SGI

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SGI

2011 North Shoreline Boulevard
Mountain View, California 94039
U.S.A.
(650) 960-1980
Fax: (650) 932-0661
Web site: http://www.sgi.com

Public Company
Incorporated: 1982 as Silicon Graphics Inc.
Employees: 10,286
Sales: $3.1 billion (1998)
Stock Exchanges: New York
Ticker Symbol: SGI
NAIC: 334111 Computers Manufacturing; 334119 Other Computer Peripheral Equipment Manufacturing; 51121 Software Publishers

Known for 17 years as Silicon Graphics Inc., SGI is one of the leading manufacturers of graphics computer systems, workstations, and supercomputers. Its history may be described as an exemplary, perhaps even archetypal, Silicon Valley success story, until lower-priced competitors and inept production methods resulted in heavy losses in the late 1990s. Founded by a high school dropout turned college professor, Silicon Graphics capitalized on pioneering technology in 3-D computer graphics to create products used in a wide variety of professions, including engineering, chemistry, and film production. The company combined technological prowess with shrewd management to produce explosive growth; within a decade of its founding, it had entered the Fortune 500.

The story of Silicon Graphics began in 1979, when James Clark, an electrical engineering professor at Stanford University, assembled a team of six graduate students to study the possibilities of computer graphics. Within two years, Clark’s team developed a powerful semiconductor chip, which they called the Geometry Engine, that would allow small computers to produce sophisticated three-dimensional graphics simulations previously the domain of large mainframes. Clark patented the Geometry Engine, and in 1982 he and his team left Stanford to found Silicon Graphics.

Established Lucrative Niche, 1980s

In 1983 the company released its first products: the IRIS 1000 graphics terminal and an accompanying software interface known as the IRIS Graphics Library. The next year Silicon Graphics released its first workstation, the IRIS 1400, and followed it in 1985 with the IRIS 2400, a workstation with a window manager. These early entries in the IRIS series targeted the middle range of the graphics workstations market—those selling for $45,000 to $100,000—and accounted for over 50 percent of all 3-D graphics workstations sold by 1988. Sales increased steeply and consistently, reaching $153 million in 1988. Within its first six years, Silicon Graphics had established a secure and lucrative niche for itself in the computer industry.

Silicon Graphics succeeded in its early years in large part because it had introduced a useful product that had drawn relatively little attention from any of its potential rivals. 3-D graphics simulations were extremely useful to mechanical engineers who wanted to assess their designs without having to build prototypes, as well as to chemists who used 3-D modeling to study molecules. Such workstations as the IRIS series provided power at a relatively affordable price and major workstation manufacturers, including Hewlett-Packard, Apollo Computer, and Sun Microsystems, were slow to focus their energies on 3-D graphics, leaving Silicon Graphics without much direct competition.

Observers also credited James Clark’s technical skill and entrepreneurial sense for the company’s success. The path to Silicon Valley glory was a circuitous one for Clark, who dropped out of high school in Plainview, Texas, after he was suspended for setting off a smoke bomb on a school bus. After a hitch in the Navy, he went back to school, enrolling as an undergraduate at Tulane University. He went on to earn an M.S. in physics from the University of New Orleans and a Ph.D. in computer science from the University of Utah, where he first became interested in computer graphics. Clark then committed himself to an academic career, holding teaching posts at the University of California at Santa Cruz, the New York Institute of Technology, and the University of California at Berkeley before coming to Stanford. Along the way, however, he became disenchanted with academia. “I had always seen myself as a senior professor at a university,” he once told the Business Journal —San Jose, “but I think I learned that my strength is making things that work, rather than writing papers. Universities encourage writing a lot of papers.” Hence, he departed Stanford and founded Silicon Graphics in 1982.

Once he established the company, Clark displayed the good sense to find his proper role within the operating structure and stick to it. Soon after Silicon Graphics was born, Clark brought in Edward McCracken, a veteran Hewlett-Packard executive, to run the company as president and CEO while he remained chairperson. Clark concentrated on serving as the company’s technology guru, leaving McCracken to take care of the business operations. According to McCracken, this role best suited Clark’s temperament: “Jim’s not a day-to-day person. He works in his own time frame,” he told the Business Journal —San Jose. McCracken continued, “He takes complex things and makes it simple. It might take a month, a day, or a year. He gets in these moods for a while where he’s almost unavailable. He’s most effective when he’s in that mood.” Clark also used this division of labor to devote more time to outside interests that included ballet, classical music, art, and stunt flying.

A useful blend of high technology and business sense enabled Silicon Graphics to move forward from its early successes. In 1987 it became the first computer company to make use of MIPS Computer Systems’ innovative reduced instruction-set chip, or RISC, when it incorporated RISC architecture into its new IRIS 4D/60 workstation. Within several, years, most workstations would use RISCs. The company received a boost the next year when IBM agreed to buy Silicon Graphics’ IRIS graphics card for use in its own RS/6000 graphics workstations and to take out a license for the IRIS Graphics Library—a big first step toward making the IRIS Graphics Library the industry standard.

Lower-Priced Workstations Broadened Customer Base, Late 1980s

Also in 1988, Silicon Graphics introduced amid much fanfare a new line of entry level graphics workstations, which it called Eclipse. Although it dominated the more expensive end of the graphics workstation market, the company needed to broaden its customer base if it expected to maintain sales growth. The Eclipse was designed to bring 3-D graphics to people who had previously regarded IRIS workstations as un-affordable. Eclipse lacked the speed and processing power of more expensive machines, but initial versions sold for less than $20,000—as little as one-fifth of the cost of higher-end machines. Eclipse scored a major success soon after its release when Chrysler announced that it would buy a large number of the machines to go with the IRIS workstations that it was already using to help design its automobiles.

Although Eclipse put Silicon Graphics into more direct competition with its rival workstation manufacturers, who began to chip in with their own low-end 3-D workstations, it also succeeded in expanding the company’s customer base. In 1990 sales volume topped $420 million. The move into the lower priced, high-volume end of the market worked well enough for Silicon Graphics that in 1991 the company released an even less expensive product line—the IRIS Indigo, a 3-D graphics workstation so compact that the company called it the first personal computer to use RISC architecture. The Indigo offered many features found on more expensive models, as well as digital audio and video processing capability, and the base model sold for less than $10,000.

During this time, Silicon Graphics scored several major coups on the business side. In 1991 the company granted a license to software giant Microsoft for the IRIS Graphics Library. Microsoft intended to use the IRIS Graphics Library in its New Technology operating system for personal computers. Also in 1991, Compaq Computer agreed to acquire a 13 percent stake in Silicon Graphics for $135 million, giving Silicon Graphics a much-desired infusion of capital. Furthermore, Compaq agreed to invest $50 million in a joint workstation development project with Silicon Graphics. Together, these moves provided software developers with greater incentive to write programs for Silicon Graphics machines and also broadened the company’s customer base even further.

In 1992 Silicon Graphics agreed to acquire MIPS Computer Systems, which had run into financial difficulties, in a stock swap valued at $230.8 million. The cost of assimilating MIPS forced Silicon Graphics to post a loss of $118.4 million that year, but it also secured the company’s long-term supply of MIPS’s RISC microprocessors, which had become a crucial piece of technology. The merger with MIPS was “endorsed” by a consortium of eight international high-tech companies, which announced plans to buy 1.5 million shares of Silicon Graphics. It turned out to be a successful merger. By mid-1993 the company was able to ship the new R4400 microprocessor, and MIPS employees who survived layoffs seemed productively integrated into the Silicon Graphics organization.

Company Perspectives:

At the core of our strategy is our commitment to delivering nothing less than the highest-performing computer systems in the world, with the world’s best graphics solutions. Indeed, we have built our company, and our vision, on the notion that the ability to visualize the results of massive calculations and modeling allows customers to gain instant insight into the problems they are trying to solve.

In January 1993 Silicon Graphics announced a new computer that would use RISC architecture to achieve supercomputer power at relatively affordable prices. The Power Challenge, as it was called, would link multiple RISCs in a single machine to provide unprecedented processing capability in a computer of that price. Whereas traditional supercomputers like those made by IBM and Cray Research typically sold for millions of dollars, the Power Challenge would sell for between $120,000 and $900,000. The new product was announced over a year in advance of its anticipated shipping date to give targeted customers, such as government agencies and universities previously unable to afford supercomputers, time to include it in their budgets. Observers pegged Power Challenge as a sudden move into the faltering field of supercomputer manufacturing, but in fact the company’s ever more powerful workstations were approaching the level of supercomputers anyway, and the company had already established contacts with customers at whom the Power Challenge would be aimed.

Silicon Graphics Workstations Used in Film Industry, 1990s

In April 1993 Silicon Graphics and Industrial Light and Magic, the famed special effects division of Lucasfilm, announced that they had joined forces to create a high-tech entertainment special effects laboratory. The joint venture was called Joint Environment for Digital Imaging—the acronym JEDI recalled the Jedi Knights of Lucasfilm’s (George Lucas’s) Star Wars trilogy—and grew out of the fact that Industrial Light and Magic had been using Silicon Graphics workstations since 1987. The liquid metal cyborg featured in the film Terminator 2, the dinosaurs in Jurassic Park, special effects in The Hunt for Red October and The Abyss, and animation in Beauty and the Beast were all created on Silicon Graphics computers. For Lucas and Industrial Light and Magic, JEDI was expected to yield both financial and aesthetic benefits: digital manipulation of images cost about one-tenth as much as models and drawings, and, according to Lucas, would “change motion pictures from a photographic process to more of a painterly process,” enabling greater authorial control over a film’s appearance. For its part, Silicon Graphics hoped that alliance with an entertainment industry partner would help push the leading edge of its technological development forward.

The entertainment industry was a growing interest of James Clark’s at the time. In 1995 Silicon Graphics teamed up with DreamWorks SKG—the entertainment entity formed by Steven Spielberg, Jeffrey Katzenberg, and David Geffen—to form DreamWorks Digital Studio for the creation of animation, feature films, and other products. Silicon Graphics also acquired Alias Research and Wavefront Technologies for $500 million in 1995, which positioned Silicon Graphics in the software business. Alias specialized in 3-D animation software that was widely used in the entertainment industry and in industrial design. It had developed new ways to simulate wind, fire, skin, and other special effects, and it also had an animation tool used by Nintendo in its video games. WaveFront Technologies developed industrial visualization software.

Silicon Graphics was facing fierce competition in the 3-D graphics and imaging markets from Apple Computer Inc., which was introducing QuickDraw 3D, and Microsoft Corporation, which had recently acquired Softimage and its line of simulation software. In addition Steve Jobs, founder of Apple and NeXT, had recently purchased animation producer Pixar and teamed with Walt Disney Studios on Toy Story, a full-length animation film created entirely with computers.

Major Acquisitions Continued, 1996-97

In 1996 Silicon Graphics acquired financially troubled supercomputer maker Cray Research Inc. for $767 million. Although lower end workstations accounted for more than half of Silicon Graphics’ revenues, its high-end workstations were facing increasing competition from lower-priced PCs. The Cray acquisition was intended to help Silicon Graphics dominate the high end of computing where workstation prices started at $10,000 and ran as high as $1 million. Together, Cray and Silicon Graphics would have accounted for 43 percent of the $1.9 billion scientific and engineering market in 1995, and analysts predicted the two companies could generate $4 billion in combined revenues.

In 1997 Silicon Graphics acquired ParaGraph International Inc., a leading vendor of Virtual Reality Modeling Language (VRML) for Web graphic tools. Silicon Graphics created a new software business unit, Cosmo Software, to manage and develop areas such as VRML, 3-D, audio, and video software for multiple platforms.

Operating Losses Became a Problem, 1997-98

After posting a profit of $78.6 million on revenues of $3.66 billion for fiscal 1997 (ending June 30), Silicon Graphics experienced mounting losses in fiscal 1998. During the first quarter the company lost $55.5 million on revenues of $768 million, and CEO Ed McCracken and Executive Vice-President Gary Lauer resigned.

Silicon Graphics’ losses were caused by several factors. More than half of Silicon Graphics’ sales came from shrinking markets such as Unix workstations and supercomputers, whose sales were being undercut by less expensive machines running industry standard Windows NT on Intel processors. Silicon Graphics also had a poor operations record, with numerous product delays, production shortfalls, and a lack of controls.

Richard Belluzzo was brought in from Hewlett-Packard, where he was second in command, to take over as CEO and president, effective January 1,1998. He immediately took steps to turn the company around and address its most immediate problems. Costs were trimmed in a corporate restructuring that involved laying off 700 to 1,000 employees, nearly ten percent of Silicon Graphics’ workforce. Two factories that manufactured printed circuit boards were sold, and Silicon Graphics’ operating structure was simplified by reducing its 26 profit-and-loss centers to five product groups.

Belluzzo recognized that Silicon Graphics would have to take steps to meet the competition its higher-end proprietary workstations were experiencing from industry standard machines running on Windows NT. Silicon Graphics entered into a strategic alliance with Microsoft to produce a low-priced Visual Workstation for Windows NT that would cost around $3,400 for introduction in fiscal 1999.

Belluzzo also divested some of Silicon Graphics’ non-core business assets. In July 1998 a previously planned spinoff of MIPS Technologies Inc. was completed, raising more than $70 million for Silicon Graphics, which retained an 85 percent interest in MIPS. Also sold were a number of applications software research groups, and the company terminated its investment in its Cosmo software business.

Fiscal 1998 (ending June 30) was a poor year for Silicon Graphics due to market conditions, poor operational execution, and missed opportunities. The company reported a net loss of $460 million on declining revenues of $3.1 billion. Restructuring and other one-time charges amounted to $206 million.

In October 1998 Silicon Graphics entered into a joint venture with Real 3D Inc. of Orlando, Florida, to codevelop and market advanced computer graphics technology worldwide. Silicon Graphics took a ten percent stake in Real 3D for an estimated $30 million. Real 3D, which was spun off by Lockheed Martin Corporation in 1996, had been a smaller-scale competitor to Silicon Graphics in providing graphics systems for higher priced computer workstations. As part of the venture the two companies agreed to a royalty-sharing licensing agreement and gave up their longstanding patent infringement litigation.

For the first six months of fiscal 1999 Silicon Graphics posted a net loss of $87 million on revenues of $1.6 billion. Belluzzo’s plan to turn Silicon Graphics around included driving sales up through the introduction of lower-priced visual workstations and finding new applications for its high-end supercomputers. His plan to revamp Silicon Graphics’ operations included outsourcing production of Silicon Graphics’ computers and cutting the company’s operating budget by $200 million. He was also attempting to change Silicon Graphics’ corporate culture through a “Get Serious” campaign.

In April 1999 Silicon Graphics Inc. changed its name to SGI as part of a new worldwide corporate identity strategy that reflected the breadth and depth of the company’s products and services. The strategy included three sub-brands: SGI servers and workstations, Silicon Graphics visual workstations, and Cray supercomputers. The three sub-brands consolidated previously ill-defined product lines. It was hoped that the new branding strategy would reposition SGI and its products and services in the marketplace.

Still, SGI faced several obstacles in its search for profitability. Rival computers were offering vastly improved performance as sales of Cray supercomputers were plummeting at a 40 percent annual rate. Entering the Windows NT market would require more rapid production cycles, something SGI had not shown it could accomplish. As a competitor in the Windows NT market, SGI would also be subject to delays associated with the introduction of new versions of Windows NT and Intel processors. Given SGI’s operating results for the first half of fiscal 1999, Belluzzo and SGI appeared to have their work cut out for them.

Principal Subsidiaries

Silicon Graphics Ltd. (United Kingdom); Nihon Silicon Graphics K.K. (Japan); Silicon Graphics Ltd. (Hong Kong, People’s Republic of China); Cray Research, Inc.; MIPS Technologies Inc.