Digi International Inc.

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Digi International Inc.

6400 Flying Cloud Drive
Eden Prairie, Minnesota 55344
U.S.A.
(612) 943-9020
Fax: (612) 943-5330

Public Company
Incorporated: 1985 as DigiBoard, Inc.
Employees: 204
Sales: $57.8 million
Stock Exchanges: NASDAQ
SICs: 3577 Computer Peripheral Equipment Nee; 7373 Computer Integrated Systems Design

Digi International Inc. is one of America’s fastest growing computer companies and is known for its unusual product line, which includes hardware and software products that enable as many as 512 computer users to work off a single, desktop personal computer. By equipping workers with dummy terminals, rather than full-fledged PCs, and allowing them to communicate through a single computer, rather than over an expensive local area network, Digi (pronounced “Didgy”) can set up an office network at a fraction of the cost of a conventional system. In 1993 an article in the Minneapolis-St. Paul newspaper City-Business commented, “If Digi International’s growth curve were a mountain, a climber would have a hard time scaling it.” In fact, since its inception, Digi has managed an annual growth rate of more than 90 percent.

The company was created in 1985 by a former rocket scientist named John Schinas. After working for GTE Sylvania during the 1960s, Schinas joined the Massachusetts Institute of Technology as a researcher. There he developed computer software used to guide the Apollo lunar module in its moon landings and rendezvous with the orbiting command module. Schinas later moved across Boston to work for Raytheon, where he wrote software programs for air traffic control systems. He also helped develop the first shared-access computer system for The Washington Post, enabling writers and editors to convert news copy directly into page layouts.

After leaving Raytheon, and working for a couple of years at Stearns Computer Systems, Schinas joined Digigraphic Systems (now called DSC Nortech), a manufacturer of computer circuit boards and assemblies. Digigraphic was struggling in a depressed market, and after its restructuring in 1985, the company elected to abandon some of its major circuit board lines, including those that allowed computer terminals to share a single processor.

Schinas, then a group vice-president, strongly disagreed with the move and tendered his resignation. He purchased the company’s inventory of circuit boards, some test equipment, and machinery for $400,000, raising the cash through a second mortgage and from friends. He then sold off the product inventory, earning a small pool of cash, and hired a some software engineers to develop improved boards, while he set up a new company called DigiBoard.

During this time, the 286 chip was developed. This chip, combined with a UNIX operating system for personal computers, enabled a single controller to take over thousands of simple functions from the CPU, or “brain box” in a conventional personal computer. This, in turn, meant that a single CPU could serve several computer terminals at the same time. Such a network proved useful for standard interoffice communication, basic computing functions, and sales and inventory work. It was also cheaper to set up than local area networks, or LANs, pioneered by companies such as Novell, which required a CPU at each work station.

To Schinas, LANs seemed an inefficient use of resources. Few applications required so much computing power, and because the market for such simple applications was enormous, it was clearly more economical to have several workstations share a single CPU. Schinas then made a daring assumption: he decided that, in their rush to sell computers, manufacturers such as IBM, Compaq, Apple, and DEC would ignore the simplicity of the 286 chip application, preferring to market LAN systems consisting of several terminals each equipped with a CPU. Schinas decided to develop a system that could compete with LANs.

The DigiBoard system, known as the PCS input-output, or “I/O,” system, required the installation of three items: a circuit board to perform the function of serving several computer screens and keyboards, the software to govern these functions, and the wiring needed to connect everything. The system’s major selling point was its low cost. Customers could either equip their offices with several $4,000 computers, or use Schinas’ system consisting of a single $4,000 computer and several $250 terminals.

Many computer manufacturers refused to market the PCS system, fearing that it would cut into computer sales. Furthermore, for larger companies such as Novell the DigiBoard system represented a threat to their commanding presence in the growing LAN market. In order to get his product to market, Schinas hired Mykola Moroz, a former purchasing executive at Digi-graphics. Drawing on his experience in both computer systems and marketing strategy, Moroz established a series of distribution channels, including magazine classifieds and the few computer retailers then in existence.

Wary of competition, Schinas sought to hold down costs at DigiBoard. Rather than manufacturing its product himself, he elected to farm out the work to local subcontractors. This enabled DigiBoard to concentrate on new product development and marketing. In another attempt at holding down costs, DigiBoard located its offices in an unfinished $2 per square foot factory space, where engineers had to contend with noisy ceiling furnaces and occasional fuel oil leaks.

DigiBoard ended its first year in operation with impressive total sales of $1.5 million. After losing $260,000 in 1986, the company made a million dollar public offering the following year, and sales grew to $3.5 million. During this time, faster and more complex personal computers were developed, robbing LAN architectures of their comparative strengths. Customers could do more with a single CPU than ever before, and at rapidly dropping prices. All this activity in the market helped DigiBoard to garner sales of $7.8 million in 1988, enabling Schinas to repay those who invested in his venture.

Thinking in terms of a global market, Schinas launched a second public offering in October 1989 under a new parent organization called Digi International. The offering reaped $11 million, and shares in the company were publicly traded on the NASDAQ. Digi finished 1989 with sales of $14.6 million. The following year, the company acquired PC Research, a software developer, and a division of Progressive Computing that developed ISDN technologies, which allowed tremendous amounts of data to be sent over conventional telephone lines. Sales in 1990 topped $23 million.

However, as the market continued to grow, so did the competition. From a host of smaller companies, Arnet Corporation emerged as Digi’s chief competitor. When Arnet’s founder announced his intention to retire in 1990, he purposely sought out Schinas, hoping Digi would offer to buy out the company. With its product line and facilities, Arnet was a good match for Digi, which acquired the company for $5 million on March 1, 1991.

By this time, Digi had moved into a new office complex in Eden Prairie, Minnesota, and had established a manufacturing facility in nearby St. Louis Park. Furthermore, on July 8, 1991, the company opened a German sales subsidiary in Köln.

The rapid growth in computing power, driven by a revolution in computer chips, continued to broaden the potential applications for Digi’s I/O systems. New versions of the PCS were introduced that enabled phone banks to handle hotel and ticket reservations and product orders.

In the early 1990s, the U.S. economy, weakened by years of deficit spending and short-term business strategies, slipped into a prolonged recession. Corporate budgets were cut drastically, and capital purchases, including those for computer equipment, were deferred indefinitely. Computer companies such as Dell, Apple, DEC, and Compaq suffered huge declines in sales, while IBM and Wang were devastated. Digi suffered a less profound blow, however, buoyed by the fact that its systems came into demand as cheaper alternatives to LANs.

The company also gained greater marketing strength through a series of distribution agreements. The Digi product line was incorporated into larger systems sold by IBM, NCR, Bell Labs, MCI, Honeywell, and GTE Data Services. Later, distribution channels were established through Bell Atlantic and BellSouth.

In 1991, Digi had about 20 percent of the market for multi-user systems, then valued at about $200 million annually. However, growth in this market had topped out, and, in order to maintain its sales, Digi decided to break into the market for LAN systems, which were less of a competing technology than ever.

Digi established manufacturing agreements with Novell and Microsoft, in which Digi LAN products were integrated with those of established LAN operating systems. Digi later expanded its LAN technologies into the wide area network, or WAN, market, in which computer systems in different locations are linked by telephone wires.

Digi completed a third stock distribution in September 1991, generating an additional $23 million in capital. This enabled the company to create a telecommunications group to develop and market high-speed data communications equipment. The following year, Moroz succeeded Schinas as chief executive of the company. Schinas retained his position as chairperson, establishing a smooth path of transition for his eventual retirement.

Digi acquired another competitor, Stargate Technologies, in April 1993. This company manufactured a variety of alternative software systems for the I/O and LAN market. Also that year, Digi made its first major entry into the ISDN market with a new PC IMAC product line using the Novell NetWare and Microsoft LAN Manager and Windows systems. The system simplified the commands needed by a computer user to establish and administer a high-speed data connection over telephone company ISDN lines.

In 1993, Digi International held a leading 25 percent market share of the I/O market and had established a strong position in the LAN and WAN connectivity markets. The company’s systems were distinguished by their software, a command-intensive system that eliminated the need for large hardware adjuncts, making it easily—and inexpensively—adaptable to existing computer systems.

Digi International has frequently been noted for its rapid growth and good management. In 1990 Schinas told Minnesota Ventures, “Management by consensus is the biggest problem in U.S. corporations. It detracts and draws away from the abilities of creative people. Companies are afraid to make mistakes, and fear strangles you. It makes you impotent.” Schinas attributed his company’s success not so much to the quality or innovation of its products, but rather to its looser style of management.