D-Day for the Home Computer

By John Greenwald

Marching from success to success, IBM now has a product for the living room

The secrecy, intrigue and rampant speculation made it seem more like a cloak-and-dagger thriller than just the introduction of a new product. For nearly a year, computer buffs, retailers and IBM's competitors have anxiously awaited the appearance of a home computer by the industry's giant (1982 sales: $34.4 billion). IBM repeatedly denied that the product even existed, but newspapers and trade journals were filled with speculation about the new machine and its expected announcement date. Late last week the guesswork grew frenzied. After the Boston Globe published what it called a photograph of the home computer, Wall Street began hearing rumors that an angered IBM would delay the new model until early next year. But industry watchers quickly dismissed the reports as "disinformation" put out by the company to heighten suspense.

It is expected that IBM will finally and formally present its new home computer this week. About 100,000 of the machines are to be shipped to stores across the U.S. before Christmas. Originally code-named Peanut and now styled the PCjr, the computer should be exultantly greeted by computer-store owners, who have been turning away would-be customers for months. "We've never seen such a tremendous demand for a product that does not even exist," says one Manhattan store manager.

The clamor for the new product reflects the continually growing power of the world's largest computer maker. Since August 1981, when it unveiled its first Personal Computer, or PC, IBM has claimed a pacesetting 28% of the market for machines costing between $1,000 and $5,000. The PC, intended mainly for office use, is costlier and more powerful than a home computer. Last year IBM sold 185,000 PCs. This year sales are expected to reach some 800,000. Runner-up Apple, once the leader in small machines, this year will have sales of about 600,000, and now has approximately 17% of the market. Says one IBM executive: "The reason there is so much excitement about the introduction of an IBM home computer is that people expect us to do in the home market what we have already done in the office one."

Last month the Armonk, N.Y.-based company reported that third-quarter earnings had climbed to $1.3 billion, up 25% from the same period in 1982, when the company was already the most profitable U.S. manufacturer. Among those watching intently have been investors on Wall Street, where IBM stock has more than doubled since August 1982 and stood at 128 at the end of last week.

IBM's success has contrasted with striking setbacks for many competitors. Last week Texas Instruments (1982 sales: $4.3 billion) announced a $110.8 million third-quarter loss and said that it was pulling out of the home-computer market. The company, which will continue to make and sell its Professional Computer for office use, said it is halting production of its 99/4A home model "in order to limit further financial drain." TI's losses for the first nine months of 1983, which were largely due to poor sales of home computers, totaled $222.9 million.

Apple Computer (1983 sales: $982.8 million) reported last week that its fourth-quarter profits fell 73%, to $5.1 million, compared with last year's earnings results. The plunge forced Apple, hitherto one of the most prosperous firms in California's Silicon Valley, to suspend payment to its employee profit-sharing plan for the first time since the company went public in December 1980. A day after Apple's announcement, Massachusetts-based Digital Equipment Corp. (1982 sales: $3.8 billion) announced that its profits were off 72% during its most recently ended quarter. Digital's stock lost 21% of its value in a single day two weeks ago, sliding 21 points, to 79 1/4, on the news that it would report a drop in profits. The company's stock closed last week at 66 1/4.

IBM, meanwhile, has been relentlessly pouring it on with new products, aggressive pricing and an avalanche of advertising. Last month it introduced a pair of new PC models, the 3270 and the XT-370, that will give users of IBM's desktop equipment access to the company's large mainframe computers. Since an estimated two-thirds of the 1,000 largest U.S. industrial firms use IBM mainframes, the new machines will make the company even tougher to beat. Says Ulric Weil, a computer-industry analyst for Morgan Stanley: "The 3270 could lock Apple, Tandy and other major personal-computer makers right out of the top corporate markets."

IBM has increased the allure of its machines by offering seductively low prices. The 3270 will sell for just under $6,000, or approximately $2,000 less than Apple's top-of-the-line Lisa, which has similar features. Both Lisa and the 3270 can display so-called windows on their monitor screens to enable users to work with several programs at once.

But it is the PCjr that has captured the computer world's imagination. A few retailers, including Macy's and some computer-store operators, have reportedly had a look at the new machine, but only after signing nondisclosure agreements that bar them from discussing what they have seen.

The long-awaited machine has been causing other computer makers to tremble. Two weeks ago, Atari disclosed that it was delaying plans to market two advanced home computers. Many analysts attributed that postponement to fear of the PCjr. So intense have expectations grown in the face of IBM's silence that the mere rumor of an announcement can shake a competitor's stock. As recently as Sept. 28, the shares of four computer makers lost $340 million in combined total value after two Wall Street analysts predicted that the PCjr would arrive this fall.

Despite IBM's secrecy, industry watchers have been able to describe the new home computer in fine detail. It is expected to come in a basic version with 64,000 characters of memory for $695, and an expanded model that includes a disc drive and twice as much memory for $1,295. Both versions will have far less overall capability than the PC itself, to keep them from biting deeply into the costlier product's sales. Perhaps the most striking feature of the new machine is a battery-operated keyboard that is not attached to the main part of the computer and will enable users to move about a room. Like an American Telephone & Telegraph terminal out last summer, the IBM home computer can communicate with display screens by infrared signals.

All the hoopla notwithstanding, some experts who claim familiarity with the PCjr are unimpressed. They point out that the IBM machine has a relatively high price, in comparison with competitive products already on the market. The Coleco Adam, which was first shipped last month, includes a printer along with the computer and is available for less than $600. Commodore's hugely successful Commodore 64 has a base price of just $200. The Seybold Report on Professional Computing, a respected industry newsletter, describes the PCjr as "a surprisingly modest machine, embodying relatively little innovation."

Innovation, however, has seldom been IBM's strongest selling point. The company has traditionally stressed service and reliability. The PC, for example, was not a technological breakthrough and is assembled largely from parts made by outside suppliers. Its microprocessing heart is manufactured by California-based Intel, while the monitor's display tube is produced by Japan's Matsushita. Microsoft of Bellevue, Wash., provides the operating system, or master program. The PC has been successful largely because the IBM name symbolizes confidence and security in a field known for instability and uncertainty.

The lack of originality in IBM's PC has hardly been a drawback. The company deliberately made the computer's specifications widely available so that the machine could become the industry standard. That tactic has worked so well that PC users are now able to choose from a vast array of programs that run on the machines. Says David Wagman, chairman of Softsel, a Los Angeles software distributor: "The change has been overwhelming. Eighteen months ago, 85% of the software we saw was for Apple and 5% for IBM. Now 29% is for IBM and 26% for Apple."

Even well-established computer makers are being forced to copy IBM. In September, Hewlett-Packard (1982 sales: $4.2 billion) introduced an office computer built around the same microprocessor that the PC uses and employing the same operating system. "It's the first time we've conformed to an industry standard," says Cyril Yansouni, general manager of the Palo Alto, Calif.-based company.

The companies now enjoying the greatest growth in personal computers are those that produce virtual clones of IBM's PC. Houston-based Compaq Computer, which last week announced that it was registering stock for an initial public offering, makes a portable version of the PC. Sales of the 21-month-old company reached $36 million during the quarter that ended Sept. 30. Eagle Computer, which had sales of $14.2 million in the three months ending Sept. 30, a more than fivefold increase from last year, now sells nine IBM work-alikes. Boasts Eagle President Ron Mickwee: "We have more IBM-compatible products than IBM does." Columbia Data Products of Columbia, Md., has three IBM-type models. Chief Financial Officer Joseph Kelley says that his firm's strategy is simple: "We'll always be cheaper than IBM."

Apple, meanwhile, has been chastened by its struggle against the PC. The California company's 17% market share for personal computers is down from the 28.9% it commanded in 1981 when IBM entered the market. Now Apple is scrambling to recover. "IBM has forced us to squeeze three years of work into the next twelve months," says Apple President John Sculley. The company, which is stressing its record of technological innovation, plans to show off Macintosh, a computer that will sell for about $2,500, at its shareholders' meeting in January.

With IBM on a roll, some computer dealers worry about its growing market dominance. Companies like Apple and Compaq may be helped in the future by the eagerness of computer-store owners to have something to sell besides IBM products. Says Seymour Merrin, a Westport, Conn., dealer: "We cannot allow our futures to be totally controlled by an outside force like IBM. If you do, you become a slave, not a business." But if IBM continues to move forward at its present pace, dealers may have little choice. IBM controls 70% of the mainframe computer market, and the company is unlikely to settle for anything less in the personalcomputer market.

--John Greenwald.

Reported by Michael Moritz/San Francisco and

Frederick Ungeheuer/New York

With reporting by Michael Moritz/San Francisco, Frederick Ungeheuer/New York This file is automatically generated by a robot program, so viewer discretion is required.