SGI's CEO McCracken tumbles

Electronic News, Nov 3, 1997 by Cynthia Bournellis

Mountain View, Calif.--Stumbling on the road to transforming itself from a high-end computer graphics company to one that can deliver servers to run businesses, Silicon Graphics Inc. has dropped its long term CEO, Ed McCracken. At the board of directors' insistence, Mr. McCracken resigned so a search could begin for a new CEO.

The trigger was the fact that SGI has lost money four out of five quarters. The company's net loss was $37 million on revenues of $768 million, for the first quarter ended September 30, 1997 of fiscal year 1998. Mr. McCracken's resignation is a clear sign that SGI had not met its numbers, said Jim Garden, a workstation analyst at Technology Business Research, Inc., in New Hampshire.

Meanwhile, Gary Lauer, president of SGI's World Trade division, also resigned last week. Acting COO Robert Ewald will take over Mr. Lauer's duties. Finally, a layoff is planned for nearly 1,000 of SGI's 11,000-member workforce. The company said this is part of a restructuring plan to run a leaner company.

Hit by a shrinking Unix market and an inability to compete effectively with Sun Microsystems, Hewlett-Packard and IBM, SGI's only road to recovery could be paved by Intel and Microsoft.

In the midst of the calamity at SGI lies a major opportunity for the company to deepen its relationships with Intel and Microsoft. Mr. McCracken recently acknowledged this, when he announced SGI's plans to build low-end Wintel workstations.

While SGI has yet to give further details on these systems, which are expected to debut by the second half of 1998, many observers believe the migration to Windows NT will take over SGI's entire workstation line, from the high-end Octane systems to the commercial O2 products. "SGI can build NT systems, but it needs assistance from Intel on how to do it on Intel architecture," said Peter ffoulkes, an industry analyst at Dataquest, a market research firm in San Jose, Calif. "If SGI can build a second- or third-generation Octane or O2 now, they could have a better product (than the competition)."

Intel wouldn't comment on the recent rumblings at SGI, except to say that it is supporting SGI in order to deliver Intel architecture and create new processors. "Graphics is an attractive area, and we want to get into that space," said an Intel spokesperson.

Intel's new workstation division and the acquisition of Chips & Technologies is a testament to the chip maker's desire to become a force in the graphics market. "Intel has MMX, but it's like pedals on a bike," said Mr. Garden. He said the need for high-performance visual computing will only grow, and that SGI has some "mind blowing" technology that will support this demand.

Forced Into Intel's Camp

Many industry analysts believe that for SGI to maintain its reputation as a leader in 3-D graphics, it will have no choice but to align with Intel. "Imagine if they could join forces with Intel who could help them in the volume space, but leave them to develop the best in visual computing," said Mr. Garden. While SGI does have a partnership with NEC Electronics on the MIPS platform, Intel could provide a more solid foundation, as many industry skeptics believe that the MIPS processor on the desktop will eventually go away.

SGI could slip its engines underneath Intel's platform, particularly the forthcoming Merced processor. SGI has already done this on Sparc and Alpha processors. "SGI could become a premier development arm working with Intel, and they may decide to throw their embedded MIPS technology into the deal," said Mr. Garden.

A deeper relationship with Intel could give SGI the insight it needs to manage the transition to Windows NT, a transition that is not easy. "We went through the move of being vertically integrated to being at the whims of Microsoft and Intel," said Jeff Edson, VP of Intergraph Computer Systems' digital media division. Intergraph nixed Unix long ago in favor of Windows NT. "NT is a different world...your product line changes every four months, and this impacts the rest of your company," said Mr. Edson, referring to the frequencies with which Intel and Microsoft spit out products. Now that SGI has partnered with Intel, Mr. Edson said Intergraph will definitely compete with SGI in the area of 3-D graphics.

Competition Grows

So will others. HP just added a weapon to its graphics arsenal. The company's Pixel Flow (PxFL) technology, originally designed to run on the HP Visualize PxFL super graphics workstation, which was demoed at the Siggraph trade show in Los Angeles in August, will show up in future midrange workstations from HP. A company spokesperson said HP will not sell the Visualize PxFL system commercially.

Aside from its challenges on the 3-D workstation front, SGI will be focusing on the commercial server market, which is virtually virgin territory to the company. Not to be mistaken with the commercial market in the areas of online transaction processing or accounting, SGI will go after a part of the commercial market where the company said it can add value, such as the television broadcast industry, which has begun to migrate its process from analog to digital.