Is Silicon Graphics Busting Out Of Its Niche?

A spate of new deals may put its 3-D software in millions of PCs

Its computers help design snazzy new cars and create dazzling special effects for big-name movies, such as The Hunt for Red October and The Abyss. But Silicon Graphics Inc. has never escaped the glare of fellow workstation maker Sun Microsystems Inc., based just down the road in Mountain View, Calif. Sun, after all, is No. 1 in workstations. And Silicon Graphics stuck to a relatively small niche: workstations that can display and manipulate images in three dimensions.

But now, after three major announcements in the space of a week, Silicon Graphics has grabbed the spotlight. On Apr. 2, Microsoft Corp. said it will use Silicon Graphics' 3-D software in a future operating system for personal computers. The next day, Compaq Computer Corp. said it had signed a deal to invest $135 million for a 13% share of the company. Compaq will also give Silicon Graphics $50 million more for joint workstation development.

But the capper came on Apr. 9, when 21 companies said they will back a common workstation design that's expected to include a large dose of Silicon Graphics technology. Says Edward R. McCracken, Silicon Graphics' chief executive: "We're taking this type of computing into truly mass markets."

He has been trying to create a bigger market for a while. Silicon Graphics has half the $850 million business for 3-D workstations and last year posted sales growth of 59%, to $419.8 million. It also has an impressive customer list: Levi Strauss and J. C. Penney use Silicon Graphics computers to design clothes, Lucasfilms' Industrial Light & Magic unit uses them to produce special effects, and Chrysler designs everything from seats to bumpers with the 3-D workstations.

But Silicon Graphics' worry is that it has only 5% of the overall workstation market, which was valued at $7.4 billion in 1990. And, the big players in workstations, particularly Sun, have been trying to grab Silicon Graphics' 3-D niche, too. That's partly in response to Silicon Graphics' efforts to push 3-D computing into their turf: Last May, it introduced a 3-D workstation with a $10,000 price tag, $5,000 less than its previous low-end model. And in October, the company unveiled circuit cards to give IBM-compatible PCs 3-D capabilities. Neither move was enough. Says Sun Vice-President Anil P. Gadre: "Everybody's been waiting for the 3-D market to explode, but it really hasn't happened."

What has happened is that the overall workstation market has grown more competitive. In the past year, a price war has erupted as Hewlett-Packard, Digital Equipment, and IBM have tried to unseat Sun. Because Silicon Graphics sometimes matched the cuts and some customers delayed buying, the company says earnings plunged in its third quarter, ended Mar. 30. Prudential Securities Inc. figures the company's revenues will come in at $132 million, vs. $110 million a year ago, but that earnings will fall 72%, to $2.4 million. The stock is now at around 37, down from 47 in March.

HOT COPIES. The new deals, however, give Silicon Graphics its best shot yet at market expansion. Microsoft's pledge to include Silicon Graphics' 3-D graphics in its New Technology operating system could bring 3-D graphics to millions of PCs. The deals with Compaq and Microsoft also should spur software developers to write 3-D programs for Silicon Graphics machines. And Compaq's investment will take care of the company's financing needs until 1994.

Alliances have paid off big for the company in the past. In 1987, it sided with MIPS Computer Systems Inc. and was the first computer maker to use MIPS's reduced instruction-set computing (RISC) chips. Now, most workstations use RISC. In 1988, when the market for stock offerings dried up, Silicon Graphics persuaded Control Data Corp. to take a 20% stake, which it has since repurchased. Later in 1988, Silicon Graphics licensed its graphics technology to IBM, which uses it in its RS/6000 workstations.

Silicon Graphics' new deals have some risks: Microsoft and Compaq gain rights to the company's crown-jewel technology and could turn into competitors. "They've given Compaq the opportunity to grab a lot of market share," says Hambrecht & Quist Inc. analyst Robert G. Herwick. Others wonder whether Compaq, which made its name building copies of IBM PCs, is the best partner to pioneer a new technology market.

Silicon Graphics has a safety net, though: It still builds the fastest 3-D machines. On Apr. 8, it introduced what it calls the industry's most powerful RISC workstation. Moreover, it will be a year before Compaq releases a low-end machine, and Silicon Graphics will ready its own cheaper model by summer. McCracken isn't saying much about that computer yet. For now, Silicon Graphics has all the attention it wants.

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