Silicon Graphics' Next Stop: The Living Room

If 1993 ended tomorrow, it would still go down as a blockbuster year at Silicon Graphics Inc. In late January, the company surprised other computer makers with new machines that rival the power of Cray Research Inc.'s supercomputers. That helped push its stock to an all-time high of 33. In February, the company leaped into the media spotlight when President Bill Clinton and Vice-President Al Gore used a visit to its Mountain View (Calif.) headquarters to kick off their national technology initiative. And the company's 3-D graphics workstations, which have been creating movie special effects since The Abyss in 1987, played a key role in creating Steven Spielberg's upcoming Jurassic Park. SGI machines will even appear in scenes of the modern-day dinosaur tale.

But none of this may be as important as what Silicon Graphics still has on its calendar. Before the year is out, Chairman James H. Clark and Chief Executive Edward R. McCracken expect to position SGI squarely in the middle of what could prove to be a huge new market. As computers, communications, consumer electronics, and digital media converge, cable-TV operators and phone companies are planning information superhighways to carry digitized movies, interactive games, video phone calls, and on-line shopping. These "digital media" services will require powerful computers called servers to store reams of digitized data as well as technology to reproduce graphic images on TV screens.

Both, it turns out, are SGI specialties. Since the company was started in 1982, it has distinguished itself from Sun Microsystems Inc. and other workstation makers by concentrating on sophisticated, three-dimensional graphics. SGI computers are used to model drugs at Genentech, design cars at Ford, and develop aircraft at Boeing. Such customers will be SGI's mainstay for years. But because of its advanced graphics and history in Hollywood, SGI is becoming a serious player in the emerging world of digital media. "I keep getting drawn into the consumer area," says McCracken.

SPEEDY DOTS. Indeed, Silicon Graphics is being wooed as a technology partner by some of the biggest names in media (table). Clark won't confirm it, but industry sources say he's talking with Time Warner Inc. for a deal to use SGI servers to route digitized cable-TV signals to homes. The deal might also include providing technology for a TV-set cable-converter box for Time Warner cable systems. SGI has also met with No.1 cable operator Tele-Communications Inc. and various phone companies.

Digital media represents a huge opportunity. While SGI's existing business is growing briskly--revenues are expected to jump 27%, to $1 billion, for the fiscal year ending June 30--the new markets would be gravy. McCracken expects SGI's revenues to grow at least 30% annually over the next few years. "Digital media is the big story for Silicon Graphics," says Sanford C. Bernstein & Co. analyst Barry F. Willman.

Consider the potential markets: According to Carmel (Calif.) market researcher Paul Kagan Associates, shipments of digital cable-converter boxes will grow from 320,000 this year to 2 million in 1994 and 4.5 million in 1996. In addition, the cable industry will need to retrofit its networks with hundreds of millions of dollars worth of computer gear to store and distribute digitized movies, games, and other services. Naturally, other manufacturers, from IBM to Japan's Matsushita Electric Industrial Co., want in on the action, too.

What could set SGI apart is the way its workstations create stunning 3-D video images that can be manipulated quickly. SGI machines do that better than ordinary workstations and much more cheaply than supercomputers can. SGI uses a set of custom-designed circuits that moves the tiny dots, or pixels, that form video images around the screen quickly. And high-capacity circuitry in the computer speeds data among parts of the machine. That's critical for video: Just one second of it gobbles up 30 million bits of data in uncompressed form.

Hollywood, which had been using supercomputers for special effects, immediately saw the potential of SGI's technology. Lucasfilm Ltd.'s Industrial Light & Magic Inc. has used SGI machines since the mid-1980s. "Our work couldn't be done without Silicon Graphics machines--or at least, I couldn't afford it," says Michael Backes, head of the American Film Institute unit that did graphics for Jurassic Park. SGI machines also help produce music videos such as Peter Gabriel's Steam.

FLIGHT SIMULATOR. Lately, SGI has gotten even tighter with Hollywood. On Apr. 7, it signed a deal with Lucasfilm to create faster and less-expensive special effects. On Apr. 20, it announced a digital video-production system using a server that stores up to 30 hours of video. And Eastman Kodak Co. plans to use SGI machines for a new digital-film system for movie studios. Interactive entertainment is another focus of talks. Mountain View startup Magic Edge Inc., for instance, uses SGI machines in a flight simulator ride.

But the "big carrot," Clark says, is digital cable TV. SGI has already devised a scheme in which its servers would be placed in neighborhoods to convey digital media to homes. And SGI wants to play a role in low-cost consumer devices that would replace conventional cable-TV decoder boxes. These boxes would handle requests for movies from vast video libraries, connect to interactive shopping services, and allow users to play interactive games. Most likely, he says, SGI would license to an electronics maker the microprocessor technology it acquired last year with the purchase of MIPS Computer Systems Inc., along with SGI graphics chips and software. Such boxes, which analysts say might be built by Japanese consumer-electronics companies and such U.S. makers of cable converters as Scientific-Atlanta Inc., should be available by 1995, says Clark.

Despite its advantages in digital media, SGI faces obstacles. Its technology may be too pricey for the consumer market. And competitors are multiplying. IBM and Hewlett-Packard Co. both want to sell video servers. Startup 3DO Co. has backing from Time Warner, AT&T, and Matsushita for its home-video machine. And on Apr. 27, Intel, Microsoft, and General Instrument launched a converter-box alliance. Finally, Sun says it's talking to the same companies as SGI. It will take more than special effects to make these rivals go away.

    Before it's here, it's on the Bloomberg Terminal.