Digital Downsizes, Forges Alliance

A FEW weeks ago, after a breakfast meeting of business leaders here, Digital Equipment Corporation founder and president Kenneth Olsen was asked a predictable question:

What role would DEC's new Alpha chip, which is much faster than competing microprocessors, play in the company's future?

Mr. Olsen's answer was unexpected: "It could kill us." He went on to explain that while the engineering feat opened doors of opportunity for the company, "people don't buy technology, they buy solutions."

The comment reveals Olsen's understanding of challenges facing the nation's second-largest computer company.

With rapid technological change and competition shaking up the industry, Digital must show it can still meet customer needs. After steady growth in the early 1980s based on its popular VAX line of minicomputers, Digital, like other providers of high-end systems, was hit by the personal-computer revolution that has brought increasing power to desktop machines at ever-lower prices.

Both Digital and the No. 1 computermaker, International Business Machines Corporation, have been downsizing aggressively.

"How do these really large companies adapt to changing markets and technologies," asks William Bluestein, a senior analyst at Forrester Research, in Cambridge, Mass. "Both of them have been flailing about."

For both giants, the answer lies in cutting payrolls, greater independence of business units within the company, and spinning off businesses that aren't central to their long-term strategy, Mr. Bluestein says. But where IBM reported strong profits in the most recent quarter, DEC reported an unexpectedly high loss of $294 million. Digital's stock sagged to $48 a share from around $65 when the Alpha chip was announced in January.

Bluestein attributes the red ink in part to Digital's early announcement of Alpha, which will not become available in volume until late this year. Since Digital says the chip will be used in machines ranging from portables to supercomputers, the early announcement may have put customers on the sidelines.

One key to Alpha's success will be the availability of software applications to run on the Alpha-based machines. Here a big boost could come from an alliance with Microsoft Corporation, the leading provider of personal-computer operating systems - the basic software on which other software applications run. On Friday, the two companies announced that Microsoft would make its new high-end operating system, Windows NT, run on the Alpha chip as well as on several other microprocessors. The deal helps ensure

that there will be plenty of software to run on systems made by DEC and other hardware companies who are licensees.

Commenting on the alliance, analyst Steven Widen says "everybody seems to be switching partners." Not long ago, IBM and Microsoft had close relations, and DEC and was developing a partnership with Apple Computer. But last year Apple and IBM got together to work on a new operating system to compete with Microsoft's Windows. While the DEC-Microsoft partnership gives Digital a shot at developing a high-volume market for desktop Alpha systems, that will depend on their price and on how fast they come to mark et, says Mr. Widen, of Workgroup Technologies Inc., a research firm in Hampton, N.H.

For now, Widen says, the two key issues for DEC are maintaining revenue until the Alpha products come out, and downsizing the company and cutting bureaucracy. DEC also announced that it will take a $1 billion charge to cut 10,000 to 15,000 more jobs.

But bigness still has its advantages. "A lot of very large companies want to do one-stop shopping," Bluestein says.