Several factors led to SGI decline

The company says it will reorganize its business lines and adopt Windows NT for its workstations, but recovery will not be easy.

Michael Kanellos
Michael Kanellos Staff Writer, CNET News.com
Michael Kanellos is editor at large at CNET News.com, where he covers hardware, research and development, start-ups and the tech industry overseas.
3 min read
Manufacturing problems, news leaks about upcoming products, a failure to anticipate customer demand, and competition from NT workstations all contributed to the problems
Silicon Graphics (SGI) now faces, say analysts and company insiders.

And while SGI has said it will reorganize its business lines and adopt Windows NT for its workstations, recovery will not be easy.

"It's a slippery slope for these guys," commented Tom Rhinelander, computer analyst at Forrester Research.

While the emergence of Intel-based workstations running the Windows NT operating system has largely been identified as the cause of SGI's decline, the beginning of the company's problems can be traced back to manufacturing and marketing failures that started in early 1996, according to Peter ffoulkes, workstation analyst with Dataquest.

During this period, the products that emerged from SGI performed well: The problem was that they weren't well timed to customer demand.

SGI's first problem emerged in January of last year with the release of the MIPS R5000 and R10000 processors, said ffoulkes. MIPS, which is owned by SGI, announced the new processors earlier than originally planned to counter the release of UltraSparc processors from competitor Sun in late 1995. While SGI was able to incorporate the R5000 into entry-level workstations early, it could not deliver enough of the R10000 products, thereby squelching some demand.

"They were announced early and then disappointed when they couldn't deliver," said ffoulkes.

Ironically, while still dealing with a shortfall, in September the company had to issue a recall of R10000 chips made between March and June due to a manufacturing flaw.

Then came October 7, 1996, a day that will live in infamy at SGI. On that day that SGI introduced a completely new generation of products, including the relatively affordable O2 workstations, the Origin servers, and the Onyx2 high-performance visualization supercomputer, among other products.

While the products themselves were highly regarded and continue to be so, SGI's rollout negatively impacted the company's balance sheet, said ffoulkes and sources close to the company. Pre-release publicity about the new products had caused customers to delay purchases during the summer, which caused revenues to dive. Then, after the products were released, SGI could not produce enough of certain models, ensuring another dismal quarter.

SGI CEO Ed McCracken at the time chalked up the company's dismal performance in the second half of 1996 to this whipsaw effect of customer anticipation and demand.

During this time, NT workstations from Compaq, Hewlett-Packard, and others were rapidly catching on in the market. "It was something they should have seen coming, but didn't," said ffoulkes. "They didn't read trends in the market," he said.

To recover, the company will have to carve out a niche for itself in the Windows NT market, which won't be easy. SGI, for one, won't even be coming out with its first NT workstations until at least July 1998 under its current development calendar.

A number of vendors are already selling fairly high-performance NT workstations with strong graphics capabilities, pointed out Rhinelander, making it a competitive market. "Your job is staying one step ahead of Compaq and HP," he said.

Although SGI has said it will continue to develop and sell high-end servers based on Unix, Rhinelander does not see great potential for a company turnaround in that market. Sun has become the premier Unix vendor, and the market is not growing substantially.

"The competitor to NT on the Unix side is Solaris. Irix [SGI's version of Unix] is kind of a has-been," he said.

"They have good products, but they have to turn their business around," said ffoulkes.