'Networking' Drive May Revive U.K. Firm --- Acorn Sees Seeds of Growth In Reinventing PC

By RICHARD POYNDER

23 May 1996
The Wall Street Journal Europe

CAMBRIDGE, England -- There's a lot of hype surrounding network computers these days -- enough to revive a seemingly moribund U.K. computer maker.

Britain's Acorn Computer Group PLC looked to be a computer casualty not long ago. Now, it's on the bandwagon with networking heavyweight Oracle, U.S. computer makers Sun Microsystems Inc. and Apple Computer Co. and more than 50 other companies looking to make a bundle by reinventing the personal computer.

So-called network computers are envisioned as lean machines that run on small memories and software gleaned from the Internet. In theory, they should be able to do everything today's costly desktop models can -- but for a pricetag of around $500 -- or half what a conventional PC costs.

Such "network" computers so far exist only in prototype. But enthusiasm for the concept, and Oracle's credibility, has helped propel a more than 350% run-up in Acorn shares over the last year. Acorn's stock closed Wednesday at 303 pence in London trading, unchanged on the day.

In London and California this week, Acorn has been demonstrating prototype network computers built with processors designed by its joint venture with Apple and using Oracle's technical standard for network computers.

Acorn is negotiating with a hardware manufacturer for the construction of a small number of network computers "to seed the market," Acorn Managing Director David Lee said in London. "We hope to make an announcement in the next few weeks," he added. "One possibility would be if a cable company or an Internet service provider wanted to offer network computers in a bundled way." He declined to go into further detail.

If the market for network computers does take off, as companies like Oracle and Sun are betting, the stakes would be huge. With the market research firm Dataquest estimating that more than 71 million PCs will be sold this year, network computers would be immensely successful if they could grab just part of that market. For the moment, Acorn is well-placed to deliver the kind of high-performance, low-cost technology such machines will require.

How Acorn struggled back from where it was in the mid-1980s is a story filled with twists. In five short years following a 1978 startup, sales of Acorn's micro computers -- stripped down PCs that plugged into TV sets and were largely targeted at the U.K. education market -- reached a phenomenal #100 million. But debts quickly mounted, marketing suffered and a disastrous Christmas brought the business to its knees.

In 1985, Italian PC maker Ing. C. Olivetti & Co. tried to ride to the rescue.

"I was on the original Olivetti team called in to look at Acorn," Mr. Lee said in an interview. "My conclusion then was that while the company had some very interesting technology, I wouldn't pay more than a pound for it."

Olivetti ignored his advice and sank millions into the company, adding to its own four-year string of losses.

Even now, skeptics are quick to point out that the success of network computing is far from certain. Even if such a machine is marketed, it will face a number of high hurdles, not least consumer indifference and congested computer networks.

But Acorn, some observers note, is well-positioned for strong growth even without network computers. Its joint-venture with Apple, Advanced RISC Machines, has signed chip licensing agreements with more than a dozen major international companies, including U.S.-based Digital Equipment Corp. And last year's agreement with Digital has already led to the first of a new generation of fast processors. The StrongARM, the next generation of ARM chips, runs about as fast as Intel Corp.'s top-of-the-line Pentium processor, can operate on two AA batteries and yet is significantly smaller -- an ideal combination for portable devices.

Acorn got its second chance largely by stubbornly insisting back in the mid-1980s on developing processors its own way -- a decision that initially backfired on several counts. At a time when its competitors were migrating to the increasingly dominant PC platform, Acorn instead chose to develop RISC architecture. Reduced instruction set computing, by reducing the number of functions embedded on a chip, can allow a microprocessor to run a great deal faster than conventional PC chips.

But RISC initially led to Acorn's slide from the No. 1 seller of computers in the U.K. education market to its current ranking in that market as a poor third.

"Acorn has a long history of successful technical developments," comments Lynn Moates, Primary Marketing Manager at Research Machines Ltd., Acorn's supplanter as the leader in U.K. education. "Its problem has been one of selling and marketing that technology."

Opting for RISC also led Acorn straight into Apple's ill-fated Newton project. Apple around that time was looking for a suitable chip for its first-generation personal digital assistant. "We needed a low-cost, low-power RISC processor for the Newton," explains Nigel Turner, head of New Media and Education at Apple Europe. "Acorn was ahead of everyone else in designing that type of microprocessor, and we decided that strategically it made sense" to team up.

But while the Newton failed to hit anyone over the head with its brilliance, and revenues at ARM proved equally lackluster, the chip technology the joint venture came up with was something new and saleable in itself. ARM's RISC technology led to the development of processors featuring high performance, low energy consumption and low cost. It's a niche in which ARM is still ahead of the pack. While large players like International Business Machines Corp., Sun and Hewlett-Packard Co. have been developing their own RISC technology, the chips they produce are aimed at the high-powered desktop market, a segment currently dominated by Intel.

The stakes for Acorn are high. Despite a brief return to profitability, the company has consistently failed to regain its past glory. Last year was particularly bad, with a 24% fall in sales leading to a #12.4 million loss.

Nevertheless, Mr. Lee has moved swiftly to try to get Acorn onto firmer ground. He has reduced staff by a third, closed a loss-making German operation, and in February merged the education business into Xemplar, another joint venture with Apple. He has restructured the company into three divisions -- Online Media, which designs and produces set-top boxes; Network Computing, formed as a result of the Oracle agreement; and Acorn RISC Technologies, focusing on further leveraging of the companys RISC technology. Also, Olivetti recently reduced its holding to 45%, technically making it a minority shareholder.

Dataquest analyst Joe D'Elia believes that whatever becomes of the network computer, Acorn's real opportunities lie with ARM, its first joint venture with Apple. "ARM's RISC technology is ideally suited for a whole host of applications, including set-top boxes, mobile phones and smartcards."

"The danger," says Mr. D'Elia, "is that ARM's success may encourage others to develop competing technology. Its licensees may use the ARM technology to get into the market place, and then go on to develop their own."