The months of December and January were a watershed for Digital Equipment Corp. After two quarters of flat sales for its flagship servers and workstations based on its ultra-fast Alpha processor, chief executive officer Bob Palmer decided on some dramatic action. To help stave off attacks by the systems vendors selling rival systems that use the Intel Pentium chip and run the Windows NT operating system, he cut prices on DEC’s complete line of Alpha systems by between 13% to 47%. And in an effort to spur the so far slow uptake of Alpha chips by other systems builders, he cut the cost of what is acknowledged as the world’s fastest commercial microprocessor in half. According to Computer Business Review, it is too early to say what effect, if any, those moves will have on customer enthusiasm for Alpha, but what is clear is that things have not been going to plan at DEC since the company closed its fiscal year on 30 June last year. After reporting that Alpha systems sales grew by 45% to around $2.4bn in fiscal 1996, the company has had two uncomfortable quarters in which Alpha systems revenue growth first slumped to 4% and then to 1% in the most recent quarter. And while Alpha revenues may still be creeping up, they are doing so only because sales of DEC’s other computer lines are falling fast.
Alpha accounts for a third
Over the latest three months to the end of December, Alpha systems revenue at around $600m accounted for a third of total product sales, up from around a fifth at the end of fiscal 1995. The same amount again can be added in related Alpha services, software, storage and other add-on items, which would bring total Alpha business to just over a third of the company’s total quarterly revenues of $3.36bn. DEC maintains that the slower- than-expected sales had little to do with lack of demand. Rather it suggests that a shortage of certain varieties of the Alpha microprocessor held back sales worth $50m. However, there are other likely influences – most notably a change in the mix of operating system across the Alpha line. According to Patrick Spratt, vice-president of DEC’s investor relations, in the first quarter, Unix-running Alpha systems accounted for 50% of Alpha sales, compared to 30% to 40% sold with VMS and less that by 20% with NT. Since then, the market’s love affair with NT has deepened and the proportion of NT-based Alpha systems can only have increased. But the dynamics of the NT market put Alpha/NT systems in the ring with scores of Intel/NT systems vendors, something that dictates lower prices and lower margins than DEC has derived from Unix and VMS Alpha sales. As DEC increasingly looks to position Alpha/NT boxes as the superfast – and the only – mainstream alternative to Intel/NT – it will simply have to sell more units to hold its Alpha revenue stable and profitable. At the same time, there is some bet hedging going on. Since the close of its fiscal year, DEC has pulled its personal computer division out of loss-making activities in the home and commercial standalone personal computer markets and focused that salesforce on selling servers and networks of personal computers. In fact, one of the highlights of its second quarter figures was that, for the first time in over a year, the personal computer unit actually turned in a profit. That encourages DEC to believe that, alongside its Alpha NT engine, it can also sustain a strong presence in the commodity Intel/NT market – the very market that the Alpha group is trying to out-maneuver. Nevertheless, the strategic focus is on Alpha. Since its launch in 1992, Alpha products have brought around $12bn into DEC’s business. DEC could not have survived without the Alpha chip and its systems, and some customers have been willing to pay well for that technological edge. But with its recent re-pricing, DEC is trying to kill the perception that high performance equates with high price. Whether that will give it the volume of sales that it so anxiously awaits, will only become apparent as customers begin to react to this twist to DEC’s recovery strategy.
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