Digital Unveils 2 New Mainframe Computers

NEW YORK â€”  Digital Equipment Corp., emboldened both by its own comeback and International Business Machines’ continuing misfortunes, escalated the war between the two computer giants Tuesday by introducing a powerful new computer system designed to infiltrate IBM’s biggest and most profitable markets.

During a splashy, 90-minute press conference at its Wall Street office, the Maynard, Mass.-based maker of mid-sized computers unveiled two new mainframes and a new disk-storage device. Each new computer can support more than 1,000 computer users and is up to 50 times more powerful than Digital’s original VAX computer. And, in keeping with Digital’s reputation for building computers that are all on “speaking terms,� both are compatible with other Digital computers and will communicate easily with IBM mainframes.

Most Powerful Models

All the new products are the most powerful computers Digital has ever offered and are designed for large corporations--a considerable change for a company whose traditional strength has been smaller computers, principally for scientists and engineers, that are able to communicate with IBM mainframes.

But much more significant than the new products themselves is the signal that industry analysts say Digital is sending to its customers and to IBM with this introduction.

“This is important because it signals their marketing direction,� said Marc G. Schulman, an analyst for the investment firm of Salomon Bros. “Clearly, they’re stepping up their marketing effort, trying to make it easier to grasp what they’re trying to sell and indicating their drive to win big customers away from IBM.�

Many analysts think that Digital’s timing couldn’t have been better. While IBM uncharacteristically limps along, the most visible victim of a sustained industry slump, Digital has astounded Wall Street for nine months with sharp sales and earnings increases and major inroads into another IBM stronghold: minicomputers.

The two companies’ latest earnings reports are illustrative of the divergence. IBM announced Tuesday that its fourth-quarter earnings fell 48.2%, even worse than most analysts had predicted, triggering the company’s first back-to-back earnings declines in decades. That news came less than a week after Digital reported a 98% earnings increase for its second fiscal quarter--which corresponds to IBM’s fourth quarter.

Happy Coincidence

While some Digital executives were gloating privately Tuesday about the coincidence of IBM’s bad news falling on the same day as Digital’s big product announcement, the coincidence turned out to be inopportune for Digital. Despite Wall Street’s eager reception of Digital’s product announcement, the company’s stock finished the day down $2.125 a share at $140.625, as IBM ‘s poor earnings put a damper on technology stocks. The day before, Digital’s stock had soared $6 a share in anticipation of Tuesday’s announcement and on news that Moody’s Investor Service had raised its ratings on Digital’s long-term debt.

Nonetheless, analysts aren’t optimistic about Digital’s prospects for making major inroads into IBM’s mainframe market.

“This is a smart move for Digital and very good for Digital customers . . . but it isn’t terribly important to the rest of the industry because I don’t think they’ll go in and replace IBM,� observed Jean W. Orr, an analyst with the Wall Street investment firm Drexel, Burnham, Lambert.

Rather, Orr and others expect Digital’s new mainframes to win business from users of smaller Digital computers who need more computing power than their older machines offer or from companies that currently buy mainframes from someone other than IBM.

Digital acknowledged as much at its press conference. “Our strategy is not specifically to replace IBM . . . but to gracefully coexist with IBM,� said Rose Ann Giordano, vice president of Digital’s information systems business group.

The new Digital computers aren’t new in the truest sense of the word. Rather, Digital has linked together several of its existing VAX 8700 computer processors into a single powerful machine and cut the price. The result: More computing power for less money.

Customers also would save “several hundreds of thousands of dollars� by buying either of Digital’s new clusters, as such computer combinations are called in the computer industry, instead of buying four or eight individual Digital model 8700 computers, Giordano said.

Received First Order

Price was an important consideration for New York’s Chemical Bank, which Tuesday became Digital’s first mainframe buyer, acquiring a model 8974 for about $238,000 less than the price of four individual model 8700s, a Digital official said.

Digital’s stunning reversal of fortunes is largely attributed to the same man who only a year ago was being dismissed by industry critics as flaky and washed up: Kenneth H. Olsen, president and chief executive since he founded what is now the nation’s third-largest computer maker in 1957.

It was Olsen’s much-criticized decision to scrap the company’s decentralized management structure at a time when that organizational approach appeared to be largely responsible for keeping Digital ahead of the computer pack. His reasoning: Digital’s far-flung managers were going off in too many misguided directions.

To survive down the road, he argued, the company had to centralize, carefully target only a few markets and use other people’s concepts if necessary in order to concentrate on something foreign to Olsen’s own background: software.

“I’m an old hardware guy . . . and I still don’t know what these software guys are talking about when they try to explain things to me,� Olsen told the press conference Tuesday, drawing laughs. “But software is what has made the VAX (Digital computer system) what it is.�

His strategy was in keeping with another important decision Olsen made 15 years ago: To insist that all Digital computers have the same operating system so that all of the company’s products can be connected in one network. This so-called interconnectivity, accomplished with easy-to-use software, is the latest buzzword in the computer industry and the single biggest reason for Digital’s comeback and IBM’s minicomputer woes.