A Growth Industry Grows Up

IT was only 20 years ago that the world's first commercially sold computer, a Univac Model I, was installed at the Bureau of the Census in Washington. Today hardly any type of commercial or human activity in the U.S. goes unrecorded, unpredicted or unencumbered by computers. The machines keep track of almost every bank check, reserve nearly all scheduled-airline seats, scrutinize every federal income tax return. Computers help to diagnose illnesses, plan radiation therapy, and map a path for the brain surgeon's scalpel. One computer has synthesized the tone of a trumpet so authentically that experts cannot distinguish it from a genuine trumpet blast. In fact, the cybernetic sweep has reached so far that one harassed Manhattanite placed an ad last week in the New York Times begging computers to spell his name correctly: Ruben Morris.

As unmistakably as the computer has altered the character of everyday life, it is changing the shape of the computer business itself. For the past three years, one-tenth of new U.S. investment in plant and equipment has gone into computers, enough to make electronic data processing the nation's fastest-growing major industry. Last year computer-industry revenues rose 17%, to some $12.5 billion. Still, the computer industry may in some ways be a victim of its own success. Computer technology has raced ahead of the ability of many customers to make good use of it. Not long ago, the Research Institute of America found that only half of 2,500 companies questioned felt that their present machines were paying for themselves in increased efficiency.

Price War. Despite such doubts among their customers, the major producers of computer hardware--IBM, Burroughs, Control Data, RCA, NCR, Sperry Rand--have all brought out new products within the last year. Many of them are so-called "fourth generation" computers: incredibly complex instruments of astronomical calculating power. In fact, they make the original Univac I look like an abacus by comparison. Last week Honeywell-G.E. introduced its Series 6000 line of fourth-generation models (price: up to $4,500,000), which can execute 1,000,000 instructions a second.

Simultaneously, the first big price war has flared in the computer industry. Under antitrust pressure, IBM last year decided to abandon the single-price, machine-plus-service package that had helped the company gain 70% of the U.S. computer market. The "unbundling" left IBM customers free to shop around for bargains in systems-engineering, programming and employee education. Customers had always been able to buy peripheral equipment--the storage and retrieval units that speed data into and out of the machines--from competitors offering prices up to 15% below IBM's. But unbundling illuminated the disparity. By year's end, the scrappy independents had grabbed an estimated 15% of the computer industry's prime growth market in such periperals as disk and tape drives.

Stung by the loss of business, IBM struck back by introducing new peripherals with prices 10% to 35% lower than comparable existing models. On top of that, IBM filed a lawsuit against Memorex, a large peripheral maker, alleging use of IBM trade secrets. The company also brought out a model of its new System/370 that can be equipped with its own disk drive, making it difficult for a user to add a competitor's gadget. The independents have retaliated with price cuts of their own, and more are expected.

Ironically enough, Wall Street responded to the battle by marking down the stock prices of several independent firms, which had been regarded as glamor issues. Naturally, some independents rushed to the New York Society of Securities Analysts to give reassurances from its lectern. Rebutting contentions that IBM may squash its smaller rivals, Lester Kilpatrick, president of California Computer Products, argued: "IBM, not the independents, is on the defensive. For the first time in its history, IBM has been forced to lower prices to retain its predominant share of the market. The rest of us can prosper too."

Lag in the Middle. That proposition has become a particularly debatable topic. A report now being privately circulated by the consulting firm of Arthur D. Little shows that IBM domestic shipments of computers fell 18% last year, while those of its competitors rose 8%. On the other hand, so many companies have moved into software, data processing, time sharing and facilities management that 42% of 102 companies surveyed in this field lost money even in 1969, according to the Little study. Though figures for last year have not yet been compiled, the recession undoubtedly increased the flow of red ink. By 1975, predicts Little, 20 firms in services and software may well snare the bulk of revenues that are now spread among 2,500.

Beyond the computer industry's present difficulties, however, Little's experts foresee years of sturdy growth. The value of installed computers in the U.S. may well double by 1975 to $53 billion. In hardware, the greatest expansion will come at the extremes: giant computers (those priced over $1.5 million) and small computers (less than $200,000). Though the middle range will continue to be the largest market for computers, its rate of growth is likely to lag. IBM, which derives most of its hardware revenues from middle-sized computers, may see its share of the U.S. hardware market drop from today's 68% to 60% by 1975. Some analysts prophesy that, in time, perhaps as early as 1980 or perhaps not until 2000, computers will pass even the oil and auto industries in total size.

Teaching by Wire. Before computers can complete their conquest of business, computer makers will have to educate executives in how to use the machines more wisely. Most top management men still regard the computer as a glorified adding machine, complains Walter Carlson, president of the Association for Computing Machinery. "It costs them millions," he says. "Yet the electronic-data-processing manager is usually below the rank of vice president. Almost always he reports to a man who is not schooled in the subject." Recently, one major credit-card company ran into a costly surge of errors in processing monthly bills because it had tried to cram too much information onto the standard 80-column punch card. As a result, the company has been forced to slow its expansion while it straightens out the mess.

The most significant strides over the next few years are likely to come from "applying existing computer technology to new fields. IBM, for instance, recently brought out a portable 10-lb. "terminal" that salesmen can connect to a pay telephone to send orders directly to their home-office computers. Sixteen New York City schools now use an RCA computer in Manhattan to teach arithmetic, reading and spelling to 6,000 pupils.

Scientists have already endowed computers with the power to see. For example, optical character recognition enables computers to read printed characters rather than sense data from holes in cards or impulses on tape. Some experts believe that they can devise computers that "think," at least in a rudimentary way. For all the change that it has already wrought, the computer has barely begun to transform the methods of business and very probably the character of civilization.

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