Alpharel Finds Optical-Disk Competition Is Getting Stiffer
When Michael McGovern started Alpharel Inc. in 1981, he recognized an immediate problem. How would he sell his product, a computer so complicated it requires up to 76 terminals, 24 machines, a price tag of $2 million-plus and a name like the Optical Disk Storage System?
The answer was rather simple. He reached out and touched someone--his former employers, the folks over at AT & T.
Today, Alpharel has close to $14 million a year in sales, largely because it and AT & T signed a $56.8-million contract to sell optical-disk systems to the Army and Air Force. “There’s no way the government would have looked at a 12-man company as a serious contender,” said Clay Chisum, Alpharel’s president. “Having a big brother there was an important feature.” Alpharel went public in June.
What is an optical-disk storage system? It’s a lot like a personal computer except it’s much bigger and records data on an optical disk rather than on a floppy disk. Optical disks are a little larger than compact discs (the CDs that songs are recorded on), but both are made of glass and the element tellurium.
How does it work? One part of the computer, which strongly resembles a paper shredder, sucks up anything from a .9-inch-by-1.4-inch piece of 35-mm film to a 34-inch-by-44-inch engineering drawing at a rate of three to 44 seconds a document. As the papers move through this machine, a laser burns their images onto the optical disk. Once the data is entered, workers can call up those documents to review or modify them. When the user is finished, the optical disk system prints out a new version that is the same size as the original--a computer card entered into the system leaves the system as a computer card.
Because optical disks cannot be erased, documents are never misfiled or damaged.
Corporations and the government like the optical disk for its versatility, speed and capacity. One 14-inch disk can hold all of the data on a tower of papers 92 stories high.
The optical-disk storage industry still is in its infancy. In 1986, industry sales amounted to $100 million. But Coopers & Lybrand, the accounting and consulting firm, projects that, by 1996, sales will have soared to $2.4 billion.
Not surprisingly, bigger and better-capitalized firms than Alpharel have announced plans to sell optical systems, among them Eastman Kodak, Wang Laboratories, 3M and Toshiba.
At the same time, Alpharel’s contract with AT & T is about to expire. This is serious because, in 1986, 91% of Alpharel’s revenues came from that contract.
AT & T hasn’t said whether it will extend the contract, so the company faces the unsettling prospect of going it alone against the likes of Kodak.
“Our strategy is plain-old, flat-out, to go out and get a much bigger business base than we currently have and not be so dependent on one company,” said Chisum. “There is no question about that.”
Alpharel already has made some strides in procuring new business. Pacific Gas & Electric ordered a system. And General Electric and Alpharel signed an agreement to sell storage systems to the electric power industry. What’s more, Lockheed bought 12.7% of the company in 1986 with the intention of sharing technologies.
Although those contracts are promising, they’re not guarantees of business. Alpharel still needs to get more corporate customers. Even Merrill Lynch, the company’s underwriter, is holding its breath. “We are waiting to see if they pick up some commercial orders to balance out the military orders,” said Phillip Brannon, a Merrill Lynch analyst.
Alpharel faces a showdown with a Costa Mesa company, Filenet Corp. From 1985 until March 31 of this year, Filenet shipped 77 systems, mostly to financial corporations. By comparison, Alpharel, which focuses on engineering rather than financial needs, shipped 11 systems from 1985 until now. Alpharel had $13,897,000 in sales last year; Filenet’s sales were more than double that.
“Filenet has the real stranglehold on the finance industry,” said Howard Cooper, Alpharel’s former executive vice president. Now, Filenet is going after Alpharel’s market, recently announcing an agreement with 3M to begin selling optical-disk storage systems for engineering drawings near the end of this year. Filenet is going public within two weeks.
Alpharel executives concede that the competition is heating up. But they argue that a Kodak or Toshiba will lend credibility to their industry rather than squashing Alpharel. “They’ll legitimize the industry the way IBM legitimized the personal computer market,” said Chisum.
Because Alpharel has a two-year lead over most of its bigger competitors, a conglomerate might try a takeover. Lockheed already owns 12.7% of the company. “They would be an attractive acquisition for another company,” said Cooper. “This is not an easy technology to get into, not even for a company like IBM.”
Chisum, who until recently was in charge of Lockheed’s stock purchases, said Lockheed has no plans for a takeover.
Michael McGovern, the company’s founder, isn’t as slick as the mergers-at-any cost, Wall Street types. But he works just as hard. He still thinks of himself as an engineer, who describes a seminar on coherent light laser technology as “a delightful interlude.”
Co-workers say he is a workhorse. He is usually one of the first ones in and one of the last to leave. In the first two years he was in California, he didn’t take any time off, unless you count Sunday mornings when he went to church. His wife, said a co-worker, is always begging McGovern to take “mini-vacations. That means he comes home in time on Sundays to take her out to dinner.”
His employees are a group of young, loyal and keenly intelligent engineers who even stood by McGovern one Christmas when he had to pay them in stock options.
Now it is his shareholders McGovern worries about short-changing. Going public was not McGovern’s idea of fun. “A lot of people would be excited and happy; and I am too, but I feel we have an enormous task ahead of us,” he said. “We raised close to $20 million from people, and I feel we have obligations to do what we said. We’re not over the hump or the hill. We have a lot of work to do, but we feel positive.”
Analysts say it will be five years before the industry shakes out. Stay tuned.
