Major Players Are Moving Into PC Add-On Market
Dr. Martin Alpert’s claim to computer fame begins, modestly enough, in Cleveland in October, 1981. That month, Alpert raced to a Sears store in Chicago and became one of the world’s first retail buyers of IBM’s spanking new Personal Computer.
Upon returning from Chicago, the former physician unbolted his new plastic box and dissected its innards, as much to determine what the computer didn’t have as what it did.
Five weeks and six days later, Alpert startled an unsuspecting computer industry with the introduction of 20 products, including plug-in memory expansion and clock/calendar boards, to increase the power and abilities of IBM’s desk-top computer. Until that move by Alpert’s Tecmar Inc.--and, indeed, until the introduction of the IBM PC--the personal computer enhancement market consisted of a few dozen one-product companies sharing an Apple Computer accessories market that, at best, totaled a couple of million dollars.
Almost five years later Tecmar, which still makes memory expansion boards and other products for the IBM PC, is one of the top three U.S. board-makers and a major participant in the personal computer enhancement market, an industry that the Dallas-based research firm of Future Computing Inc. estimates is nearing the $15-billion mark. Future Computing projects the industry’s sales will jump to $26.5 billion by 1990, a 75% increase that far exceeds the rate of increase expected for sales of personal computers themselves.
One reason for such projections are analysts’ estimates that owners of the 6 million to 7 million IBM PCs and their clones spend at least another $1,100 to $1,600 each to upgrade their computers in the two years following the initial purchase.
Furthermore, other analysts estimate that PC purchasers typically spend at least $500, and often more, for enhancements at the time that they buy their machines. The most common purchases--either at the time of purchase or shortly thereafter--include printers, modems to allow telephone data transmission, multifunction boards, color and graphic display boards and memory expansion items--a wide-ranging field that includes hard disks, floppy disk drives and memory boards.
As a result of PC owners’ purchasing habits, the enhancement industry is becoming increasingly attractive to established electronics manufacturers, many of whom are looking for promising markets to augment their slowing computer sales.
Within the last 18 months, companies no less formidable than Intel, the firm founded by the inventor of the microprocessor, and IBM have introduced enhancement products for sale at retail stores.
“The enhancement market is huge, and it’s always going to be there and growing. We wanted to be a part of it,” says James Johnson, general manager of Intel’s personal computer enhancement operations, a division established solely to develop retail products.
“Manufacturers are feeling insecure,” observes David Wagman, co-chairman of Softsel in Inglewood, the nation’s largest distributor of personal computer accessories and enhancements. “If they’re selling to some other manufacturer, they don’t have their name on any products and they haven’t created any brand loyalty with the users.”
Analysts predict that the move by such giants into the young and still highly fragmented industry will bring major changes, including a weeding out of small, one-product companies, an intense price competition and an increasing adherence to industrywide technology standards established primarily by the larger competitors.
Yet, the market is still attractive to the smaller players.
Perhaps buoyed by the nearby success of industry leader, AST Research Inc. of Irvine, no fewer than three Orange County electronics manufacturers moved into the retail enhancement market within the last two years.
Late last year, both Western Digital Corp. and Alpha Microsystems Inc. introduced products to boost the performance of the IBM PC. Two years ago, Emulex Corp. purchased a small IBM enhancement maker that now accounts for about 25% of its $100 million-plus annual sales.
“This is such a huge market that the winners won’t be known for years,” said Roger Johnson, Western Digital chairman and president.
Wide Range of Products
Like the auto accessories market, the PC enhancement industry covers a wide array of products, ranging from the absolutely essential to the almost frivolous.
Some products, such as video terminals, complete the basic computer system. Others, such as printers, make the computer more useful.
Still other products, such as disk drives and graphics and multifunction boards, “turbo-charge” the computer’s basic abilities, allowing it to process more information faster and with fancy illustrations.
Finally, there are the retrofit products, the items that make old-model computers work as well as their new, state-of-the-art counterparts.
“The way I see it,” says Western Digital’s Johnson, “our core business is still providing leading-edge (data storage) products for our (computer making) customers. But every time we do that, by definition, there’s an installed base of customers that don’t have this nifty new product. That’s the group we go after with the retail product.”
No one, however, is claiming that it’s going to be easy.
Jon Gruber, a securities analyst with Montgomery Securities in San Francisco, claims that retailers are largely uninterested in new products unless they come from a company with an established name or customers are clamoring for them.
“Retailers are reducing the number of products they carry and want to deal with fewer, not more, manufacturers,” adds Safi Qureshey, president of Irvine-based AST Research Inc., the 5-year-old company that dominates the retail enhancement market for the IBM line of personal computers. “Most stores, and especially the major chains, are limiting themselves to the best sellers and the big-name vendors.”
Winners in Market
According to Softsel, the best sellers include AST’s SixPak Plus multifunction board, the Hayes SmartModem, the Hercules graphics card, printers from Epson and Okidata and a variety of so-called turbo boards that allow the IBM PC to operate as quickly as its newer and more expensive sibling, the AT.
Other emerging winners include several products that incorporate a hard disk on a board that slides into the back of the computer.
The competition is already so stiff, analysts argue, that even a great-performing new product will find it difficult to become a big seller at the neighborhood computer store.
Furthermore, Richard Bloss, a project manager with the marketing research firm of Frost & Sullivan, says retailing requires companies to service small orders, to have ready inventory, to track their deliveries and to handle a wide range of customers.
“Most manufacturing companies don’t understand (that) retailing is just a whole different business from making products and shipping them to users or distributors,” Bloss says. “Having a great product alone is just not enough to make it in retail.”
Richard Cortese, Alpha Microsystem’s chief executive, has already learned that lesson.
Late last year, Alpha Micro introduced a system that allows IBM PC users to store their computer files on a high-speed, high-capacity videotape system rather than on more cumbersome floppy disks and data tapes.
Initially, Cortese thought that he could persuade Micro D Inc., a nearby personal computer products distributor in Santa Ana, to carry his new item, Videotrax.
But, as he discovered, distributors aren’t interested in a product until a retailer wants it. And, no matter how interesting a product may seem, Cortese later found out, a retailer won’t call for it unless customers are begging for it.
Launched Ad Campaign
So, after initially hoping to circumvent a costly introduction phase, Alpha Microsystems is in the midst of a $1.2-million advertising campaign to create what the marketing world knows as “customer pull” for Videotrax.
“It’s easier to convince a distributor to carry your product when you can tell them how much a customer has liked it, not just how much they are going to like it,” Cortese says. “Most experts tell us it’s slow and that we just have to keep hanging in there.” Sales so far, he reports, have exceeded $200,000.
Emulex of Costa Mesa took a different route to the retail counter. In 1984, the company, then just a maker of products sold to manufacturers of entire systems, bought Persyst Inc., an established Irvine manufacturer of boards that improved the data communication, graphics and memory powers of the personal computer.
James Orris, now manager of the Persyst division, says Emulex decided that it was easier to buy a company that had an established product line and distribution channels rather than start one from scratch.
“The chains are interested in dealing with an established name or a brand name recognized by the customer,” Orris says. “And that’s not easy to do if you start out on your own.”
Intel’s personal computer enhancement operation has cleared the start-up hurdle. Eighteen months ago, the division--which operates in Oregon, more than 700 miles away from the company’s chip-manufacturing headquarters near San Jose--introduced the first of what is now a six-product retail lineup.
Within six months, reports division general manager Johnson, the Intel products, which include chips to improve the personal computer’s mathematical abilities and boards to expand the PC’s memory capacity, were carried by every one of the country’s top 20 retail chains.
Name Made Difference
“The Intel name made a huge difference,” Johnson admits. “Retailers are looking for stability, and we have it.”
Despite a growing product line, Johnson says Intel is more interested in establishing technology and production standards that will dominate the whole industry and set the tone for future products from all suppliers.
In the process, Johnson and others expect the small, one-product companies to fall by the wayside.
“Intel as an entire corporation spends $250 million a year on research and development,” Johnson says. “Few companies can keep up with that.”
Still, the smaller newcomers remain undaunted.
“If you’ve got a good product, you can succeed,” Western Digital’s Johnson says. “The world is made up of greed and avarice. And, if your product is good, people will want to sell it and other people will want to buy it.”
