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NT closing in on Unix

Windows NT may not be ready for prime time, but it is nevertheless putting the squeeze on the profit margins of traditional Unix workstation makers.

Windows NT may not be ready for prime time among enterprise customers, but it is nevertheless putting the squeeze on the profit margins of traditional Unix workstation makers.

Hewlett-Packard (HWP), for one, yesterday announced that its fourth-quarter results were hurt by declining revenues for its Unix system workstations. Demand for its Kayak PC Workstations for Windows NT, however, did well during the quarter.

Silicon Graphics (SGI), at its annual shareholder meeting last month, acknowledged that it is feeling the competitive pressure from Microsoft (MSFT) and Intel (INTC). That pressure in part prompted the company's move from offering a solely Unix operating system to offering Windows NT machines as well.

"There now are more workstations running NT, but those manufacturers are making less money selling those than Unix workstations because they have lower price tags and lower margins," said Jean Bozman, software analyst at International Data Corporation.

"People want a cheaper platform and they want the Intel standard," she added, "so the implication would be that these companies will need to sell more units to make the same in sales."

Companies like HP and SGI are finding that they may have to churn out twice the number of NT systems for every Unix workstation just to keep the same level of profits flowing into their coffers.

But companies moving into NT likely will be successful in their respective markets, said Keren Seymour, an analyst with IDC. So SGI, for example, a company that is successful in the entertainment industry, likely will carry its success with NT into the entertainment market. Compaq, on the other hand, will likely be successful with the Fortune 500 companies.

"Install base is the key here," she added.

But for the meantime, makers of workstations based on Windows NT will have to battle it out in the low-end markets because NT just isn't scalable enough for the enterprise, said Seymour.

The biggest growth area for businesses making the NT transition is for PC vendors selling workstations instead of a PC. The number of those walking away from Unix is a much smaller portion. Rather, NT is for people who no longer can afford Unix.

"Up until now, nothing compared to Unix, but now NT just might be good enough," noted Seymour. "It is not quite the same performance, but it might be good enough for half the price."

The average Unix workstation costs $17,000 to $18,000, while the average NT workstation runs $3,500 to $5,000. Therefore, margins are much bigger because users are paying more for the performance.

"On Unix boxes, there really is a difference between Sun and SGI, but on NT there really are no differences, so there is a lot of pricing pressure," said Seymour, pointing out that all of the players, including IBM, Compaq, HP, and Dell are trying to sell the same product, and cutting the price tag is one way to attract customers.

Analysts note that much of the competition with the Windows NT platform is happening at the low end of the market, while mid- to high-end Unix machines, in contrast, currently have a fairly stable market.

"NT is gaining share where it can do the job in a low-end server and desktop, but that isn't the whole market," said Jay Stevens, an analyst with Buckingham Research.

In Europe, companies have a tradition of moving slowly into new technologies, said Stevens, pointing out that this tradition is giving Unix vendors the upper hand--at least for now.

"Unix is not dead, and more voices need to send this message," he added, noting that, historically, it has taken up to ten years for other platforms to move into the mainstream.

But that does not mean workstation makers like Sun Microsystems (SUNW) should sit back and relax. Rather, Sun must market Windows NT systems in such a way as to have them ready to make the switch once consumers and businesses are ready.

Bozman said that the traditional Unix workstation market was basically flat in terms of unit growth, and down 6 percent in revenue for 1996. IDC's preliminary 1997 numbers are not out yet, but Bozman said the market for workstations that run Windows NT is growing.

"Hewlett-Packard and Digital Equipment (DEC) are starting to ship more and more NT workstations," said Bozman.

(Intel is an investor in CNET: The Computer Network.)