Last week, the company laid off dozens of advanced graphics division engineers who were working on high-end computers used for visualizing complex graphics such as models of planes, according to sources. The fancy hardware was destined for systems scheduled to debut in 2001.
The company also is backing away from "Fahrenheit," a joint initiative with Microsoft to create a future graphics standard, and is transferring many employees working on midrange graphics to graphics chip company Nvidia, according to a source familiar with the changes. Some also have speculated that SGI might get rid of Cray Research, the supercomputer company SGI acquired in 1996 for $576 million.
The moves, part of broader company changes to be announced next week, are integral to SGI's effort to move itself to more profitable products, such as workstations and servers built around Intel processors rather than SGI's own operating systems and chips. Still, without a lead in graphics, SGI would lose one thing that makes the company stand out as it enters a server market already crowded with competitors.
SGI declined to comment on what it termed "rumor or speculation," but said the company will describe "the second phase of our turnaround strategy" at its upcoming analyst conference, which was moved from Thursday to August 10.
SGI has been searching for a new strategy since competitors began encroaching on SGI's graphics specialty, and inexpensive Windows NT workstations started undermining profit margins, analysts say. But the shift to Intel hardware brought SGI into a market that's already crowded with competitors that ship many more products, and the delay of Intel's 64-bit chips meant SGI couldn't switch as fast as it wanted.
"It's an exact replication of the problem that got IBM, Unisys, Digital Equipment, Wang Laboratories, and Apple. They just could not change their behavior...to match the changes in the industry," said Jon Peddie, an analyst with Jon Peddie Associates in Tiburon, California. "They were way too late in understanding that [Windows] NT is going to replace Unix, that customers are going to migrate, that they are not going to pay those kinds of prices for machines any more."
Now SGI appears embarked on a two-pronged course, concentrating its own resources on high-powered machines and using partnerships to enter the higher-volume markets. Its high-end Unix servers were partly responsible for last week's surprise announcement of a profitable quarter, the first after seven quarters in the red.
Cutting back graphics at SGI would be sad, said Peter Glaskowsky, an analyst at MicroDesign Resources.
"The company continues to be one of the most innovative graphics companies in the world," he said. There are several graphics tasks that can't yet be done on a computer, and SGI is "one of very few companies on the planet" that could accomplish them, he said.
SGI's roots lie with advanced graphics systems, machines used in the creation of digital dinosaurs in Jurassic Park and expressive insects in A Bug's Life. For years, the company had a major lead over graphics competitors, but that lead diminished as the market became more competitive, and now the company is shifting its product line in the direction of servers. For example, SGI unveiled its first Intel-based servers today, as expected.
SGI chief executive Rick Belluzzo said in an interview last week that SGI will focus its products on more specific markets where it can better stand out from the competition. The former HP executive pointed toward partnerships with larger computer companies, a push toward single-purpose "appliance servers," and building big servers running Linux and using dozens of processors.
Reports of a possible acquisition by IBM or another company sent SGI stock upward in recent weeks, but now it appears only that some sections of the company will depart from SGI, said Goldman Sachs financial analyst Laura Conigliaro.
Possible candidates include the remnants of Cray Research, the supercomputer company SGI acquired in 1996 but has been de-emphasizing since 1998, and the company's Intel-based workstation division. The Visual Workstation product has been "disappointing in its financial performance," Conigliaro said. "It probably isn't the direction" that SGI will invest too much energy, she said.
Cooling down Fahrenheit
The Fahrenheit initiative, announced in December 1997, appears to be cooling off, sources said. Employees have been laid off, and David Story, who directed Fahrenheit engineering, is winding up his tenure at SGI is today, according to his voice mail.
"Fahrenheit is basically dying," one source said. "When the director of a project leaves, you know something is going on."
Fahrenheit is a combination of graphics standards, including Microsoft's DirectDraw and Direct3D, and SGI's OpenGL.
But SGI has been stepping back from its earlier keenness for Windows. The company said last week that that Linux is the operating system of choice for servers in the long term, and that its Intel-based workstations will run Linux by year's end.
Microsoft executives were not immediately available for comment, but on June 30, Microsoft chief executive Bill Gates said that the Fahrenheit work is continuing and that "a year from now, we should see those results."
Meanwhile, many employees on SGI's "Odyssey" project, which was working on midrange graphics systems for SGI's Unix workstations, are being transferred to Nvidia, a graphics chip company that entered into a strategic alliance with SGI about two weeks ago.
The alliance with Nvidia settled a patent infringement suit SGI brought against Nvidia. As part of the settlement, Nvidia has licensed SGI's 3D graphics patents and SGI has licensed Nvidia's patents, the companies said.
In advanced graphics research cuts, SGI likely will move away from its own chip designs and try to use off-the-shelf components as much as possible, a source said. The research and development personnel in the downsized group were working on a successor to the Infinite Reality graphics system in the Onyx2 computers.