This week, Digital Equipment experienced what is nowadays a rare pleasure - its stock was upgraded by one of Wall Street?s most influential IT stockwatchers, sparking off a rally in the company?s share price. John Jones of Salomon Brothers hiked his rating of Digital?s stock from a buy to a strong buy, convinced that the company will beat Wall Street expectations for this fiscal year.
This is the sort of seemingly minor event on Wall Street that can mark a sea change in a company?s fortunes. Investor confidence breeds customer confidence, and the history of the hi-tech industry shows us how critical market perception can be to a company?s fortunes, sometimes regardless of its product set. Although few in the industry doubt the overall quality of Digital?s technology, the ratings of the financial community will prove just as important if the company really is to turn itself around after four long years in the doldrums.
President Bob Palmer has been trying very hard to convince the market that fiscal 1997 will be the year when the recovery finally happens, and will be mightily cheered by actions such as Jones?. He was as tireless last month in courting customers and investors across the US with promises of recovery, as his lookalike, US president Clinton, was in campaigning for re-election. And just as much as Clinton?s, Palmer?s future career depends on his success. Some analysts question why the man who was brought in three years ago with the brief of revitalising Digital is still at the helm when the vital signs are still so spasmodic.
Palmer?s recipe for Digital?s, and his own, survival, seems to rest on the Alpha processor, NT, and the final discovery of a sales model that balances channel and direct sales to best advantage - something that has eluded Digital throughout the past decade. The latest in a long line of sales reshuffles was blamed for disastrous first quarter figures, announced last month, while the only division to be consistently in profit, the networking unit, is also the one that sells only indirectly.
Sorting out the conflicts between direct and channel sales is an urgent priority for Digital - its problems in this area have arguably been worse than any of its rivals? - and a happy result is certainly not a foregone conclusion. ?Digital still hankers after IBM-style account control, and that means direct sales, but its strengths are in markets that are better served by a largely indirect model - technical and vertically-oriented workstations, departmental machines, Pcs, networks,? said an analyst at the Aberdeen Group.
However Digital manages to sort out its channel, the product strategy the partners will have to sell is less beset with confusion. Two years ago the company was still basically playing variations on its old themes of technological expertise, high performance and multiple operating systems. Now it has piped down about proprietary technologies such as VMS - however technically superior and popular with the older user base - and is emphasising the Internet, NT, and fast Lan servers. There is less talk of services and consultancy and less of scientific computing - although this base will always remain critical as a revenue stream for Digital.
NT and the Internet - hardly original, but Digital does have some important advantages here. One is its very close relationship with Microsoft. It is well known that NT was developed by the architect of VMS and shares many of its properties. The most cynical observers even believe Microsoft has been forced to get closer and closer to Digital through its dependence on Digital technology, rather than for marketing reasons. Whatever the reasons, Microsoft has made Digital a primary development and support partner and given the former minimaker a significant headstart in the exploding NT world.
Its other advantage is Alpha. Unlikely to seriously challenge Intel for the processor crown as Digital once hoped, Alpha does nevertheless appeal to Vars in high performance markets and this year has seen its first year of mass sales, with cheaper and more mainstream versions - plus the Digital NC chip - joining the superfast but expensive high end Alphas.
With Digital the first to run the emerging 64-bit version of NT and talking about being able to hold a whole database in memory on forthcoming Alpha/NT servers, there is a clear market for it in the Web server space, one that it may be better suited to fill than many rivals relying on common or garden technology.
For once, Digital may have a technology that is not only high quality but fashionable. The reawakening of Wall Street interest, if it continues, will also be a serious advantage. Now Digital just needs to sort out its channel and convince its customer base.
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