Stratus Computer, Inc. - Company Profile, Information, Business Description, History, Background Information on Stratus Computer, Inc.

55 Fairbanks Boulevard
Marlboro, Massachusetts 01752

History of Stratus Computer, Inc.

Stratus Computer, Inc. is a leading producer of computer systems that offer continuously available, or fail safe, applications. The company sells its hardware and supporting software to customers in industries, such as financial services, telecommunications, and healthcare, where reliable non-stop computing power is essential. Started in the early 1980s by three experienced engineers, the company rapidly achieved profitability and steady growth, which slowed in the 1990s as the nature of the computer industry shifted.

Stratus was founded in 1980 by William E. Foster, who had worked in the research and development department of the Hewlett-Packard Company in the 1970s. When co-workers he supervised left the company to start their own company making computers that never broke down, Foster declined their invitation to join them, only to see the company they founded, Tandem Computer, become highly successful. By the end of the 1970s, after changing to a job at the Data General Corporation, Foster had become convinced that he could do the job his friends at Tandem were doing, only better. Joining with Gardner C. Hendrie and Robert A. Freiburghouse, who also had experience in the computer industry, Foster formed Stratus Computer in May 1980. On the strength of their reputations, the three men raised $6.7 million from seven different venture capital firms to start the company.

Computers made by Foster's rivals relied on software to provide their users with fail-safe operation. When their system was first developed, this had been the most economical way to design such a system, since parts, or hardware, had been very expensive. In the intervening years, however, the cost of hardware had come down. With this in mind, Foster and his cohorts set out to design a computer system that relied on duplication of hardware to insure reliability.

Twenty-one months after Stratus was founded, the company was ready to ship its first product. It marketed its effort as a computer with more fail-safe aspects than Tandem's, which nevertheless cost less. The Stratus/32 machine had two central processors, which worked on the same tasks at once. Inside each Stratus Continuous Processing System, two computers were nestled side by side, like Siamese twins. Each processor was able to check its own operation, since duplicate logic circuitry had been wired into it. If one computer failed, the other took over automatically, avoiding a breakdown in service. Unlike the Tandem product, Stratus' processors did not need to spend time checking on each other, so they were able to work more quickly. This advance was made possible by the fact that semiconductors cost just a fraction of their former price.

In January 1982, Stratus shipped a computer system to its first customer, the West Lynn Creamery, a dairy located near company headquarters in Massachusetts. The creamery used its $148,000 system to handle orders and to route its milk trucks. Although this customer was a small start, Stratus was confident that the market for fail-safe, or "fault tolerant," computers would grow, as businesses became more dependent on computers for much of their day-to-day operations.

To increase sales, Stratus embarked on diverse marketing campaigns in the United States and abroad. Aggressive marketing efforts in the United States, in which Stratus attempted to set itself apart from Tandem, brought the company a lawsuit charging the company with false advertising. To sell computers in Italy, Stratus signed a $40 million marketing agreement with Ing C. Olivetti & Company, an Italian typewriter and computer company which had been an early investor in Stratus. Under this arrangement, Olivetti sold Stratus computers in Italy under the Olivetti name; by the mid-1980s, ten percent of Stratus' products were sold through Olivetti. By the end of 1982, sales of Stratus products had reached $5.5 million.

On the strength of its early success, Stratus sold shares to the public for the first time in July 1983. The company used the revenue generated by its stock sale to buy equipment for new product development, testing, and demonstrations. When software to link its fault-tolerant systems to IBM computers was introduced in 1983, the company tapped into a new customer pool. By the end of 1983, sales of Stratus products had nearly quadrupled to $20.6 million. With these gains, the company reported its first profit, of $2.2 million.

By 1984, Stratus had increased its customer base to include financial services companies, such as Morgan Stanley, which used its products to report stock prices, and Merrill Lynch, a brokerage house. Other buyers of the Stratus system included the Bank of America, Ford, and Xerox. These companies used Stratus products to perform on-line transaction processing, in which computer operations took place in real time, frequently in conjunction with a customer interaction. Automatic teller machines, for instance, needed to be available to customers at all times, so that banks could avoid embarrassing breakdowns.

Stratus tried to broaden its customer base by providing numerous products and using different marketing avenues. Stratus was marketing three models of its computer by 1984, the most popular of which sold for around $200,000. But by 1986, Stratus marketed entry-level and mid-range models of its standard 32-bit based computer, and the company's products then ranged in price from $100,000 to about $1 million. In November 1984, Stratus introduced a version of its operating system called Virtual OS, which was designed for use with UNIX mainframe computers. In addition, the company unveiled new software to facilitate communication between IBM personal computers and its fault tolerant machines in August 1986. Stratus entered into a strategic marketing alliance with IBM in 1985 which licensed the computer giant to resell its products. IBM named its Stratus offering the System/88, and it became the only non-IBM product to be sold by that company's enormous sales force. By 1986, Stratus' sales had risen to $125 million, an increase of more than 50 percent from the previous year. In addition, earnings had grown to $13.5 million.

Despite its impressive record of growth, Stratus remained a small company, winning just a small portion of a small niche in the computer market. By 1987, no more than four percent of the country's on-line transaction processing was handled by fault tolerant computer systems. Major potential customers, such as airline reservation systems, remained unwilling to give up their crash-prone IBM or DEC mainframe systems, and Stratus found itself bidding for contracts against competitors who were many times larger.

In an effort to enhance its competitiveness in the cut-throat computer marketplace, Stratus unveiled a new generation of computers in 1987. The company's XA2000 was designed to process transactions three times as fast as its older models. This speed was made possible by the computer's use of new, more powerful computer chips, which were strung together in groups of up to four. Comparable in power to Tandem's top of the line machine, the Stratus model was priced at 40 percent less. By the end of the first three months of 1987, sales to IBM made up 15 percent of the company's revenues. Within three months of the introduction of its new line, that percentage had risen to 25 percent, as IBM cemented deals with customers such as telephone companies MCI and Southwestern Bell.

Overseas, Stratus found that its linkage with IBM gave it credibility in markets where its own name was not well known. To expand its markets overseas, Stratus Computer GmbH, a computer sales company based in West Germany, was opened in December 1985. Stratus continued its push overseas in 1986, when the company cemented an agreement with the C. Itoh company of Japan to market its products and inaugurated Stratus Taiwan to tap into another Asian market. By 1987, it formed a subsidiary to market its products in France. Stratus finished 1987 with sales of $184.1 million, as its revenues continued to grow sharply.

In January 1988, Stratus enhanced its new XA2000 line by producing an additional two models to be marketed. The XA2000 Model 50, priced at $79,000, was designed to handle 10 transactions a second. The XA2000 Model 70 had the capability of performing 12 operations a second, and was sold for $110,000. Each of these computers was compatible with older, more powerful models. With these offerings, Stratus hoped to broaden its customer base to a wider range of customers.

In June 1988, one of Stratus' original investors liquidated its investment in the company, as Olivetti sold its 9.3 percent stake in Stratus for $52 million. This did not indicate a severing of ties between the two firms, however, since Olivetti renewed its marketing agreement with Stratus at the same time. By the end of the year, Stratus was once again reporting dramatically improved financial results, with revenues of $265.3 million in 1988. Growth continued the following year, as this figure rose to $341.3 million, a gain of nearly a third.

Despite this continued good news, however, the first signs of trouble for Stratus were beginning to appear. By the late 1980s, orders for its three-year-old product line slowed as customers waited for newer products to be introduced. This anticipation caused a flattening in the company's sales for several quarters.

The company's introduction of 13 new models of its XA2000 Continuous Processing Systems line of computers in 1990, however, moved the company into the highly competitive mainframe computer market. Among the customers Stratus won with its new line were US West Communications, which used the company's fault tolerant computers to run 911 emergency telephone systems; First Florida Banks, which used Stratus technology in automated teller machines; and the Mt. Sinai Medical Center in New York.

In addition to the introduction of new, more up-to-date products, Stratus began an effort to widen its channels of distribution. Throughout the late 1980s, the company had relied on sales of its products by IBM for a significant portion of its revenues. By the early 1990s, Stratus' continuing growth was being threatened by declining sales of its products by IBM. Where it had once relied on IBM to move a significant portion of its products, the company now found sales to its partner stagnant. To protect itself against this fall-off in revenues, Stratus began to diversify its business partnerships, entering into a flurry of marketing agreements. Some of the agreements included leasing worldwide marketing rights for its operating software to Sanderson Computers, signing a joint marketing pact that allowed software sellers to bundle their products with Stratus computers, and signing an agreement with Perception Technology to develop its voice processing capabilities.

The most significant deal in this string of alliances was an agreement with the Japanese computer company NEC. Beginning in 1991, Stratus gave NEC the right to sell its computers throughout the world. NEC planned to package Stratus' fail safe computers with its own telephone switching and networking products, in an effort to win contracts from telephone companies in many countries. In addition, Stratus granted NEC the right to use its basic operating software in its own computers.

The alliances enabled Stratus to continue its profitability throughout the early 1990s, despite a general downturn in the American economy. Stratus revenues grew to $403.9 million in 1990, and climbed again to $448.6 million over the course of 1991. By the end of 1992, sales had risen to $486.3 million.

These gains belied the problematic transition that Stratus, along with the rest of the computer industry, was undergoing. Rather than continuing to market computers that ran on its own proprietary operating system, Stratus decided in the early 1990s to switch over to an industry standard operating system developed by Unix. In an effort to compensate for the difficulties and delays caused by this change, which brought about a slowdown in revenue, Stratus also decided to invest in the development of a new generation of products based on a new computer chip, called PA-RISC. Manufactured by Hewlett Packard, this chip used "Reduced Instruction Set Computing," rather than the older "Complex Instruction Set Computing," or CISC, in its operations. The company introduced a family of products called XA/R, which incorporated its RISC-based operating system, in 1992, and they were fully available by the following year.

By the middle of July 1993, Stratus' sales had flattened, and its net income had begun a slight decline. The company announced that its earnings for the year would be down. The biggest source of Stratus' problems was a sharp drop in sales of its products by its marketing partners. IBM moved 62 percent fewer Stratus machines than it had a year earlier, and Olivetti sold only 22 percent of its previous year's allotment in the second quarter of the year. Overall, growth had slowed in Stratus' flagship fail safe computer line, and additional company models, which were less expensive and also slightly less reliable, were unable to make up the slack.

In an effort to take greater control of its destiny in a competitive and rapidly changing market, Stratus announced a new corporate strategy in the fall of 1993. Rather than concentrate exclusively on the manufacture of computer hardware, the company decided to diversify into software as well, in order to provide a more complete package to customers. To do so, Stratus announced a $100 million plan to invest in small software makers in the field of on-line transaction processing, the area where most Stratus computers were used. Stratus planned to specialize in a few industry niches, such as healthcare, telecommunications, banking, retail, travel, and gaming, and it looked at nearly 100 small software companies in these fields, shopping for acquisitions. In September 1993, Stratus made its first purchase: Shared Financial Systems, Inc., a privately owned company based in Dallas, Texas, that made software for credit card authorization and other banking and retail functions. The company paid $15 million for its first acquisition, which it renamed Shared Systems Corporation. Other acquisitions included BellSouth Systems Integration, Inc. (renamed SoftCom Systems, Inc.), a unit of BellSouth Corporation which created software to link older mainframe computers and newer, small computer systems, and Isis Distributed Systems, Inc., a privately owned software maker.

As it moved into the mid-1990s, Stratus faced a computer market that had evolved dramatically from the one in which it began. With a solid history of profitable operation behind it, and a strenuous effort to restructure and refocus its operations on a more precise segment of its original market for fail safe computing, the company appeared well suited to prosper in the coming years.

Principal Subsidiaries: SoftCom Systems, Inc.; Isis Distributed Systems, Inc.; Shared Systems Corporation; Stratus Computer Corporation (Canada); Stratus Computer S.A. (France); Stratus Computer GmbH (Germany); Stratus Computer Ltd. (Hong Kong); Stratus Computer Japan Co., Ltd. (Japan); Stratus Computer Ltd. (United Kingdom).

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Further Reference

"A Fail-Safe Entry That's a Bargain," Business Week, November 16, 1981.Kleinfeld, N. R., "Stratus' Nonstop Computers," New York Times, July 11, 1984.Wiegner, Kathleen K., "Mixed Blessings," Forbes, September 21, 1987.

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