LF.ROTHSCHILD,UNTERBERG,TOWBIN
55 WATER STREET, NEW YORK, NY 10041
lIS TEL (212) 412-1000 CABLE: PROBATICA
IpJ
ARTIFICIAL INTELLIGENCE COMPUTERS: AN INVESTMENT PERSPECTIVE
INVESTMENT VIEWPOINT
From an investor's perspective, artificial intelligence (Al) represents a new wave of computing technology with major growth dynamics.
Like earlier computing technologies (minicomputers, fault-tolerant
computers, personal computers, graphics workstations), it is likely
to spawn one or more market leaders that will prove rewarding investment vehicles. This will evolve despite the onslaught of new vendors
as Al moves from the research/development phase to a delivery/production phase, and notwithstanding more concerted local competition in
Europe as well as in Japan. In the Al computer/workstation sector,
which is our point of focus in this report, we believe that both
Symbolics, Inc. (SMBX, 13, OTC), and Lisp Machine Inc. (LMI, a private company) are particularly worthy of investor interest, and we
shall continue to monitor both closely.
.
BACKGROUND
fl
One definition of Al, which we borrow from Patrick H. Winston, director of MlT's Artificial Intelligence lab, states: "Al is the study of
ideas which enable computers to do things that make people seem intel
ligent the central goals of Al are to make computers more useful and
to understand the principles which make intelligence possible."
—
All Al applications involve using computational power to solve complex "what if" problems. Instead of number crunching, Al computer
systems tackle concepts, images and ideas--represented by symbols and
lists of attributes heretofore the exclusive domain of the human
intellect. To deal with symbols representative of concepts, the LISP
language (which takes it name from List Processing) was developed at
MIT in 1960, and PROLOG (from Programming Logic) at the University of
Marseilles in France in the early 19705. The early pioneering work at
MIT was performed on relatively large computer systems (the Digital
Equipment PDP-10 and the DECsystems 10 and 20) , then on custom systems with architectures optimized for the LISP language. The technology developed at MIT was licensed to Symbolics, Inc. and to LISP
Machine Inc. (LMI), both founded in 1980, as well as to Texas InstruStanford University, Carnegie-Mellon University and
ments (TXN)
Xerox's Palo Alto Research Center (PARC) also proved to be hotbeds of
Al technology. By riding down the rapidly declining cost curve for
semiconductor and storage devices, Symbolics, LMI, Xerox and TXN soon
could offer Al workstation products that were an order of magnitude
less expensive than the DECsystems that helped develop them.
—
.
f)
Two developments acted as further stimuli to the growth of the Al
market. First was the launch in 1981 of Japan's Fifth Generation
project and the funding (SIOO million over five years) of ICOT
(Institute for New Generation Computer Technology), representing a
serious challenge which the rest of the world took seriously. In the
U.S. a Strategic Computing Initiative (SCI) was formed under the
aegis of the Defense Advanced Research Projects Agency (DARPA), with
a budget of $1 billion over ten years. In addition, a consortium of
7
leading high technology companies, the Microelectronics and Computer
Technology Corp (MCC) in Austin* Texas, was formed, in part to
advance the fields of Al and parallel processing. Similarly, the
European Common Community (ECC) launched ESPRIT with funding of $1.2
billion over five years and emphasis on Al and parallel processing,
while the U.K., with a partial contribution from industry, funded two
additional projects, Alvey and Flagship. All of these were in
addition to private industry developments in Japan, as well as in
Europe where a consortium of three companies (France's Matra
Datasystems, Norway's Norsk Data, and Britain's Racal Electronics)
are joining forces to develop and market Al program products.
—
The second stimulus to Al growth was the emergence of standards
Common LISP, under the prodding of DARPA in the U.S., and PROLOG in
Europe and Japan which helped focus the development work. Judging by
the concerted efforts expensed abroad, it is likely that the Europeans as well as the Japanese will justifiably lay claim to much of
their own markets. However, given the much wider scope and faster
pace of developments in the U.S., this country's historical supremacy
in computer systems markets does not seem to us to be seriously at
risk.
—
MARKET SIZE AND TRENDS
Table 1 presents estimates from a leading market researcher, DM Data
Inc., of the various segments of the Al market. Table 2 presents this
company's estimates of the leading Al computer vendors. Of these,
only Symbolics has verifiable Al revenues (being publicly owned and
dedicated to this business), and its calendar 1985 revenues actually
approximated $90 million. It is the leading vendor of dedicated Al
(LISP) processors accounting for roughly two-thirds of total revenues
of the LISP market. Its hardware and related system software
offerings set Al industry standards, and its customer base is broad
and diverse with a large potential for repeat business. Symbolics is
expected to introduce lower-cost as well as multi-user versions of
its computer offerings this year.
Lisp Machine Inc. (LMI) is the only other pure Al player in this
group. Its strategy is to specialize in selected vertical markets
process control and aerospace to date where it offers integrated
hardware/software environments to allow users to create their own
customized applications.
—
—
Of the other two vendors of dedicated Al computers/workstations,
Xerox and TXN, the latter presents the more formidable challenge
longer term. It is presently developing, under contract to DARPA, a
"LISP-on-a-chip" implementation of its current board-level product,
the Explorer. It is presumed that TXN would use this chip as a
co-processor in its Professional Computer Series, which is compatible
with the IBM PC, thereby attracting new business from potential PC
users heretofore intimidated by the PC. In addition, it is selling
the Explorer series to the Sperry Corporation. However, it seems unlikely to us that the chip product would be marketable until 18-24
months down the line, at which time we expect the SMBX and LMI offerings to have moved sharply down the price curve. Xerox introduced
and started delivery in 1985 of its 1186 and 1185 Al workstations,
which supersede the 1108, with compelling price/performance specifications, which engendered a large order from Apex, Inc., a leading
expert systems company.
L
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L.F. ROTHSCHILD.UNTERBERGJOWBIN
65 WAT STREET NEW YORK' NY 10041
IPJ
1»TEL7(212)~~412-1000'
CABLE: PROBATICA
Of the other vendors with generic products and LISP compiler capability, the most notable in our view are Apollo, Sun Microsystems, and
Hewlett-Packard, the first two by reason of the high resolution graphics they offer which they have in common with the offerings of the
Sun more aggressively so with their generAl vendors. Both compete
plus
Common LISP compilers implemented by
workstations,
graphics
ic
Lucid, Inc. Incidentally, Lucid also offers cross-compilers between
Apollo and Sun on the one hand and SMBX on the other. HewlettPackard, on the other hand, has made it clear that it covets the Al
market and will introduce products, possibly RISC architecturebased, in the not-too-distant future.
Frederic H. Cohen (212) 412-1565
—
—
—
Table 1
THE U.S. ARTIFICIAL INTELLIGENCE MARKET
(dollars in mil:lions)
Market Area
1981
1982
28
3
5
4
$ 56
5
8
9
Visual Recognition
Voice Recognition
10
22
Total*
55
U.S. Government
Contracts
20
Al Computers
Al Languages
Natural Language
Expert Systems
5
$
7
$ 30
1983
1984
103
217
8
18
17
51
12
116
_11
_20
$
208
$
40
1985
$
38
443
50
*Including U.S. Government contracts
Source: EM Data
-9-
$
21
59
74
40
$
364
1986
1987
510
$ 710
125
145
210
245
45
35
$
1988
1989
1990
970
65
320
385
500
140
$1250
80
$1570
465
s^o
168
33
260
55
370
$ 719
$ 1 130
$1665
$2380
$3225
$
$ 155
175
$
95
$
150
85
150
660
200
105
650
810
840
270
$ 200
Table 2
LEADING U.S. Al COMPUTER VENDORS
(dollars in millions)
Company
$
Apollo Computer
Convex
Data General
Digital Equipment
Flexible Computer
HP
IBM
LISP Machine Inc.
1
$
4
5
10
20
10
20
30
2
2
3
PERQ
Prime
Sun Computer
Symbolics Inc.
Technology Industries
Texas Instruments
5
$
7
$ 16
1
40
1
1
50
15
4
7
1
42
3
5
55
4
4
65
30
6
13
5
80
1
7
5
Tektronix
Xerox
Others
Total
Source: DM Data
i
7
3
10
5
20
30
8
40
15
50
$ 28
$ 56
$103
$217
$364
~N
LF, ROTHSCHILP,UNTERBERG,TOWB.N
tm 55 WATER STREET, NEW YORK, NY 10041
S&s TEL: (212) 412-1000 CABLE: PROBATICA
ARTIFICIAL INTELLIGENCE: DARPA AND THE MILITARY
OVERVIEW
The Defense Advanced Research Project Agency (DARPA) has been the
driving force behind Artificial Intelligence over the last 10-15
years, both encouraging basic research and providing the necessary
funds. Until the Strategic Computing Program was implemented in 1983
to develop advanced machine intelligence, most of the work occurred
at universities and small research-oriented companies. The funding
for Artificial Intelligence has now reached about $200 million a
year, with most of the large military contractors scrambling to obtain contracts and build their expertise in this area.
In general the larger companies are not considered Al-sophisticated
—
although some such as Martin Marietta, Honeywell, General Electric,
Texas Instruments, FMC and Harris are making good progress. Numerous
others have contracts but are not necessarily breaking hew ground.
They are benefitting from the current wave of interest and the availability of funds, scrambling to gain expertise. This is typical of
new technologies that DARPA has funded. Small companies and research
labs develop innovative solutions to small pieces of the technology
and, over time, the mainstream companies contribute their vast expertise in integrating these pieces into a functional military system
not an easy or insignificant task (the space shuttle program is probably an excellent example)
—
—
.
To date, commercial applications of Artifical Intelligence have been
in expert systems, which is really only a narrow portion of Al technology. In its truest form Al encompasses the disciplines of vision
and speech recognition and understanding, the ability to communicate
in natural language with a computer, expert systems, new computer
architectures to support Al software and the development of new
software to allow the efficient use of these architectures and option
generation.
RRENT APPLICATIO
There are numerous contracts that have been awarded to develop expert
systems, the only area of Al that is currently being applied both for
military and commercial use. It has been difficult to identify operat
ing military systems because most of the applications are classified.
Also, because of the very long lead times needed to implement military systems (10-20 years) current applications will be considered
as those systems that have moved from the development stage to the
,
—
{
hands of the ultimate user the military services--for evaluation.
Time is also the reason that, while the military has driven this tech
nology, at this juncture there appear to be more commercial than mill
tary applications of expert systems.
11
Most of the systems we have identified are classified and thus their
specifics are difficult to obtain. Generally these systems are
"taught" to recognize certain patterns using heuristic rules. Changes
in these patterns will cause the system to go on alert. This could
have a broad range of applications from inventory control to intelligence, reconnaissance and surveillance purposes. For example, the
deployment of Warsaw Pact military forces in East Germany assumes
certain regular patterns, and any changes in the movement of troops
could indicate that an invasion of West Germany was imminent.
J
\
A system in operation and used by the Army is the AALPS expert system
developed by SRI. Prior to moving military equipment by Air Force
transport planes, the Army must supply load plans. The AALPS system
is an automated aircraft loading system designed to help load military transport planes efficiently. A DEC-2060 computer is used and
may be accessed through the ARPNET network. The system is being
upgraded and rewritten in PROLOG to run on a Unix-based Sun workstation to allow portability. This system can supply plans for 500
aircraft in ten minutes. We believe that the AALPS system helped
develop plans to load cargo planes that moved equipment used in the
Grenada invasion.
RRENT
TURE
,T
DARPA is funding three programs that
will apply and test the viability of the basic research being done on Al. The objectives of these
contracts are to identify which technologies need further development, assess the feasibility of these technologies for certain applications, and determine how to implement them in an operational
environment.
"*%
The aim of the Autonomous Land Vehicle program, under contract to
Martin Marietta, is to develop an expert system for navigation and a
vision system which must operate in real time. The goal is not to develop an operational system as yet, but to test and achieve general
performance goals. If successful these concepts could then be applied
to autonomous systems that are able to sense and interpret their environment; able to plan, reason and initiate action; and capable of
being used for reconnaissance (unmanned aircraft, land or underwater
vehicles) logistics, supply and ammunition handling and weapons delivery (cruise missiles)
,
.
The first demonstration of this vehicle occurred in November of last
year with the system operating at 10 kilometers per hour. In May 1986
a second test will be performed with the goal of doubling the speed
of the vehicle and improving the vision system's ability to avoid obstacles. Ultimately a cross-country test is planned, aimed at increas
ing the vision system's ability to deal with scene complexity. The
issues here are vision and the speed at which the system can absorb
information to enable it to operate in a real-time environment, apparently the most difficult issue to solve. The algorithms that have
been developed seem to be functional (although new ones must be developed for the cross-country test) but take too much time. The hope
is that new hardware will solve the problem.
FMC and General Dynamics have contracts (not through DARPA s Strategic Computing Initiative) for the Advanced Ground Vehicle Technology
(AGVT) which is being developed to meet Army requirements. This is an
1
12
*~)
L.F. ROTHSCHILD,UNTERBERG,TOWBIN
iPJ
Wi&
55 WATER STREET, NEW YORK, NY 10041
TEL (212) 412 1000 CABLE: PROBATICA
effort to gain a better understanding of which technologies are needed to fulfill Army missions and how these technologies could be trans
f erred to an operational environment. This vehicle would have to be
able to tranverse uneven terrain, so motion (walking) is an issue,
and must operate autonomously rather than through remote control (as
it does now)
.
The PjjQt's Associate program will work at the ability to communicate
at high speeds. There were seven bidders on this contract and the award should be made during the second week in February. In simplistic
terms, the program will develop speech recognition abilities and high
speed expert systems, and then solve synchronization problems between
the two.
The cockpit of an aircraft is becoming an increasingly complex environment, with so much information being generated involving life or
death decisions that at some point the pilot will be unable to cope.
In addition, necessary reaction times will be so compressed that
pushing a button may take too much time. This has generated interest
in an Al system that could perform a set of routine tasks and so free
the pilot to perform more critical tasks. Taking this a step further,
Al could permit the pilot to communicate verbally with an electronic
warfare or weapon delivery system.
/#".
Speech recognition could prove to be impossible for this particular
application because of the high level of ambient noise in the cockpit
and the existing gravitational forces that change the character of
voice. New architectures and high speed expert systems will be critical as will be the bus structures needed to connect everything.
The third major program is a Battle Management System for the Navy
with Texas Instruments as the prime contractor. The complexities involved in evaluating options that include an insurmountable amount of
data and making decisions in an uncertain and dynamic environment
make the efficient use of resources (the Navy's fleet) an enormous
and difficult task. This management system for a carrier battle group
would display a detailed picture of the battle area, including the
enemy's status, the friendly forces available, the electronic warfare
environment, strike plan, weather forecast and other necessary data.
Drawing on previous experience along with knowledge of the current
environment, the system could generate potential courses of action,
explain the likely outcome, evaluate the attractiveness of each
option and then prepare and disseminate the plan.
<"d**>
To realize these capabilities, expert systems must be developed along
with a natural language interface between man and machine so that the
questions could be posed in ordinary English. The speed of the software and hardware could be a crucial issue. Included in this program
is "Rapid Prototyping". The battle management tool is so new that
specific needs can't be defined and requirements are difficult to
write. The system is being developed initially with what the Navy
thinks it wants. Later it will actually be put in the field and built
and modified in conjunction with the user. The first demonstration of
this system is planned for March.
Maeda Klein (212) 412-1513
ARTIFICIAL INTELLIGENCE:
ON THE BRINK OF A CRITICAL TRANSFORMATION
.">
Artificial Intelligence is a branch of computer science which attempts to create computer systems that organize and manipulate information in ways that approximate human reasoning. This is accomplished
through a new approach, symbolic computing, which, unlike traditional
numeric schemes, utilizes both hardware and software to process symbols or words that are used to represent objects and relationships
between objects. Artificial Intelligence technologies have been under
development for over 20 years in the labs of leading universities
including
Carnegie Mellon, and MIT as well as government
agencies. These development efforts, in conjunction with substantial
improvements in hardware price/performance, are on the verge of creat
ing new markets as Al technologies emerge from the lab to be incorporated in real-time commercial applications. The projected 43% average
annual growth in this nascent market over the next five years will
create significant investment opportunities.
—
—
THE TECHNOLOGY TRANSFER
Major corporations that have been experimenting with artificial intelligence technology during the past three years are now preparing
to launch operational applications. Typically a company forms an
in-house Al development group which spends four to six months gaining
an understanding of Al technologies and identifying specific applications suited to incorporation of these technologies. This group then
spends 12-36 months, or 5-20 man years, at a cost of $l-$3 million
developing applications. Following this period the corporation will
begin implementing the application in field operations. This process
represents a substantial commitment to development as well as a significant investment in hardware and software required to distribute
the application to a broad base of users.
In 1985, over 150 companies spent over $1 billion on in-house Al
and sales of artificial intelligence hardware
and software products generated revenues of over $700 million. An
expected 43% average annual growth should result in a
billion
market by 1990. The software sector is expected to grow even faster
at a 60% average annual rate over the next five years to represent a
$1.5 billion market in 1990, up from a mere $150 million in 1985. Opportunities exist for 1) hardware vendors offering lower-priced and
higher performance symbolic computing hardware as well as the ability
to perform Al applications on general purpose computers; 2) for software vendors to provide development tools, training and consulting to
reduce the cost and effort required to develop applications, followed
ultimately by commercial applications; and 3) for value added resellers to package turnkey hardware and software systems for those compan
ies lacking internal development efforts. Given relatively long and
costly development cycles, the limited numbers of engineers with Al
expertise, and the degree of commitment users must make to implement
Al-based applications, growth in the industry should be steady as
well as substantial.
-N
development
—
14
—
~\
LF. ROTHSCHILD, UNTERBERGJOWBIN
■ ft! 55 WATER STREET, NEW YORK, NY 10041
IB TEL: (212) 412-1000
CABLE: PROBATICA
SOFTWARE OPPORTUNITIES IN VARIOUS SEGMENTS
Software incorporating artificial intelligence technology can be
grouped in several categories including object-oriented programming
languages, application development tools, and expert system applications.
Object-Oriented Programming Languages - While languages such as
"Forth,
Fortran, and PROLOG can be used to develop Al applications,
LISP (List Processing) is rapidly becoming an industry standard,
aided by the acceptance of the Common LISP dialect, developed by
Lucid Corporation, which facilitates the interface between special
purpose symbolic computers (such as those offered by Symbolics and
Lisp Machines Inc.) and conventional computers.
-
Application Development Tools
This represents the largest artiintelligence software segment at present. Included in this
segment are knowledge-based systems or expert system shells, which
are integrated packages of Al software tools that provide a programming environment to facilitate development of an expert system for
commercial applications. Knowledge-based systems are essentially
expert systems stripped of knowledge components, leaving a shell of
the linguistic and reasoning mechanisms that make inferences from the
knowledge. These systems aid developer productivity as engineers apply specific knowledge to the inherent reasoning mechanisms without
having to recreate the underlying rules. Knowledge systems provide an
interface between the specific application or expert system and the
hardware or LISP language in much the same way as MS-DOS or UNIX interface with end-user applications and hardware technology. Intellicorp supports the largest installed base of knowledge systems, with
over 500 installations of the KEE (Knowledge Engineering Environment)
System. Other systems include ART, developed by Inference Corp., that
supports 200 installations, Knowledge Craft from Carnegie Group which
has been introduced but not yet shipped, and S.l and M.l from Teknowledge.
"ficial
-
Expert System Applications
Symbolic programming languages will be
used to develop knowledge systems and natural languages which in turn
"
<
will be used to reach the ultimate goal of generating expert system
applications for the end user. Expert systems draw conclusions from
the programmed knowledge of industry specialists, solving problems
previously requiring human intelligence. Expert systems do not obviate the need for specialists but provide the opportunity for a broader range of users to take advantage of expert knowledge, thus freeing
the time of the specialists to generate greater expertise. These systems also serve to preserve knowledge as well as facilitate training.
FROM HYPE TO REAL-TIME APPLICATIONS
case for new technologies, high expectations outdistanced the delivery of Al applications in the late 1970s and early
'80s. The hype is now being replaced by the delivery of real-time
expert systems that contribute significantly to productivity or offer
opportunities for totally new applications. While the military
As is often the
.«sapWMilffl«iWlMlM
">
continues to finance and direct a considerable portion of Al research
efforts for the Star Wars and NASA programs, applications are proliferating in manufacturing, business information retrieval, finance
decision support, publishing, equipment servicing, integrated circuit
design and mineral exploration.
■4
For instance, Northwest Orient Airlines recently developed an expert
system using Intellicorp' s KEE system to optimize revenues by employing the appropriate fare mix on commercial flights. Palladian Software was the first company to introduce, in August, a commercial expert system, The Financial Advisor, that can be used in decision
making and financial planning. On January 21, IBM introduced the RT
Personal Computer, which should further stimulate the market for artificial intelligence products. The price and performance of the RT/PC
represents a substantial leap forward in delivering Al applications
to a broad range of users. Intellicorp and Teknowledge have announced
intentions to offer their development tools for the RT/PC. IBM's endorsement, as well as stepped up competition between IBM, LISP computer vendors and conventional computing systems, should result in
greater end-user demand and contribute to development of commercial
applications.
"*"%
INVESTMENT IMPLICATIONS
The growth opportunities resulting from the transfer of Al technology
to commercial applications should provide attractive returns for investors. Currently only two Al companies are traded publicly, Intellicorp, a leading Al software developer, and Symbolics, the largest supplier of LISP computers. The industry's profit potential, coupled with
the limited number of investment vehicles, has resulted in substantially above average valuations for these issues. Trading at 21.4
times calendar 1986 estimates of $0.70 per share, Intellicorp' s market
value is currently 3.5 times revenues while Symbolics, trading at
12 7/8, carries a P/E of 25.8 times calendar 1986 estimates of $0.50
per share and a market value of 2.1 times revenues. As other vendors
generate profits from past investments in Al research, we would expect
additional opportunities to invest in public companies. Further momentum will be created with the emergence of LISP computers priced under
$10,000, personal computer delivery systems, opportunities created for
implementing Al technology on conventional Intel 80386 and Motorola
68000-based architectures, and the introduction of lower-priced expert
systems software. In addition to emerging companies, software vendors
including Lotus, Cullinet, Microsoft, Ashton-Tate and Software Publish
ing are likely to begin incorporating Al technologies into applications. New microsoftware companies including Symantec and Ansa Software have recently launched products called Q&A and Paradox, respectively, that take advantage of Al technology.
Michele S. Preston/Catherine C. Norton
(212)
412-1584/1516
~)