The Reward Of Many Ris Cs

On paper, it seemed like a good idea: Take the business model that developed around the IBM PC--hundreds of companies building gear to the same standard specifications--and extend it to the rest of the industry. Buyers of all sizes of computers would enjoy lower prices, and computer makers could stop sweating about gaining a fleeting advantage in hardware. Instead, they could focus on creating better software for customers. Starting with workstation giant Sun Microsystems Inc. in 1990, computer makers began proffering their high-performance RISC (reduced instruction-set computing) chips as the basis for a new standard to supplant the aging PC, based on Intel Corp. chips.

No RISC chip has established itself as a standard, however, and now it's unlikely one ever will. But that could be the best news computer makers have had in a long time. While the PC standard was great for customers, it hurt computer makers by turning hardware into an undifferentiated commodity, leading to price wars and slim profits. Indeed, the companies reaping the best profits in the PC business these days are the two near-monopoly suppliers of basic PC technology--chipmaker Intel and software maker Microsoft Corp. A RISC standard might have undermined the Intel and Microsoft strongholds, but it also would have created more commodity markets in workstations and larger systems.

TOO AGGRESSIVE? Until recently, it looked as though the market for workstations would follow the PC-industry pattern. Sun pushed hard for clones. But it was too aggressive a competitor for top computer makers to feel comfortable cloning its SPARC design. Competitive considerations also limited clones of IBM and Hewlett-Packard Co. designs. Motorola Inc., No. 2 supplier in conventional microchips (table), didn't build much of a following for its RISC chips. That left MIPS Computer Systems Inc., whose tiny computer business made it seem neutral, to challenge Intel. Some 20 companies, including Digital Equipment Corp. and Compaq Computer Corp., launched the Advanced Computing Environment consortium to set a standard around MIPS's RISC chips. But lately, key members of ACE, such as DEC and Compaq, began wavering (BW--Feb. 17). And on Mar. 12, MIPS lost its neutrality when it agreed to a buyout by workstation maker Silicon Graphics Inc.

"We joined ACE with the hope of a recreation of the PC phenomenon," says George P. White, CEO of Corollary Inc., a computer maker. "It doesn't look like that's going to happen." But with no dominant RISC standard in place, IBM, HP, DEC, Sun, and perhaps even the Silicon Graphics-MIPS-ACE gang may get to enjoy higher gross margins--at least for a while. Elserino Piol, strategy chief at Italian computer maker Olivetti & Co., says the computer market could be more like it was pre-PC. Selling hardware that offers an advantage over the competition should lead to "higher prices and higher profits."

That's not to say that the battered computer industry is back on easy street. Proprietary software--the hook that big computer makers traditionally used to keep customers tied to hardware carrying 60% and 70% gross margins--will probably never make a comeback. But, Piol says, anything above the money-losing 30% margins of today's PC-clone market "can be significant." One limitation on margins will be quasi-standard software such as American Telephone & Telegraph Co.'s Unix and Microsoft's Windows NT, which will run on many brands of computers--as will applications packages such as data bases. Industry standards for communications will help smooth over the differences among brands. Still, customers won't be able to simply move software from one brand to another as they do with PCs.

CLEAR WINNER. Ultimately, the RISC field will narrow. "The market will not support five players," insists Stephen C. Dube, a computer analyst at Sherwood Securities Corp. Established computer makers, such as IBM, DEC, and HP have the best odds of seeing their RISC designs survive over the long haul, he says. Although Sun remains the largest shipper of RISC-based computers, its rivals are signing up major players to their RISC teams. IBM has Apple Computer Inc. and France's Groupe Bull, for instance, while DEC has recruited Japan's Kubota Corp. and Cray Research Inc. Sun has cultivatedclonemakers, but it still ships 90% of all SPARC-based machines itself and now seems to be hedging: It's adapting its software to run on Intel's 486 chip.

The clear winner after all this: Intel. Its dominance of the chip market remains intact--last year, it sold 20 million chips for computers that listed for $25,000 or less, vs. just 308,000 RISC chips for such machines. RISC technology has pressed Intel into upping PC performance faster than ever, making it harder to persuade commercial customers to switch to RISC-powered machines. And for now, that's only helping Intel laugh even harder on its way to the bank.

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