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Can Microsoft save SGI?

Silicon Graphics hit with tough competition, pricing pressure, and production and image problems, is looking to take back some of its glory days.

Silicon Graphics (SGI), hit with tough competition, pricing pressure, and production and image problems, is looking to take back some of its glory days.

But will the alliance announced earlier this week to collaborate on a new graphics architecture with software giant Microsoft do the trick?

Analysts said the deal will go a long ways in restoring SGI's image as a technology leader, but not much is expected to trickle down to SGI's bottomline in the near future.

"This deal will give users a sense of confidence that SGI will be able to differentiate itself with its technology in the [Windows] NT market. and be a leader," Karen Seymour, analyst with IDC Research, said. "Don't expect another me-too box from them. They will lead the NT in graphics development."

SGI is facing competition from other NT workstation vendors like Compaq and Hewlett-Packard.

Under the deal, the companies will team up SGI's OpenGL and Scene Graph graphics with Microsoft's DirectX. These graphics programming technologies will be used to create a new graphics architecture called Fahrenheit, and SGI will enter the Windows-Intel workstation market.

SGI's viability image will also improve with the deal, analysts say.

"This raises the level of confidence for their installed base that the company will be around. This also does the same for [customers] who are considering them," Dan Dolan, an analyst with Dataquest, said.

Afterall, the company reported a first quarter loss of $56 million last October due to an acquisition and a sales shortfall in its server business. SGI has been working towards beefing up its server business, as its bread-and-butter Unix workstation business undergoes heavy competition from other players and competition from Windows NT.

Revenues of $768 million in the first quarter were virtually flat with year-ago figures and down about a third over the previous quarter. SGI in October also said it planned to lay off up to 1,000 workers and that its long-time chairman and chief executive, Edward McCracken, would give up the CEO post once a replacement is found.

Other analysts note that the deal enhances the image of SGI's management.

"This was a significant announcement for SGI. It shows that SGI sees what the industry wants and makes the correct choices for partners," said Brian Eisenbarth, an analyst with Collins & Co. "They're forming an alliance to get graphic expertise on to the [Windows-Intel] solution."

But, as analysts said, little upside is foreseen in the near future as a result of this deal.

"This deal affects their [graphics architectural programming interface]. It won't boost their hardware sales," Seymour said. "The only real advantage in the long run is they will be able to tune [the API] and make it run faster than anyone else. But that's at least five years before they may see any results to their revenues."

SGI's Scene Graph won't be ready to roll until next year and the low-level API that will include OpenGL won't be released until the year 2000.

Shares of SGI have failed to get a rise out of the deal. The stock has dropped since its announcement Wednesday, with SGI falling 6 percent to close at 12-1/2 yesterday, down 13/16 over the previous day.

But Eisenbarth notes tech stocks overall have been down and SGI's share performance may not reflect disappointment among investors with the deal.

SGI may face one risk in the deal, Seymour said.

"One of the interesting aspects of the deal is that Microsoft will control this technology. SGI says it has never controlled OpenGL anyways and had left that up to a review board. But now it will no longer be controlled by a review board, it will be controlled by Microsoft," Seymour said. "Because of this arrangement, SGI can be squeezed out. Right now API will support both Unix and NT. Microsoft may later say it will not support API for Unix."