Personal Computers Have Again Become Red-Hot Item
Last month, after about a year of shopping around, Bear, Stearns stockbroker John Gulish bought himself a personal computer to analyze stock and commodities markets.
“It is like the Model T Ford,” Gulish says. “When prices fall to an affordable level, people buy.”
Do they ever. Within weeks of Gulish’s purchase, colleagues found his IBM PC-AT clone so useful--and priced so reasonably--that “five or six guys in my office ordered their own systems.”
After stumbling through two years of disappointing growth, the personal computer industry is roaring back. Riding a wave of new technology and sharply lower prices, everyone from industry giant IBM to the humblest garage-shop assembler of clones is enjoying the bounty. Industry suppliers also are rebounding; after two years in the doldrums, semiconductor makers are showing new signs of life.
The 45,000 PC retailers and exhibitors gathering for the spring Comdex trade show in Atlanta this week are as ebullient as they have been in years.
So many exhibitors are planning new product announcements that Comdex can’t accommodate them all; a Comdex spokesman says that two dozen exhibitors are on a waiting list to hold press conferences.
“The market is very strong,” says Joseph Boudemas, president of Bay Area Computers, a San Francisco discounter that sells a fully equipped IBM PC-XT clone for $575. “With these prices, everybody who needs a computer is buying.”
The key word is “need.” Unlike previous PC-buying binges, the current upturn seems solidly rooted in buyers’ needs--and thus, barring a recession, seems more sustainable. Buyers are more knowledgeable than in the past and are purchasing machines with specific applications in mind.
Boudemas has sold so many PCs this year that he has been to London, Hawaii and Tahiti on incentive junkets paid for by product manufacturers.
High-end retailers, who emphasize service over price, also are prospering. Says Enzo Torresi, senior vice president of Businessland: “We are now expecting growth of 30% this year--about double the most optimistic forecast at the beginning of the year.” Businessland’s average sale is $7,000.
While the industry’s fortunes began improving with the upturn in the nation’s economy in the first quarter, the real buying frenzy did not erupt until International Business Machine’s long-rumored new products were announced on April 2.
IBM unveiled four new models that, contrary to earlier fears, are able to run software written for IBM’s first generation of machines--the PC, the XT and the AT. At the same time, the industry giant embraced a new operating system that will enable the new machines to run programs too powerful for previous models to handle.
Not that there was universal acclaim for the new computers. IBM’s new entry-level model 30 has been derided by some as “Personal System Jr.” because of its limited capabilities.
Two of the other PS/2 models use Intel’s 80286 microprocessor, which also serves as the “brain” of IBM’s old AT line. The top-of-the-line model 80 is built around Intel’s blindingly fast 80386 chip and should help IBM recapture sales from Compaq, a pioneer and dominant force in the “386” market.
“The announcement was a watershed,” says Scott Oakey, vice president for sales of Microsoft Corp., the largest publisher of PC software. “It cleared the air. It reinforced the fact that people could go ahead and buy either the new or the older generations without fear, uncertainty and doubt about the future.”
Even archrival Apple Computer benefited from IBM’s announcement. Apple’s Macintosh computers already feature the ease of use and better graphics that IBM has promised when its new operating system known as OS/2 is ready later this year.
“IBM’s announcement provides further validation for what has already been validated in the marketplace,” says Charles Berger, Apple’s vice president for marketing. “It is good news for the Mac. But down the line, it means that IBM will be a more formidable competitor.”
“People are beginning to realize how beneficial it is to have an operating system that is graphically oriented,” says Jack W. Browne, marketing manager for Motorola’s 68000 family of microprocessors.
“You don’t have to learn and remember a lot of cryptic commands.”
The Apple Macintosh II, introduced earlier this year, appears to be one of the hottest models around.
Huge Order Backlog
“We have a tremendous order backlog and will likely remain backlogged until September--if not the end of the year,” Berger says.
The new Mac features a color screen and the ability to run IBM-compatible software. Another new Macintosh model, the SE, is selling strongly. Apple’s stock is hitting new highs, and the company recently declared its first cash dividend.
Retailers say IBM’s new model 60 is also in short supply, as are the old IBM AT and certain high-end Compaq and Tandy models.
“We cannot get parts fast enough to meet the unexpected demand,” says Michael Swaveley, Compaq’s vice president for marketing. Particularly hot are Compaq’s new 80386 desktop and a portable model based on the 80286 chip.
IBM’s new product line seems certain to give new life to the company’s once-dominant PC business, whose profitability and market share have been eroded by an onslaught of lower-priced clones.
Although clone makers vow to match IBM’s new machines, they face major hurdles. While IBM’s first generation was built with standard off-the-shelf parts, the new computers feature many chips that are custom-built by IBM. IBM’s advanced manufacturing techniques also make it one of the industry’s lowest-cost producers, leaving plenty of room for price cuts.
Underlying the resurgent demand for PCs are dramatically lower prices and sharply improved performance. IBM figures that its new model 80, with a list price of $10,995, offers the computing power of a mainframe computer that just 12 years ago would have cost $3.4 million.
Prices are also way down at the low end. The $500 and $600 IBM XT clones, which include the Hyundai-built Blue Chip brand available at such mass marketers as Toys R Us, pack the power of a machine that would have cost $3,000 three years ago.
But these are no toys. They are fully equipped business computers that are finding their way into homes, small companies and social service agencies that were not able to afford PCs just a few years ago.
Michael Pfeffer just bought 25 IBM PC-XT compatibles, with built-in hard disks, for less than $1,000 apiece for the San Francisco Legal Services Foundation. Lawyers there use the machines for word processing.
“For legal aid programs, which are habitually strapped for money, it wasn’t until very recently the widespread use of PCs became possible,” he says. “At these prices, we can start to compete with the private bar.”
Besides price, much of the demand for PCs stems from new applications that the more powerful machines are able to perform. Apple’s Macintosh line, for example, has gotten a big boost from desktop publishing.
IBM expects its new machines’ high-resolution screens, featuring hundreds of colors and gray shading capabilities, will open new markets in medical imaging and engineering graphics.
And Compaq’s powerful portables are being used increasingly as sales tools. For example, Paccar Corp., which makes Peterbilt trucks, just bought 75 Compaq portable PCs, which allow its salesmen to instantly price custom-built big rigs based on the options a buyer selects.
“Between different cabs, engines, transmissions and so forth, our buyers literally have thousands of options,” explains Alan Bennett, who is managing the automation project for Paccar. The program is so complex that it would not have worked on earlier-generation PCs.
“This system lets them pick and choose and determines whether certain components are compatible with others,” Bennett says. “It allows the buyer to enter trade-in data, computes the sales tax and presents financing options.”
The computers have proven to be such valuable sales tools that Paccar expects that all of its 1,000 truck sales force will soon order the machines.
Another big buyer is Sherry Burger, manager of office information systems at Blue Cross/Blue Shield of Illinois, who has doubled her PC purchases this year. “A lot of the jobs we did on the mainframes and minis are now feasible on the new high-end PCs,” she says.
Older PCs also are put to good use. “We use them for training, lend them out to workers for use at home and link them into networks,” she says.
Cannibalize Old Machines
The old machines also are torn apart for spare parts. “Because so many parts are standard, we can cannibalize the old machines and use the parts in our new ones” Burger says.
The current boom in PCs extends to peripheral equipment such as printers and disk drives, and for the same reasons: price and performance.
Hewlett-Packard has sold nearly 100,000 LaserJet printers since March, when it introduced a new model whose list price is $2,495 but can be bought at a discount for $1700. It took H-P three years to sell 300,000 units of the old model, which listed for $3,995.
Many disk drive makers are also strong. Seagate Technologies posted sales of $267 million in the quarter ended March 31, up from $127 million a year earlier.
“As the cost of computing goes down, people cannot afford not to have PCs,” says Alan Shugart, Seagate’s chairman.
But despite the ebullience, industry officials say they were chastened by the slump of 1985 and 1986, and are tempering their expectations. Back then, companies accustomed to 70% and 80% growth were shaken badly when sales increases fell to 5% or 10% a year.
Businesses that rushed to order PCs during the boom years slowed down or stopped buying as they tried to figure out what to do with all their machines.
Just as PC buyers have matured, “we are much more mature as an industry,” says William Krause, president of 3Com, which makes equipment that hooks PCs into networks.
“We have learned that lower prices stimulate demand, and that growth occurs as a result of a steady stream of innovative products.”
