Network computers fall short
in contest against cheap PCs -- Sun Microsystems expected big sales
but is stymied by delays, nimble rivals
By David Bank and Don Clark
THE WALL STREET JOURNAL
Not too long ago, Federal Express Corp. seemed to be in the vanguard of a computing revolution.ÿÿThe company starred in a Sun Microsystems Inc. video endorsing a new breed of "network computer," a no-frills desktop machine without disk drives or other paraphernalia found in the bloated personal computer. NCs, capable of plucking their software from a host computer, promised to save corporate America millions of dollars while denting the monopoly power of Microsoft Corp. in software and Intel Corp. in microchips.
ÿ ÿ ÿ ÿ"We thought the NC fit the role perfectly," recalls Dennis Jones, chief information officer of FedEx, which wanted to use them to replace up to 70,000 aging terminals linked to its mainframe computers.
ÿ ÿ ÿ ÿThat was the fall of 1996. Last month, FedEx passed over Sun and selected Hewlett-Packard Co. and Wyse Technology Inc. to replace up to 30,000 of those terminals with conventional PCs, which have plunged in price, and with a new breed of desktop devices called Windows-based terminals, which are thinner and cheaper than NCs.
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`THE RIGHT CHOICE'
ÿ ÿ ÿ ÿConventional PCs and Windows-based terminals are crushing the NC - along with the threat to the hegemony of Microsoft and Intel in PCs.
ÿ ÿ ÿ ÿ"We believe that PCs are, at this point in time, the right choice," Mr. Jones now says.
ÿ ÿ ÿ ÿThat is bad news for Sun and a group of other powerful companies, including database giant Oracle Corp., Internet software pioneer Netscape Communications Corp. and International Business Machines Corp. Those companies had hoped that the combination of the NC, the Internet and Java - a programming language developed by Sun for running software on any kind of computer - would break the Windows-Intel duopoly's grip on the computer industry's profits. But the companies' hopes have been dashed by broad trends, their own mistakes, a compelling alternative technology that came out of nowhere and some clever shifts by Microsoft.
ÿ ÿ ÿ ÿOther stars of the NC road show, such as First Union Corp. and CSX Corp., have also abandoned the NC. There will indeed be a lot of thin desktop devices by the year 2002, says International Data Corp., but nearly 75% of them will be Windows-based terminals.
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DOING WINDOWS
ÿ ÿ ÿ ÿ"We made a Java network computer, and we sold almost none because it was unusable," says Mike Stebel, vice president of global marketing for Boundless Technologies Inc., Hauppauge, N.Y., a terminal manufacturer now in partnership with Microsoft. "Our customers said, `Give us access to Windows.ÿ Scott McNealy, Sun's chief executive officer, says the battle is just starting. FedEx is using Java for some applications, endorsing Sun's underlying philosophy and giving the company a chance to court Mr. Jones again for a delayed NC machine called the JavaStation, Sun officials say.
ÿ ÿ ÿ ÿ"He has bought JavaStations," Mr. McNealy says. "It just so happens they use the Windows operating system and an Intel chip."
ÿ ÿ ÿ ÿThe irony is that the anti-Microsoft alliance correctly identified some trends now sweeping the industry: PCs have been expensive to buy and maintain, and the Internet has ushered in schemes for network-based computing that can bring big savings. But it is Microsoft, which at first pooh-poohed the problem, that has most effectively used NC advocates' own marketing slogans.
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ÿ ÿ ÿ ÿNetwork computers broke on the scene in September 1995, while Microsoft was still riding the media tidal wave created by the release of its Windows 95 operating system. Oracle chairman Lawrence Ellison, speaking at an industry conference in Paris at the time, criticized the cult around the complex program and declared: "The PC is a ridiculous device."
ÿ ÿ ÿ ÿMicrosoft's chairman Bill Gates, at the same conference, retorted that people will always want a machine with its own processing power and storage for data and programs. People who think the Internet means that "dumb terminals" will replace PCs "are wrong," Mr. Gates said.
ÿ ÿ ÿ ÿSo-called dumb terminals originally connected to large central computers and had almost no processing power. Mr. Ellison and Mr. McNealy envisioned more powerful NCs that receive programs from computer networks and sell for $500, compared to $2,000 to $4,000 for most corporate PCs at the time. A single manager could centrally update software for thousands of users at once, reducing annual operating costs to a fraction of the estimated $8,000 to $12,000 per PC user.
ÿ ÿ ÿ ÿNC advocates reveled in public-relations coups. Oracle commissioned Frogdesign Inc., a tony Silicon Valley design firm, to create drawings of futuristic prototypes of network computers; the drawings were leaked to newspapers to fuel excitement. Mr. Ellison went on the Oprah Winfrey show and announced plans to donate NCs to schools; he predicted that consumer and business NCs would outsell PCs by the year 2000.
ÿ ÿ ÿ ÿMicrosoft, along with Intel, initially responded with plans for a PC that could be managed more easily on networks. But other forces had a bigger impact. Prices of conventional PCs, for one thing, unexpectedly fell to less than $1,000 and reduced the NC's up-front price advantage. Sun's JavaStation, for example, lists at $699 but doesn't include a monitor. Oracle's CEO Lawrence Ellison predicted that consumer and business NCs would outsell PCs by the year 2000.
The new machines also were squeezed at the low end, largely as the result of a small company called Citrix Corp. The Florida startup, founded by former IBM executives, developed software, based on Microsoft's Windows NT operating system, that lets customers use terminals costing as little as $350. The design outdoes the NC in shifting the processing of applications from the desktop on to servers located elsewhere on the network.
ÿ ÿ ÿ ÿAn NC, like a PC, has a powerful computer chip and processes software and data downloaded from the server. But a terminal using Citrix technology simply acts as a display device for the computing work done by the server, as if the monitor and keyboard were connected by a long cable to a computer located elsewhere.
ÿ ÿ ÿ ÿSuch terminals give users access to popular Windows software, such as Microsoft Word and Excel, and terminals can also add software to connect to older mainframe systems. Citrix customers don't even have to buy new hardware; with its software, they can use old desktop computers.
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CHANGE OF MIND
ÿ ÿ ÿ ÿMr. Gates changed course, concluding that the Windows-based terminal approach could be compelling for many customers. Last year, Microsoft paid Citrix $75 million to license its technology, plus up to $100 million in additional royalties, and announced plans for a similar line of Windows-based terminals and server technology called Hydra. Zona Research Corp., a market-research firm in Redwood City, Calif., said shipments of Windows-based terminals jumped 35% to 348,000 units last year.
ÿ ÿ ÿ ÿ"They really are mimicking the marketing message that we put out," says Steve Tirado, Sun's marketing manager for the JavaStation. "Of course that confuses the market, and that's precisely what they wanted to do."
ÿ ÿ ÿ ÿFedEx's Mr. Jones got caught in the crossfire. Last June, he asked six companies to propose designs for upgrading FedEx's vast package-delivery system. Mr. Jones hopes to retire FedEx's venerable mainframe computers in 2001 and is distributing its load of 65 million transactions a day from a single center at its Memphis, Tenn., headquarters to six data centers in the U.S., Europe and Asia. Most FedEx ground-operations personnel now use outdated terminals, known by their green screens, to tap into the mainframe. Microsoft's Chairman Bill Gates changed his mind, concluding that the Windows-based terminal approach could be compelling for many customers.
Sun responded with a broad plan for both hardware and software and sent dozens of company representatives to Memphis to sell the deal.
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BLOWING THE LEAD
ÿ ÿ ÿ ÿBut technical glitches cost Sun its early lead. For example, NCs were supposed to function without hard drives because, unlike PCs, they would rely on software downloaded from the network. But as applications grew larger to accommodate FedEx's needs, the time required for downloading software became a burden. Sun added memory chips to the JavaStation to store certain programs - reducing the functional difference between the NC and a traditional PC.
ÿ ÿ ÿ ÿSun's machine also was delayed by problems with the Java operating system. Bud Tribble, a Sun vice president and chief Java architect, says the first version was unacceptably slow and unreliable. Even an improved version included in the JavaStation released last month isn't adequate, he adds. Instead, Sun is working on an improved operating system, with help from IBM.
ÿ ÿ ÿ ÿSun made a bow in Microsoft's direction by licensing Citrix technology to give users access to Windows-based applications. Mr. McNealy derides those programs, but access to such Microsoft software turned out to be a key requirement at FedEx.
ÿ ÿ ÿ ÿSun promised to ship JavaStation in February 1997, but delayed the date to June, then November, and finally announced the availability of a product last month. Sun didn't even install demonstration units at FedEx until January.
ÿ ÿ ÿ ÿBy then, the battle was all but over. Wyse, a San Jose, Calif. company and one-time NC backer that shifted to Windows-based terminals, helped arrange a visit by FedEx executives to Microsoft's campus in Redmond, Wash., for a briefing on the software giant's plans for such terminals. FedEx was impressed.
ÿ ÿ ÿ ÿ"I don't think anybody should ever be surprised at how well Microsoft executes against a problem," Mr. Jones says.
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"I MISSED THIS ONE"
ÿ ÿ ÿ ÿInside FedEx, a faction of Java-lovers held out against a Windows-based approach. But Mr. Jones told representatives from Hewlett-Packard that it won the competition to supply Windows NT servers and standard PCs, while Wyse would supply Windows-based terminals.
ÿ ÿ ÿ ÿ"Sun is behind the power curve in bringing NCs to market on the schedule they had hoped to," Mr. Jones says. He stresses that FedEx still sees a role for JavaStations or other NCs in the future.
ÿ ÿ ÿ ÿ"So I missed this one," says Edward Zander, Sun's chief operating officer. "Life's about execution as well as a great strategy."
ÿ ÿ ÿ ÿSun claims some success stories. PHP Healthcare, based in Reston, Va., recently announced that it will deploy 500 network computers for use with Java software.
ÿ ÿ ÿ ÿBut the Wintel camp is apt to use its vast economies of scale to drive down the cost of conventional PCs. That will leave little breathing room for the NC, and other former supporters are bolting.
ÿ ÿ ÿ ÿExecutives from First Union appeared on stage with Sun's Mr. McNealy at a 1996 press event in New York and endorsed the JavaStation. Now, says Pete Kelly, First Union's vice president for capital markets, the declining price of standard PCs has eliminated the JavaStations' price advantage.
ÿ ÿ ÿ ÿJohn Andrews, the technology chief for CSX, the freight and logistics company based in Richmond, Va., had been planning to use NCs as a substitute for full-pledged PCs, but has abandoned that plan, Sun executives say. (CSX declined to comment.) Saab Automobile AB's North American operation, which is using Java in a new system linking 245 Saab auto dealerships, decided to use PCs rather than network computers to run the software. John Jacobs, manager of Saab's retailer and field information systems, says he worried about NCs' performance and reliability.
ÿ ÿ ÿ ÿ"I felt I couldn't roll the dice on that today," Mr. Jacobs says.
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ORACLE'S WOES
ÿ ÿ ÿ ÿOf the NC vendors, IBM has done the best, shipping more than 100,000 units last year of its NetStation machine, which is manufactured for the company by Network Computing Devices Inc. But most of the machines are being used like the other terminals to tap into companies' minicomputers and mainframes - and, frequently, into Microsoft programs using Citrix technology.
ÿ ÿ ÿ ÿOracle hasn't fared as well. Burlington Coat Factory Warehouse Corp. said in 1996 that it was considering Oracle's NCs. It is now planning to use Windows-based terminals from Neoware Systems Inc., based in King of Prussia, Pa. "At the time, Oracle seemed to have the definition of what an NC ought to be," says Mike Prince, Burlington's chief information officer. "The truth of the matter is, I don't think their execution has been that great."
ÿ ÿ ÿ ÿOracle's subsidiary, Network Computer Inc., has lined up several Asian suppliers to use its NC software, but failed to woo mainstream PC makers. It fell about nine months short of meeting its original mid-1996 launch date. More recently, it quietly dropped work on its "Hat Trick" software for NCs, which was supposed to provide the same functions as Microsoft's Office suite. In December, NCI reduced its staff by about 30 people to sell NCs through distributors, and in February its chief executive officer was replaced.
ÿ ÿ ÿ ÿOracle's Mr. Ellison, looking back to his September 1995 pronouncements, believes his predictions are being realized through Internet-equipped phones and other products. He rates Oracle's corporate NC sales as "not great," largely because plunging prices have made PCs equipped with Web browsers almost the same thing. "It's not exactly as I thought it would happen, but it's happening," Mr. Ellison says. He and other NC backers believe their message drove the price reductions and changed the industry.
ÿ ÿ ÿ ÿMr. McNealy says moral victories will ultimately be replaced by tangible ones. "Go ahead and write that the network computer is dead," he says. "If I can scare everybody else away, we'll own the market."
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