IBM Is Homeward Bound

By Alexander L. Taylor III

The giant of office machines gambles on a new personal computer

The $36 billion U.S. computer industry has for months been anxiously awaiting the entry of International Business Machines (1980 sales: $26 billion) into the hot new market for personal computers. Said Garland Asher, director of financial planning for Tandy Corp., one of the leading sellers of the television set-size machines: "Some people were convinced that IBM would be unveiling a new Holy Grail." Last week IBM finally showed off its product. Priced between $1,565 and $6,300, the desktop computer can store documents that once would have required a roomful of filing cabinets; it can also produce graphs in four colors, receive information over phone lines from remote data banks or libraries and even play popular new computer games like Raster Blaster and Gorgon.

There are already more than 1 million personal computers in American businesses and homes, and experts predict that there will be perhaps 10 million of them by 1985. Sales this year are expected to be $1.5 billion. About three-quarters of the machines are used by businesses to keep track of inventories and sales and perform other office tasks. Use in the home, where computers can balance a checkbook, make out tax returns or be study aids, has been developing more slowly than in small businesses.

So far, personal-computer sales have been dominated by Apple, Tandy's Radio Shack and Commodore. Those three cornpanies together have 75% of the market. But competition is growing. In addition to IBM, Japan's Nippon Electric, Hitachi and Fujitsu are all preparing to begin selling personal computers in the U.S.

The new IBM product marks an important development in the company's sales strategy. The firm has long marketed its machines, which can cost as much as $4 million, almost exclusively by in-office sales to businesses or governments. But IBM will be selling the new personal computers directly to consumers through a chain of its own retail outlets and in Sears, Roebuck and ComputerLand stores.

Competitors viewed IBM's new product and marketing strategy with both interest and some relief. IBM will be a tough rival, but the smaller firms should be able to keep a good part of the market. Said Ulric Weil, a computer-company watcher for Wall Street's Morgan Stanley: "I am sure Apple feared something much more formidable." Said Apple President A.C. Markkula: "We don't see anything out of the ordinary. There are no major technological breakthroughs and there isn't any obvious competitive edge."

The new machine is a computer-calculated risk for IBM President John Roberts Opel, 56, who last January became the company's chief executive officer. He hopes that the personal computer will contribute to a new period of company growth after several sluggish years.

Opel is a quintessential product of IBM. The holder of an M.B.A. from the University of Chicago, he started out as an IBM salesman in Jefferson City, Mo., and has spent his entire 32-year career at the company. A scholarly-looking man known to his colleagues as "the Brain," Opel commands the company's work force of 341,279 employees from the firm's headquarters in Armonk, N.Y.

His salary: $930,000 a year.

Since Thomas J. Watson founded IBM in 1924, the firm has always had a special mystique. The company for years had an unwritten dress code that required executives to wear white shirts. Employees posted THINK signs in their offices, and even jointly sang a company song, Hail to IBM* By paying high wages, promoting mainly from within and seldom laying off workers, IBM kept unions out of the company's manufacturing plants and fostered an atmosphere of close-knit camaraderie.

Though seldom a leader in technology, IBM built a superlative marketing and service organization. By the early 1970s, it commanded 60% of the world computer market. IBM was also the go-go stock of Wall Street's go-go years in the '60s, selling in 1968 for a stunning 66 times annual earnings.

More recently, though, IBM's dominance of the computer market has slipped.

It was slow to develop new small business computers, allowing such competitors as Data General and Digital Equipment to grab large parts of the market. At the same time, aggressive smaller companies, like Wang Laboratories and Lanier Business Products, took the lead in developing word-processing machines, which combine the functions of a typewriter and a computer. IBM has only about 25% of that $12 billion business.

The company also made some costly mistakes. In 1979, when it introduced the new 4300 series of intermediate-sized computers, it set prices so low that the new products practically destroyed the market for IBM's older models. The company was not adequately prepared for the 4300's success, and so deliveries were sometimes delayed for three or four years, angering customers.

Moreover, the firm that once proudly manufactured nearly everything it sold has been forced to go to outside suppliers. In 1979 IBM began buying microchips from Japan to supplement its own chip production. Last February the company signed an agreement with Japan's Minolta to market one of that company's small copiers under the IBM label. The Minolta model sells for less than $3,500, while IBM's smallest copier costs at least $25,000.

Still another company problem has been battling a seemingly endless antitrust case. On its last working day in office in January 1969, the Johnson Administration filed a suit that accused IBM of monopolizing the U.S. computer industry.

Three Administrations have since argued that IBM's market dominance should be diminished. The transcript of the court proceedings in the case now runs to 200,000 pages. Reagan antitrust officials, though, may favor an out-of-court settlement rather than continued litigation and appeals.

IBM's performance during the past few years has been dramatically reflected in the price of its stock, which is now selling for only nine times annual earnings. After stock splits are included, the value of a share of IBM has not actually increased since 1968.

The new personal computer is only part of Opel's program for getting IBM back on the track. The company this year will spend $1.5 billion, more than the annual sales of a firm the size of Polaroid, on research and development. For example, it has been trying to adapt for commercial use the experimental Josephson junction. Named after a British scientist, the technique increases the speed of electronic switching on a microchip to just trillionths of a second, or nearly the speed of light.

IBM is also entering into new ventures with other companies. Along with Comsat General and the Aetna Casualty and Surety Co., it has formed Satellite Business Systems, which has already launched two fixed-orbit communications satellites.

These will soon be used by 23 companies to relay high-speed data, electronic mail and even regular phone calls. In addition, it has joined with MCA Inc. to manufacture a videodisc player. IBM will use the 54,000 individual images on the video disc as a way of storing information.

IBM will probably never be able to regain its position as the undisputed colossus of the computer industry. But Opel believes that the strong public demand for computer equipment can return the company to the 20% annual growth it enjoyed in the '60s. Says he: "The exciting thing about our industry is that we are dealing with a product with which people do not seem to become satiated. A computer's ability to compare and display information often creates demand for more." Opel hopes that a lot of that information will be coming through IBM's new personal computers. --By Alexander L Taylor III.

* Sample lyric: With hearts and hands to you devoted,

And inspiration ever new...

We will toast a name that lives forever.

Hail to the IBM.

With reporting by Frederick Ungeheuer

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