Digital Equipment?s reported plan to sell off its networking arm is just the latest development in a bewildering break-up saga that has been going on for years, to the growing frustrataion of shareholders and customers. Indeed, the choice of this particular unit - actually one of Digital?s more successful in the past few years - highlights many of the issues that have dogged the company in its protracted battle to come up with a recovery plan.
Since president Bob Palmer took over at the helm four years ago, he has veered from one restructuring strategy to another. Sometimes, break-up is the order of the day, with non-core units put up for sale. At other times, Digital falls back on its sheer size and still massive user base and claims providing a full range of solutions is the key to its future. In a particularly strange turnabout, after getting out of the management consultancy business three years ago during one of its downsizing phases, Digital proceeded to re-establish the same group in the US just months later.
All the twists and turns, and the failure to achieve sustained growth on a scale acceptable to shareholders in a company used to being the world?s number two, has frustrated investors to the point that a vocal pressure group was formed this year, demanding more effective recovery plans - including possible takeover by another vendor - and claiming no confidence in Palmer. Palmer and other board directors refused to attend the group?s meeting.
One thing that angers these shareholders, and many other, less high profile ones, is that Digital talks periodically about returning to core business, but it constantly changes its mind about what that core business should be. When Palmer took over, it would have been unthinkable to spin off networking. Digital was still occasionally using its famous marketing slogan, ?The Network is the Computer?, and trying to present itself to the corporate world as the company that could integrate and manage complex enterprise networks better than anyone.
In many ways, this was a realistic claim, and so there will a strong feeling of ?might have been? if Digital does sell the networking division. After all, networking is in the company?s blood. It effectively invented the concept by pioneering departmental computers and then the methods of linking them together. It was largely responsible for creating the Ethernet standard and the cluster.
So the integrator role had some real credibility, and was largely marred by Digital?s persistent failure to get its channel in order. This and the decision to take on the Intel world with the Alpha processor were probably the two elements of the early 1990s Digital that most shaped its future and pushed it to move away from its multi-platform, corporate networking strategy and back to its other set of roots, in high performance hardware.
The recent suits and countersuits between Digital and Intel over alleged stolen patents in their respective chip architectures are the latest problem that have beset the Alpha strategy - and tend to highlight just how impossible is Digital?s task of taking on the mighty chipmaker with a technically sublime, but very niche, Risc processor. Holding on to the over ambitious dream of making Alpha a global standard has led directly to many of Digital?s recent business troubles and to the need to sell off units that many analysts believe have a better future than Alpha itself, such as networking.
Whether Digital is making the right decision is one question. The other, of course, is who will actually take the networking arm off its hands. Front runners among the analysts - Digital does not even admit it is planning to sell the division - are Sun and Lucent. Sun because chief executive Scott McNealy has stated that he aims to take the company into networking, like arch rival Compaq; Lucent to bolster its moves to broaden its telecomms business into the growing market for integrated voice and data networks.
Other units may be on the block also. The printing division was sold this week to Genicom, a move many observers believe should have been made years ago, given that Digital has never succeeded in making its printers into a volume cash cow to support the computer business, as Hewlett-Packard has with the Laserjets. Digital has gradually shaved down its software portfolio over the past four years and further products could go, as could some of the services units.
It all comes back to the question of what Digital now regards as its core business. The days when it wanted to be a services provider are over. ?Digital goes with the business school fashion. When all the hardware companies were moving into services because margins were falling, DEC was going to be the largest IT services operator. Now Microsoft is taking over the world it wants to be in NT,? commented one investor, who wanted to remain anonymous.
Digital?s close relationship with Microsoft has made NT the centrepiece of its strategy, at the expense of Unix, but it cannot rely on this alliance to give it the market position it craves. After all, everyone is making deals with MS, including many of DEC?s natural competitors.
The PC business is also fairly strong, but again, it is a me-too effort, nowhere near Compaq and IBM in volume and with nothing unique to offer. Alpha is unique, but too few people want it in an age of standards.
Many shareholders certainly believe that, given this dilemma, Digital should spin off its non-core units in order to put the main company up for sale too. They were disappointed by the failure of two attempts by Compaq to buy Digital, a deal that is unlikely to be resurrected now since Compaq?s purchase of Tandem.
But Digital is still an attractive prospect in many ways. It has a vast user base, many of them ripe to convert to NT technology as it becomes more scalable. It has a large if unruly channel, a global sales and development organisation and excellent routes into large corporate sites. Sadly, what Digital does best - invent great technology - is probably the least appealing aspect for potential purchasers. It seems unlikely that Alpha would survive long after a takeover by a mainstream vendor - but many investors still see acquisition as the best route forward. Their pressure may have pushed Digital into putting the networks unit on the market, but they are unlikely to be satisfied with just one gesture.
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