Silicon Graphics

(

(SGI)

SGI), famous for its special-effects animation work, now uses silly phrases to defend its shrinking dominion.

"If you strap a rocket on a basset hound, it's still a dog."

That's what SGI's chief executive, Ed McCracken, had to say recently about workstations based on

Microsoft's

(

(MSFT) - Get Report

MSFT) more robust Windows NT operating system. McCracken made his disparaging remark as SGI unveiled its new Octane workstation earlier in February.

Just a few years ago, the thought of SGI comparing its mighty workstations with any Windows-based product would have been comical. But steady improvements in processing power and efficiency have helped Microsoft combine with

Intel

(

(INTC) - Get Report

INTC) chips to make increasingly powerful workstations.

Perhaps without realizing it, McCracken is on well-trod ground with his "my computer's more powerful than yours, so I'm going to win" argument. For instance,

Digital Equipment

(

(DEC)

DEC) founder Kenneth Olsen used a similar defense of the company's own machines in the late 1970s, saying: "The personal computer will fall flat on its face." In more recent history,

Apple

(

(AAPL) - Get Report

AAPL) mocked Windows 95 by launching its "Been there, done that" ad campaign.

The affliction for all these companies -- SGI, DEC, Apple -- was a fixation on the high-end computing spectrum and its richer profits. But the "down-market" segments have shown an incredible ability to play catch-up ball. And software developers have often favored writing applications for the larger low-end market. With more software available at the low end, it became more attractive to users. Processing speed increased, giving the down-market players still more potency. And, pretty soon, the DECs and Apples found that the low end had become the high end. SGI is moving in the same direction.

A look at the entertainment market, where SGI drew nearly $400 million, or about 15% of its total revenue (and a significantly larger portion of its press) for fiscal 1996 ended in June, shows some cause for concern. Computer animation and special effects have long been SGI's province. Animators swore by the high-performance workstations, and companies paid top dollar to have SGI machines in place. The special effects in

Twister

and

Independence Day

, as well as the animation in

Toy Story

, were created on SGI workstations.

But while companies like

Industrial Light and Magic

and

Pixar

(

(PIXR)

PIXR) continue to use SGI boxes for most of their work, NT workstations are finding favor with small and midsize animation houses. A main reason: cost.

A fully loaded, middle-of-the-line SGI workstation goes for about $50,000 to $60,000, according to animators in the field. A comparable NT workstation goes for $18,000 to $20,000. While SGI has, by all accounts, a performance advantage over NT, that margin continues to thin. And an increasing number of animation jobs can easily be done on the NT systems with little noticeable difference. As a result, some animators are now working solely on the NT, and many others are now running both platforms.

With more and more people using NT, animation software companies are chasing the trend. In August, Microsoft subsidiary

SoftImage

released SoftImage 3.5 for NT. Previously, the program, a standard for high-level animation, only ran on SGI's Unix platform. "In terms of functionality, interface and features, the program is identical to the SGI version," says Brook Kennedy of New York-based corporate communications media company

TIS

. Also in August, privately held

NewTec

ported LightWave 3D, another previously Unix-only system, to the NT platform. And, notably,

AutoDesk

(

(ADSK) - Get Report

ADSK) released 3D Studio MAX, an NT-only program that earned an "Innovation of the Year" award from

Computer Graphics World

. (Of the major, high-end animation software companies, only SGI subsidiary

Alias/Wavefront

makes Unix-only applications.)

"When you have a bunch of software developers working on NT, and just a few on SGI, it makes NT much more versatile," says Matt Brunner of Portland, Ore.-based

Will Vinton Studios

(which uses both platforms). Will Vinton did the computer animation for recent M&M ads -- and did it entirely on an NT system.

Another NT advantage is the recent proliferation of plug-ins. Plug-ins are applications, often written by animators who saw a need, that add to the effects a program can do. Need that character you're animating to have rippling muscles? You can buy a plug-in that will make it a snap. According to an article in February's

Computer Graphics World

, "3D plug-in technology is shaking up the 3D modeling and animation industry. It's redistributing the development process away from singular sources and toward the 3D animation community at large." And yes, the vast majority of plug-ins are being written for NT programs.

"We take NT very seriously," says Greg Estes, a marketing manager for SGI. "We're far from arrogant or Pollyannaish. We've gotten prices down and performance up." Estes goes on to say that SGI is working hard with developers to make sure there's enough software in the pipe.

Still, some analysts are worried. "It's a concern I've had," says Jay Vleeschhouwer, an analyst with

Josephthal Lyon & Ross

(which hasn't done any underwriting for SGI). He nevertheless rates SGI a buy. "The company needs to assure that there's a good supply of software."

"I keep looking to SGI to make significant changes in their strategies, and they haven't yet," grieves Will Vinton's Brunner. "We need a broader software base. I basically love SGI's platform and want to see them succeed, but I hope they wake up and address these issues."

On Wednesday SGI traded at 24 7/8, down 1/4.

By Justin Lahart

SGI's Game with Nintendo

(1/31)

. SGI has boasted loudly of the hot-selling Nintendo 64, but N64 has meant little to its bottom line.