Finding the Silver Lining in Computer Price Wars
The price war and shakeout now raging in the personal computer industry must seem incomprehensible and even destructive. Computer prices are falling hundreds of dollars at a clip, profits of computer makers are declining and high-tech companies are changing managers like struggling baseball teams.
Compaq Computer fired its president and co-founder last October; the co-chairman and co-founder of Irvine-based AST Research stepped aside on Monday in a management shake-up brought about by the strain of competition.
What is really happening amid the chaos is that the personal computer is breaking through to become a true mass market product--perhaps the most significant product in decades.
This year will probably see as many personal computers sold--10.4 million--as videocassette recorders; annual PC sales now total more than half those of color televisions.
And just as in consumer electronics, price competition in computers has grown fierce. Compaq used to specialize in sophisticated machines selling for $3,000 apiece, but its newest products go for $899. Industry leader IBM is watching its PC revenue decline from $9.6 billion to $8.5 billion.
The business, in short, looks incredibly messy. And that raises a question: Can this scramble to sell ever smaller computers as cheaply as possible be the high-tech industry that exemplifies U.S. leadership?
You bet it can.
What you’re seeing today in computers is the customer-satisfying, market-building, technology-advancing result of open competition.
The industry is going through a two-stage shakeout, explains analyst Kimball Brown of International Data Corp., a research firm. One stage is pruning the number of personal computer makers from more than 300 down to about 50. Consumer electronics went through such a shakeout long ago, says Brown, and so “when you walk into Circuit City today you see only about half a dozen brands of TV, VCR or compact disc player”--and most of those are from Japan or Korea.
Soon it will be like that with computers, but the brands will be American because U.S. companies continue to dominate the personal computer. Compaq, Dell, AST, Apple, IBM and dozens of others are battling it out with PCs, and customers are benefiting. “As prices come down, more people can afford computers and find new uses for them in small business or working from home,” says Richard Shaffer of Technologic Partners, a consulting firm. “Customers love it.”
And the possibilities are only opening up. The other stage in the current shakeout is the barreling ahead of innovation. Intel, the Santa Clara firm that makes the central processing chips for most of the world’s personal computers, is going to push the technology yet again. Soon it will bring out a single chip capable of 100 million instructions per second.
To work with such expanded electronics, Microsoft next year will introduce a new basic operating system and IBM will be bringing along improvements in its most advanced PC software.
What that means is that personal computers will be able to process pictures as rapidly as they now process words. “It means full motion video and lots of sound and good color,” says Carmelo Santoro, a director of AST Research who became its chairman on Monday.
The computer is about to go beyond the ability to run mainly accounting and word processing programs--and beyond the office and even the desk. It will come into the home and combine with television to bring information and entertainment in a new way. It will go outside the home as a computing and communications device one may carry around like a telephone or portable TV.
But to get to the innovative future, computer makers have to survive today’s price wars, which are cutting profit margins sharply. “Those with cash, clean balance sheets and capability will survive,” says analyst Andrew Neff of Bear Stearns & Co., an investment banking firm. All the major PC makers--IBM, Apple, AST, Compaq, Dell--have lots of cash these days. And firms that supply chips or software--Intel, Microsoft, Motorola, Novell and many others--are doing well because computer sales are rising as prices fall. The market is competitive but it isn’t slow.
So don’t be disturbed by the messiness. In a sense computers are a model for all industry these days--globally competitive, changing faster than ever, but attentive to customers as never before. U.S. industry is more than holding its own in that maelstrom, despite the uninformed fears of naysayers such as Ross Perot--who kept saying “Japan won, Japan won,” in an appearance on ABC Monday evening.
To be fair, Perot was looking back, at the TV sets and VCRs of consumer electronics. But it’s more useful to look to the present and future of personal computers, a business breaking through in more ways than one.
