Painful Transition

NeXT reinvents itself as software company

Breaking news

NeXT's massive transformation from hardware manufacturer to systems-software supplier will leave many users, developers, and former employees temporarily dislocated, but a new, stronger NeXT is likely to emerge from the wreckage.

According to NeXT CEO Steve Jobs, the company faced a choice: "We could continue and be a second-tier hardware company like SGI or change and be a first-tier software company like Microsoft." NeXT cannot do both because it lacks the management and financial bandwidth, Jobs said.

The radical change in the company's structure and strategy was announced February 10 and is now underway (see charts). NeXT will discontinue production, development, and sales of its own hardware. The company will shrink from 530 employees to as few as 200 as a result of significant cuts in sales, marketing, and administration staff, as well as the elimination of most hardware-related jobs. It will change its name from NeXT Computer, Inc. to NeXT, Inc.

Acting on the advice of its customers, partners, and investors, NeXT will focus all of its resources toward making NeXTSTEP a dominant object-oriented operating system (OOOS). NeXT cites new numbers from industry analysts at IDC that the OOOS market will grow to almost $3 billion in 1996, more than the projected sales of traditional desktop operating systems.

For NeXT, this is an opportunity to compete for the mainstream business client-server market, which has been closed to the company as long as it sold a nonstandard hardware platform. But as it reaches for the brass ring, NeXT cannot ignore the marketing might of Microsoft, which is developing an object-oriented extension of Windows NT, code-named Cairo, for delivery in late 1994. The only other competitor NeXT foresees is Taligent, the joint Apple/IBM system-software venture, which is also a probable two years from shipment. (NeXT discounts SunSoft's Solaris-based Project DOE as a distant also-ran in the object-oriented race.)

"There's room for at least two players here, like Hertz and Avis," said Jobs, "and unless we're incompetent, we can at least be Avis." NeXT claims to have a lead of two to three years on the competition.

NeXT observers agree that the company can be competitive in the operating-system market now that it has shed its hardware legacy. "NeXT has removed the biggest barrier to the rapid deployment of NeXTSTEP," said Jonathan Schwartz, president of Lighthouse Design. "This removes the barriers to negotiating strategic partnerships with hardware manufacturers."

Without the drag of hardware, sales of NeXTSTEP should be far easier. While 100 units of NeXT hardware might be a $1 million purchase decision requiring the approval of committees and vice-presidents, the same order for NeXTSTEP might cost only $75,000, an expenditure that can be approved at a lower level. With the reduced cost structure of the company, NeXT makes just about as much profit on the software sale.

Though NeXT's future may be bright, it expects some difficult months ahead. Current owners of NeXT hardware will undoubtedly feel nonplussed even though NeXT will make provisions for service and support of existing hardware for at least the next five years. Besides being the right thing to do for its customers, NeXT has to provide such support under its contracts with government buyers.

Until NeXTSTEP for Intel ships later this year, NeXT's revenues will drop precipitously. The same will also likely hold for NeXT's third-party partners. Lighthouse Design said it prepared for lean times and will use the lull to ready its '486 products, but some other developers may face trouble.

Longer term, the news is probably good for third parties and others whose fortunes depend on the size of the installed base. "All third parties care about is the number of seats out there," said Kim Orumchian, NeXT's manager of strategic relationships.

NeXT has faced tumultuous times since its 1985 founding (see time line). Now, as it makes its most wrenching transition, NeXT appears for the first time to be positioned to grab a meaningful share of the mainstream computer market.

by Dan Lavin and Dan Ruby