Many Say the Home-Computer Boom Has Gone Bust : Commodore Woes Make an Industry Wince

Six short months ago, the most pressing question before home-computer king Commodore International Ltd. was whether the company could crank out disk drives, keyboards and microprocessors fast enough to meet upcoming Christmas demand for its hot-selling Commodore 64.

This week the world learned the answer. As evidenced in a bloated $400-million inventory, the company far overshot demand, analysts say, in a miscalculation that helped reduce its earnings for the most recent quarter by 94%, to $3.2 million. The firm’s sales for the quarter ended last Dec. 31 fell 21%, to $338.7 million, from the comparable quarter of 1983.

The announcement surprised most financial analysts, even those who were expecting a quarter of declining earnings. And it provoked comments that the boom years of the home-computer business--a boom that some predicted would last indefinitely--are over.

Some industry observers believe that it is now an open question whether the industry will be able to come up with new software or hardware that will enable it to reignite its fast growth. They say the industry has now sold computers to most consumers who wanted a machine simply for the novelty; the largest remaining market is among an affluent but smaller group that uses personal computers at work and wants a second computer at home, these analysts say.

The earlier forecasts of continued explosive growth “were a beautiful, beautiful daydream,” said Abbi Lawrance, an analyst with InfoCorp, a market research firm in Cupertino, Calif. “The home computer’s going to have to do a lot more before a lot of people will buy one.”

Market research organizations have not yet completed their analysis of industry sales during the fourth quarter, when home-computer makers have traditionally posted one-third to one-half of annual sales. But many are calling it a disappointment, though the more expensive home computers sold by manufacturers Apple Computer Inc. and International Business Machines Corp. have reportedly sold briskly.

For example, Douglas A. Cayne, an analyst with Gartner Group Inc. in Stamford, Conn., predicts that the number of units sold during the fourth quarter of 1984 will have dropped by about half from the previous year. Because most sales during the season were of higher-priced, higher-capability Apple and IBM machines, the dollar value of all units sold will have fallen by about 25%, he predicted.

Officials of the home-computer industry have long said they intended to find new applications for the machines to make them useful around the home and to spark a real increase in sales. Cayne said that, despite those pledges, “there’s been zero breakthrough in their utility over the last two years.”

“If they’re going to sell, they’ve got to be as useful as the telephone, or the microwave, or the videocassette recorder,” agreed InfoCorp’s Lawrance.

In fact, some analysts believe that sales of computers were hurt last Christmas season in part by the explosion in sales of VCRs. Dealers sold an estimated 7.3 million of the recorders, a 78% increase from the 4.1 million sold in 1983, according to the Electronics Industries Assn.

Earlier last year, InfoCorp estimated that home-computer sales would drop to 2.3 million units in 1984 from 2.6 million in the previous year.

Industry officials are now pinning their hopes for a renewed boom on a generation of new home computers with more processing power, better graphics and other features that are due out in the next few months.

Commodore’s long-awaited new offering is a computer called the Amiga that Cayne says will cost between $800 and $1,000 and will offer advanced color graphics and the ability to synthesize both “male” and “female” voices. He said its computing power will “easily match” Apple’s Macintosh or IBM’s PCjr.

Analysts say the Amiga, to be made by Commodore’s Amiga Corp. subsidiary, may be out by April. The manufacturer is also expected to release in the first half of the year a home computer called the Commodore 128 that offers more than 128,000 characters of storage, as well as a lap-size model.

Also due out is a Macintosh-like computer that Atari Inc., run by Commodore founder Jack Tramiel, demonstrated three weeks ago at the Consumer Electronics Show in Las Vegas. The computer, called the ST, will also cost less than $1,000 with a disk drive and color monitor.

Commodore’s lower earnings marked the company’s first earnings decline since 1978, and analysts said weak earnings might continue as the company moves into the costly and risky business of moving to a new product line. The quarterly results included a $30-million pretax charge that was related to a “certain product-pricing action.”

Analysts said Commodore intends to drop the price of the model 64 to about $150 from about $200; the $30-million charge provides a reserve to pay retailers who have already purchased the computer at the higher price. But some analysts say Commodore may have to drop the price again to move its more than $400 million in inventory, most of which is the model 64, the biggest selling of all computers with more than 3 million sold.

Commodore’s sales suffered not only because of fading interest in lower-priced computers but also because competitors cut their prices as well. Such cuts were made during the Christmas quarter by Coleco Industries Inc. to move inventory of the now discontinued Adam, and by Atari and IBM.

Cayne noted, for example, that consumers could find IBM PCjr home computers discounted to $775 for a system that included a processor-console, a monitor and a disk drive.

Also cited by Commodore was the effect of the strong dollar. The company said revenue would have been $35 million higher had the dollar remained at its year-earlier level.

For the fiscal year ended last June 30, Commodore reported net income of $144 million on revenue of $1.3 billion. Last year, analysts estimated that its market share was as high as 60%, although that might be reduced when final sales are tallied for the Christmas quarter.