Wednesday, May 10, 2006

Microsoft man's shadow over bankrupt SGI

[SGI files for Chapter 11 bankruptcy protection

After years of hopeful investments in Silicon Valley startups, Silicon Graphics has finally been forced to face a fiscal reality. One of the major companies still supporting Intel's slowly dying Itanium platform,
SGI, has finally filed for Chapter 11 bankruptcy protection. While not
necessarily a death knell, it is surely to cause investors to stay at
arms length and could very easily signal the end of an era.]

Belluzzo era left few options

Published Tuesday 9th May 2006 08:22 GMT

Analysis Got $18m to
spare? That's the market capitalization of one of Silicon Valley's most
glamorous companies this morning, after Silicon Graphics Inc. filed for
Chapter 11 bankruptcy.

The size of SGI's debt - at $664m it's twice the value of its assets
- is enough to deter all but the most determined bargain hunter. Apart
from a ragbag of trademarks - such as OpenGL - what growth has SGI left
to offer?

SGI makes a particularly painful case study for business graduates, because the company's decline was so widely heralded.

"Everyone in management had read The Innovator's Dilemma," one former staffer said Monday, "but no one knew how to execute on it."

SGI's particular dilemma was finding new revenue to replace its high
margin systems that were being commoditized by cheap PCs running
Windows NT or Linux, relentless increases in the of power of commodity
3D graphics cards, and ever faster interconnects. At its peak SGI
turned over $4bn a year, and employed around 10,000 people.

The company was additionally blessed by having customers across the
economy. Two thirds of SGI's business was split evenly across two
cyclical sectors - defense and manufacturing - but as manufacturing
spending declined, along came another splurge in defense-related
spending. (Contrary to popular belief, SGI's Hollywood business never
accounted for more than a fifth of its revenue - but it got most of the

When in their prime, companies have several options to prepare for
the day when their cash cow dries up - including putting the company up
for sale. SGI tried them all, some several times over, but was unable
to find a revenue stream that kept pace with its expenses.

SGI bought into new businesses, such as RISC pioneer MIPS - SGI at
the time was one of its biggest customers - and Cray Research, in a bid
to widen its product range. Neither was successful. MIPS customer base
fled as the vendors doubted they could gain access to the chips on the
same terms as SGI. MIPS was later spun out, finding a successful
application of its technology in low power embedded devices such as
phones. Cray's core business was also in decline, which SGI's mounting
problems didn't help. SGI decided to spin off Cray after only three
years, and it now trades as a public company. Notwithstanding recent
financial troubles, the size of the supercomputer company's revenue
last year indicates that Cray was never likely to be SGI's savior:
$201m, up from $148.9m in 2004, but down from $237m in 2003.

After years of being dismissive about a rival computer platform with
no serious graphics, SGI eventually tried to meet the challenge of the
PC head-on. At first it produced a Visual Workstation PC, with custom
ASICs providing a new proprietary interconnect and graphics chip, and
running a tailored version of Windows NT. But SGI found it hard to
market the costly new kit, which also ran into manufacturing delays.
The Visual Workstations failed to win over SGI's core customers, who
were using 64bit IRIX, and were too expensive to find lure customers.
The effort was canned almost as soon as the workstations - and a
complementary Windows server - were launched.

Thirdly, SGI's rich patent portfolio may have allowed it to create a
lucrative licensing business. But patents need to be aggressively
defended. In spring 1998 SGI announced it was suing NVidia for
infringement of its texture mapping patent. However, the case never
reached trial, and SGI's lawyers were left fuming as the company caved
in only 15 months later, agreeing to license Nvidia's patents.

All three decisions - to spin out Cray, axe the Windows
workstations, and abandon the NVidia lawsuit - were taken by former HP
executive Rick Belluzzo. Who then promptly jumped ship to join
Microsoft. The move raised eyebrows across the industry, as Belluzzo
was leaving the chief executive's role at a prestigious Silicon Valley
name to head up what we described
at the time as "pretty much a suicide mission" - MSN, the small and
ailing internet division at Microsoft. It isn't much bigger, and
continues to make a loss today.

After the Nvidia climbdown, it was never likely that SGI could enter
the IP licensing business. The plot thickens, however. In early 2002 we
broke the news that SGI was transferring many valuable graphics patents
to Microsoft, for the sum of $62.5m. SGI denied the deal at the time, but it wasn't long before it was proved to be correct.

Other factors didn't help SGI, such as its decision to end of life
its own MIPS processor in favor of Itanium, but in large part the woes
of recent years were settled by these decisions taken in summer 1999.
After that, with each fresh quarter bringing news of losses and
layoffs, SGI was on the back foot.

Belluzzo's spell at Redmond was brief: in spring 2002 he announced
he was leaving to start his own company. Today, he's CEO of storage
vendor Quantum.

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