Crosswinds Still Buffet Computer Industry in U.S.

SAN FRANCISCO — A flurry of developments in the computer industry on Monday shows that the turmoil caused by recession and fast-changing technology is likely to be the rule in the electronics world for some time to come. Nothing better illustrates the continued upheavals than Compaq’s announcement that it is withdrawing, as expected, from the Advanced Computing Environment (ACE) consortium. Compaq, along with Microsoft, Digital Equipment, Silicon Graphics and MIPS Computer Systems, played a key role in forming ACE last year, but has now decided that the consortium does not hold the key to next-generation desktop computing after all.

Compaq’s withdrawal effectively kills the consortium, analysts said.

IBM, in the meantime, is contemplating an acquisition of Northgate Computer Systems, a Minnesota company that sells cut-rate personal computers by mail. IBM, which all but ruled the PC business in the 1980s, is still casting about for ways to compete in what has become a price-driven, mass-market business.

These developments take place against a backdrop of ambiguous economic data that has left analysts puzzling over whether the recession--and the industry’s long sales slump--are coming to an end. Lack of consensus on this issue has contributed to wild swings in technology shares as investors pounce on promising companies, then retreat if earnings are below expectations.

At Hambrecht & Quist’s annual technology conference, which opened here Monday, analyst Bruce Lupatkin noted that “all the traditional industry monopolies are under assault. There are no clear leaders, and that causes the confusion and volatility in the technology stocks.”

H&Q; analysts said they see a pickup in orders that indicates that the recession is coming to an end, and some computer companies have been reporting good news in recent days. Intel, which has seen competitors erode its monopoly on the chips that form the brain inside most PCs, said Monday that it will spend $2 billion on R&D; and capital equipment this year, up from $1.5 billion last year.

Disk-drive vendor Seagate Technology reported record earnings and revenue last week, an indication that the market for disk drives--and, by extension, for PCs--is picking up.

But Richard Shaffer, publisher of the Computer Letter, is among those who caution against premature optimism. “The industry got burned badly at the beginning of 1991 by betting on an upturn that didn’t happen,” he noted.

Compaq, which began to flounder last year after years as a highflier, is still struggling. Its withdrawal from ACE, foretold when it sold its stake in workstation vendor Silicon Graphics in January, shows how dramatically it has scaled back its ambitions since founder Rod Canion was ousted as CEO last year. Under Eckhard Pfeiffer, the company is focusing on being competitive in the low-end PC business.

On Monday, Compaq reported that earnings for the first quarter fell to $45 million, or $.53 per share, down 60% from the $114 million, or $1.26 per share, registered last year. Sales plunged 19% to $783 million from $971 million a year ago. The news took Wall Street by surprise and sent Compaq shares down 3 3/8 to 23 3/4.

Analysts said Compaq’s pullout effectively marks the end of ACE, which had once hoped to set standards based on a computer-on-a-chip from MIPS and a new software operating system from Microsoft. “ACE has become Microsoft doing deals with leading computer companies” to get them to adopt the new operating system, said Robert Herwick of Hambrecht & Quist.

Just last week, Microsoft announced a deal with DEC under which the new software will work with DEC’s upcoming Alpha chip. DEC was once a key player in ACE, but has now backed away from ACE and the MIPS chip in favor of Alpha.

All of this leaves Silicon Graphics Inc., which long ago committed to the MIPS chips for its powerful graphics workstations, in a lurch. SGI, which last month announced that it would buy MIPS Computer Systems, said Monday that the buyout terms had been changed in light of MIPS’ poor earnings.

The new terms, combined with a fall in SGI stock, means the stock swap is worth $200 million rather than the $333 million it was valued at when announced.

SGI Vice President David Bagshaw says ACE still has a role to play. But analysts say SGI is now just a straight-up competitor to Hewlett-Packard, Sun, DEC and the IBM/Apple alliance, all of which have their own advanced microprocessor chips.

The disclosure that IBM is discussing a buyout of Northgate, first reported in the trade journal PC Week and confirmed by company sources Monday, indicates just how far IBM is willing to go in restoring its position in the PC business. The Armonk, N.Y.-based behemoth has traditionally been cautious about acquisitions, though it now welcomes other types of alliances.

Northgate had revenue of $167 million and a profit of $2.7 million last year. It has been seeking a partner to keep pace in the cutthroat mass-market PC business.