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Does Sun have a new enemy number one?Buyout of Digital creates juggernaut to challenge Sun in enterprise, workstations, and storage markets
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Maybe the worst news for Sun about Compaq's DEC acquisition is the fact that it won't be so easy to pick on Digital anymore. Compaq is now the second-largest computer company and, whether Sun likes it or not, it's going to represent some new competition for our friends in Mountain View. We tell you what Compaq has bought and give you a hint at what kind of company ComDEC could become, and where it will affect Sun. (2,700 words)
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In other words, "ComDEC," as it has been dubbed in some circles, has the potential to threaten Sun in all its markets, especially at the high end where Sun wants to be and in the departmental server and workstation markets which are Sun's bread and butter.
"Sun was competing head to head with Digital, and to a certain extent with Compaq," says Jerry Sheridan, director and principal analyst in the computer systems and servers program at Dataquest, a San Jose, CA, market researcher. "Now the combined company is a larger competitor with features that make it more formidable to Sun."
Needless to say, Sun doesn't see it that way, at least not publicly. Sun sees the merger, and the period of confusion that will follow as the two companies try to combine product lines, as an opportunity to steal sales from both Digital and Compaq. "Compaq now faces the unenviable task of trying to get disparate technologies (from Tandem NonStop to DEC Unix/VMS to Compaq NT) to work together," Sun said in a prepared statement released after the merger was announced.
While Sun's statement has a certain air of whistling in the graveyard it also contains a lot of truth. Certainly the acquisition represents one of the biggest challenges Compaq has ever faced. Getting synergy out of the deal is not going to be easy, and the new company will undoubtedly stumble along the way. Industry observers generally see the merging of the two companies as the biggest potential obstacle.
However, the potential benefits are huge as well. Most analysts are optimistic about Compaq's chances of digesting DEC -- eventually. They point out that Compaq has moved quickly and effectively to integrate its other major recent acquisition, Tandem Computers. They think the company can do the same thing with the much larger DEC.
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Servers, workstations and the future of Unix
The new Compaq's most
immediate threat to Sun is in the workstation and departmental
server market. Both Compaq and DEC are NT powerhouses, and the
combination is going to be even more powerful. Compaq is a Windows
company and DEC is known for its high-end NT solutions. DEC has
also forged close links with Microsoft over the last
few years and shifted more of its focus to NT. The merger creates an
NT powerhouse, complete with a direct sales force and more
Microsoft-certified engineers than any other company in the world.
All of which should help increase sales of NT servers and workstations. And because Sun is the dominant player in the Unix workstation market, much of that increase will come out of Sun's hide.
According to International Data Corp., a Framingham,
MA-based research firm, Sun sold about 43 percent of the 660,000
Unix workstations sold last year. Compaq by itself had just over 15
percent of the market for NT workstations, which was roughly twice
the size of the Unix market.
This is an area where Sun is already coming under strong pressure
from companies selling NT systems. In the last three years NT has
gone from nothing in the workstation/server market to a major
presence. "NT is going to cause major problems for the traditional
workstation players, including Sun," says David Vellante, a senior
VP at IDC. "The bottom line is that NT really puts pressure on the
workstation market. It makes that business a low growth business for
Sun and underscores the imperative of moving Sun into the
enterprise."
In the short term, the increased emphasis on NT at the expense of
Unix may help Sun win business from Digital customers who want to
stay with Unix and are unsure of Compaq's commitment to DEC Unix.
Some analysts point out that Sun followed this strategy effectively
when Hewlett-Packard announced its line of NT products. Of course
HP's workstations and servers had been strictly Unix-based while
Digital has been increasing its commitment to NT for years, so the
pickings may be slimmer this time around.
Although both DEC and Tandem had versions of Unix, one common
assumption is that the new Compaq will move out of the various
flavors of Unix to concentrate on NT. However, this isn't a done
deal. In discussing the merger, Compaq officials have been careful
to keep their options open in regards to operating systems.
This isn't just a matter of reassuring nervous Unix customers. For
one thing it would be hard to replace Unix across the board in
Digital's product line. DEC's high-end multiprocessor systems with
16 or 32 processors run Digital Unix. There is nothing equivalent
on NT, although Digital is working with Microsoft to develop 16- and
32-processor versions of NT.
For another, NT has some significant drawbacks in the enterprise
environment. Microsoft Scalability Day notwithstanding, the
current versions of NT do not scale well across the enterprise. As
the combined Compaq/DEC moves further into enterprise territory the
weaknesses of NT will become more apparent.
One important piece of the puzzle will be a 64-bit version of Windows NT. A beta version of this code is supposed to be in the hands of developers around the time NT 5.0 ships (scheduled for this summer, according to Microsoft), and Microsoft is swearing up and down that by the time Merced arrives, there will be a 64-bit version of their OS available. This software is expected to fix some, but not all, of NT's deficiencies and will make it a stronger competitor against Unix.
Compaq the RISC vendor
"I believe both Digital Unix and the Alpha processor will go
forward, at least through the introduction of the Merced," says Dataquest's Sheridan. "Then I believe there will be a period of
stability and integration for both Merced and NT 5.0, and when all of
this gets ironed out, then I believe it will be an issue of
price-performance, installed base, applications ported, and channels
of distribution which will determine which one -- or both -- of
these survives."
A new game in the enterprise
Sun and DEC have been competing in the enterprise market for some
time, but Sun's stronger financial position and general upward
momentum had given Sun major advantages. Indeed, the competitor Sun's
sales force worries about most in the enterprise isn't DEC. It is
Hewlett-Packard, or occasionally IBM. Compaq has moved up from the
desktop to the departmental and LAN server market to a presence in
the enterprise, but it hasn't been as important.
In buying Digital, Compaq has sped up its development from a desktop
and departmental server company into an enterprise computer company.
"Compaq reasoned, correctly in my opinion, that in order to keep its
momentum going it had to attack the enterprise," says Vellante.
"They had two choices. They could have made deep, prolonged
investments in infrastructure, technology, and partnering over the
next three to five years, or they could buy DEC."
"Digital was exactly what Compaq needed to be more efficient in the
large corporate market. Compaq without Digital was a PC company
trying to play with the big boys," says Vellante. "With Digital
it's a PC company that can play with the big boys."
Sales and service: Digital's experience with Compaq's aggressiveness
"I think Digital's service business was paramount to Compaq in the
buyout," says Dataquest's Sheridan. "One of the needs Compaq needed to satisfy as it moved toward its goal of becoming a $40 billion enterprise server
company, one of the gaping holes, was the need for a world-class
service and support entity. By purchasing Digital,
they acquire that capacity."
Digital's service and direct sales force experience combined with
Compaq's aggressiveness creates a potent competitor that will
undoubtedly take enterprise business away from other companies.
Since Sun is a leader in enterprise computing, albeit a relatively
new one, Sun is likely to be the number one victim.
Storage
But in large account sales Compaq was hampered by its reliance on
resellers for most of its sales. Sun, by contrast, has sold storage
through its own sales force for years. "If Sun sales reps can't
outsell a reseller on a big server deal, they shouldn't have their
job," says Vellante. "Now they have to go up against a PC model
company with a direct sales force." This is a much tougher
proposition, Vellante says, and it is likely to hurt Sun.
Making it work
That DNA includes a corporate culture that evolved in the closed
systems minicomputer business and never really developed the
aggressive marketing skills needed to compete in the open systems
world of today. Over the last few years DEC has grown sluggishly
when it has grown at all. "Compaq had great momentum without a
service organization," says Vellante. "Digital had a great service
organization without momentum."
"Compaq bought a non-momentum company. It's not common to buy a
non-momentum company and give it momentum," says Vellante. "There
are isolated examples of that happening, but with DEC it's going to
be a challenge."
Momentum is critical because it has been one of Sun's major
advantages over Digital in the enterprisewide market. "Sun's big
advantage over Digital was momentum," says Vellante. "Sun was the
hot company. It had Java. It had business model advantages. It made
its own processors, so it had higher gross margins. In my opinion
what Compaq brings to Digital is heat, and you don't get much hotter
than Compaq."
Concepts like heat and momentum aside, Compaq's business culture
is ruthlessly focused on low-cost manufacturing and high-impact
marketing. Compaq started out making IBM PC clones and has survived
20 years of increasingly brutal PC wars. It has a reputation as
a tough, relentless competitor that innovates when it has to and
keeps its focus on the bottom line.
The overlap
This acquisition is more difficult than the Tandem buyout, Sheridan
says, because unlike Tandem, DEC and Compaq have significant
overlaps in their product lines. For example, both Compaq and
Digital have lines of departmental servers running NT, both have
storage array businesses, and so on. "The advantage the
Tandem/Compaq merger had was that because the companies had such
disparate product lines it was fairly easy to fit Tandem into Compaq
because there was very little overlap," says Sheridan. "With Digital
there is a lot of overlap."
One result is a certain amount of nervousness among Compaq and
Digital customers. Everyone expects that Compaq will rationalize the
product lines of the merged company, but no one knows what products
will be discontinued. That announcement will come in May.
Meanwhile Compaq is doing its best to calm fears, especially among
Digital customers. After the merger was announced, Compaq officials
met with press and analysts to assure everyone that they intended to
continue to support existing systems. Compaq CEO Eckhard Pfeiffer
called such support "an absolute must for customers' business."
Some observers wonder if Compaq hasn't taken its passion for growth
too far. "Compaq seems to be obsessed with the notion that bigger is
better," says Vellante skeptically. "If you're not a $10 billion
company it's hard to get people's attention in the enterprise. But
if you go from a $50 billion to a $70 billion company I'm not sure
that gives you a lot of leverage."
Among other things, what Vellante calls the "Law of Large Numbers"
comes into play. The bigger a company is, the harder it is to
maintain a given annual growth rate.
In general, the longer it takes for ComDEC to get its act together,
the better it will be for Sun. A prolonged period of digestion will
give Sun a breathing spell and the opportunity to take customers
away from the struggling company.
Opinions vary on how long it will take the new
Compaq to get itself pulled together. Some observers, such as
Hewlett-Packard's Emilo Ghilardi, manager of worldwide marketing,
think it could be as long as four years, based on HP's experience
with similar mergers. Others point to how quickly Compaq has moved
to integrate Tandem and expect a much shorter period.
"One thing people keep asking is when Compaq can be this formidable
competitor," says Sheridan. "It's not easy to answer that. There's
a period of assimilation and integration that has to take place.
Compaq has to bring together these three cultures [Compaq, DEC and
Tandem]. How do you divest yourself of installed base or people and
buildings? And how do you coalesce all the sales, service, and support
people to present a cohesive face to the world?"
Sheridan noted that Compaq recently announced an initiative called
E2000 that might be the model for bringing DEC into the Compaq
fold. "The purpose of E2000 in my mind is to announce to the world
that there is a unifying umbrella over the Compaq and Tandem product
lines. The products will communicate with each other, enhance
information, files, and computing resources for one another. It's to
demonstrate to the world that there is a united front."
"What Compaq needs to do, sometime down the road when they have all
their strategy ironed out, is to come out with a modified E2000 to
show where all Digital's products and structure will fit into the
new corporation," he says.
When that day comes, Digital customers will gain some degree of certainty, and Sun will better understand how the world's second largest computer company intends to go after its business.
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A related question involves the future of Digital's Alpha RISC
microprocessor, which has never lived up to its promise in the
market. While the processor itself is screamingly fast, Alpha's
sales have been slow. There is speculation -- denied by both
parties -- that Compaq will drop the Alpha line entirely in a
couple of years. Here again, one critical question is the success of
a new potential competitor, in this case Intel's 64-bit Merced
processor, due to ship next year.
Say "DEC" and most
IT professionals immediately think of VAX minicomputers and the
company's glory days as an industry monolith. Although the glory
days are behind it, Digital Equipment Corp. has a significant
presence in the glass house -- the world of enterprisewide
computing that is so important in Sun's future.
One of the main reasons Compaq can do this is because of Digital's service and support
organization. Last year DEC got 45 percent of its revenues ($5.8
billion out of $13 billion total) from service. DEC's service
business is worldwide and generally recognized as world class.
Vellante also cites DEC's storage array business as a place
where the combined company can hurt Sun. Although Digital sold off
its disk drive manufacturing business to Quantum, it kept the
business of making and selling storage subsystems. "Digital is a
major storage subsystems company, and I think that the combined
company will be the largest storage subsystems vendor in the world.
That's interesting because it's a big market -- $30 or $40 billion
annually -- and Compaq had a big chunk of it growing nicely
already."
The purchase of DEC isn't an unalloyed win for
Compaq. As Vellante points out, in purchasing Digital, Compaq got "a
great channel presence, a good service organization, and pretty good
technology," but Compaq also got some things it didn't want. "The
bad news is they got a lot of DNA as well," he says.
Not everyone expects the acquisition to be a match made in heaven.
Compaq's competitors, such as Sun and Hewlett-Packard, see a lot of
pitfalls and potential problems.
Rick Cook divides his time between writing about the Web, computers and high technology, and novels. His most recent stories for SunWorld are
"Linux lines up for the enterprise"
"IBM bets on Java"
(December 1997), and "Sun turns its rays on big iron" (November 1997).
Reach Rick at rick.cook@sunworld.com.
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