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DIGITAL'S STRUGGLE TO SAVE ITS ALPHA CHIP

Big price cuts may keep it from being pushed to the margins

Price cuts are as regular as clockwork in computer chips. But few in the industry can recall a drop as steep as the one announced by Digital Equipment Corp. on Dec. 11, when the company slashed prices on its powerful Alpha microprocessors by as much as 50%. Alpha chips with twice the speed of Intel Corp.'s best-selling Pentium Pro now carry almost no premium over their rival, akin to pricing a Porsche on par with a Toyota.

It's a dramatic gesture--some say a desperate one. Digital has been trying for years to persuade the big names in the business to build desktop computers and high-end servers around Alpha, counting on the chip's big performance advantage. But that approach has failed to make Alpha more than an asterisk on industry market-share charts. Now, Digital is using price to try for a much-needed boost in volume: A 300 Mhz Alpha chip, for example, now costs $395, compared with $695 previously.

RELENTLESS. Digital can afford the gamble: Revenues from the sale of Alpha chips have been negligible. Building momentum for Alpha is crucial if Digital is to regain its role as a major force in computers. Without a big uptick in Alpha shipments, ''Digital would still survive, but they would be relegated to the status of a marginal player,'' says Brown Brothers Harriman & Co. analyst William J. Milton Jr.

Digital has long pinned its hopes on Alpha. Chairman Robert B. Palmer has been working relentlessly for four years to link the Alpha chip to Microsoft Corp.'s Windows NT operating system, which is supposed to sweep through the corporate world in the next few years. Palmer aimed to have Alpha chips inside one out of five computers running NT by now. But the ratio is closer to one in 20--almost all of them Digital's own Alpha computers.

The Alpha price cuts have rekindled the debate over whether Digital is a pathfinder or simply lost. Samsung Electronics Co. is voting pathfinder. The Korean conglomerate has begun to make Alpha chips in small batches, and analysts think it may use its ownership stake in PC-maker AST Research Inc. to begin marketing an Alpha PC sometime next year. Mitsubishi Electric Corp. is also working with Digital on an Alpha PC chip design, the first fruit of an alliance formed three years ago, and Digital says it has signed up 20 lesser-known companies to build PCs and low-cost workstations using Alpha chips.

In some ways, Digital's new price strategy couldn't be better timed. In mid-December, IBM and Motorola Inc. cut back their support for the PowerPC chip, a rival microprocessor that has failed to live up to its performance promises. That leaves Alpha as the main alternative to Intel's chips. But major PC makers have strong incentives to stick with Intel. By linking several of its Pentium chips, computer makers expect to deliver performance close enough to Alpha's next year and still get Intel's price advantages. That advantage has narrowed since Digital dropped Alpha's price, but PC makers still have huge investments in the design tools and knowhow tied to the Pentium world. That narrows Digital's opportunity to win Alpha converts.

Indeed, volume is the name of the game in the chip industry, and the volume is flowing relentlessly to Intel. Case in point: Compaq Computer Corp. and Dell Computer Corp. are both pushing into the profitable market for workstations, the powerful desktop computers used by engineers, scientists, and graphic designers. Alpha is the undisputed speed champion at rendering graphics on computer screens because of its ability to process data in 64-bit gulps rather than the Pentium standard of 32 bits. But Compaq and Dell both opted to go with the Pentium Pro.

Digital faces the same obstacles in its computer-systems business. The company is expected to sell around $3 billion worth of Alpha-based computers in its fiscal year ending June 30, vs. $2.3 billion last year. But those sales slowed dramatically last quarter, the fault, the company says, of disruptions caused by sales force reorganizations. In the current quarter, Alpha sales are growing about 11%, analysts say, down from the 30% to 40% growth rates earlier in the year. Still, Digital has yet to pass along the chip-price reductions to customers of its Alpha computers. Getting in the holiday spirit might help DEC's Alpha prospects.

By Paul C. Judge in Boston



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