBM and Apple as major backers and will probably have at least several other major hardware partners.

(3) As a result of both the late arrival of AXP and its inability to attract strong partners, it has failed to attract the volume of software that a new processor needs to become an important platform. Digital has indicated that there are now about 1,500 packages available for the AXP chip, but they are divided among three platforms, Open VMS, Unix, and NT. This means that there is no critical mass of software for any single operating system on AXP.

(4) Digital has had difficulty making operating systems choices about AXP. It has placed a great deal of emphasis on Open VMS and has divided the rest of its focus between NT and Unix, even though NT is not quite ready to go, in terms of available software and customers. Digital has also had difficulty giving up its commitment to VMS on the VAX platform and continues to manufacture and market VAX computers, further diluting its platform focus.

It is my opinion that the success of a platform can be predicted by the number and quality of the partners it attracts during its first year or so of life. By that measure, AXP is not doing well and is likely to continue to be mainly a processor for Digital's own use, and the use of interested niche markets, but not of other major vendors.

• Digital's continued lack of financial success, in part because of the factors above, in part because its infrastructure is best suited to a day in which customers were willing to pay large premiums for big machines sold through direct sales forces, is forcing it to restructure. Digital is doing that with a vengeance. Some of the changes Digital is making (or will make soon) are matters of fact, not speculation:

(1) Digital has reorganized the company into three groups, with much of the power in the hands of former Olivetti executive Enrico Pesatori. Three additional groups, all reporting to Palmer, fill out the picture.

Digital's New Organizational Structure

(2) Digital is selling off its data storage business to Quantum Corp. for $400 million, including its magnetic disk drive, tape drive, and sold state disk businesses, as well as its advanced disk recording-head technology. Quantum will also acquire Digital's 81% interest in Rocky Mountain Magnetics, a developer of next generation data recording technology. Digital's businesses had annual revenues of $750 million, so Quantum is getting quite a bargain. Along with the products, Quantum gets 5,000 Digital employees and real estate in the U.S. and Malaysia. Quantum was a $2.1 billion company with 3,000 employees before this transaction.

(3) Digital is discontinuing its famous matrix management style -- in which management decisions had to be agreed upon by many different groups -- moving instead to a more traditional hierarchical management style which Digital hopes will lead to faster decisions, better suited to a dynamic market.

Digital is also making enormous cultural changes. It has largely moved away from the engineering-driven culture that ran the company for its first 28 years under founder Ken Olsen, to a more marketing and financial results-style culture. In keeping with that style change, in the last year Digital moved from a salaried sales force (more like technical representatives) to a commission compensation plan, more like others in the computer industry (thought to be essentially modeled on IBM's).

(4) Digital is eliminating the bulk of its field sales force. As part of its decision to cut 20,000 jobs in the next 12 months, Digital has decided to eliminate much of its sales force. It will keep account executives who call on the 1,000 top accounts (who Digital believes account for more than 75% of their business) and service the rest of the Digital customer set indirectly through VAR's and others. This will represent a unique opportunity for competitors to try to sell alternative computing environments to Digital customers and will probably sharply erode Digital's already threatened customer base.

(5) Digital is trying to sell off or otherwise find profitable use for some of its excess chip manufacturing capacity. AMD and others have been mentioned as potential partners or buyers.

• Digital's financial problems cause continued financial uncertainty, which sets up a deadly cycle. Customers are concerned about making new commitments to Digital, uncertain that the products they are buying will continue to be supported or enhanced in the future. Lack of new commitments further erodes revenues, and the cycle continues.

In the midst of all this uncertainty, there is continuing speculation as to just what else Digital can do. Here are some of the guesses:

• Digital was supposed to be considering selling off its consulting business, perhaps to CDC.

• Digital was also rumored to have tried to sell its systems integration business but not to have received an adequate offer. Neither of these arrangements now look likely.

• Digital could (and undoubtedly will sell off additional excess manufacturing capacity and real estate.

• Other peripheral businesses such as printers or Digital's PC manufacturing business could be sold off. You don't have to manufacture PC's to sell them, but this is Pesatori's heritage and he may strongly argue to stay the course.

There is a future (for Digital)

We'd hate to see Digital dispose of either its consulting or systems integration businesses. These are large, billion dollar businesses and they represent Digital's best chance for leveraging itself into a successful and profitable company in the future. If Digital can do the downsizing, get rid of the people and products it doesn't need and can't afford, and then move out as a very good provider of open systems products and services, there is a future. But they'll need their consulting and systems integration businesses to do that. We hope they've figured that out.

Or maybe they have a different game plan. In that case, we hope they'll tell us -- and their customers -- what it is soon. The suspense is killing us.

Comments or Questions: Send Email to opinions@wohl.com

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Entire contents © 1994 by Amy D. Wohl. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden.