Down Time for Computers

By Charles P. Alexander

Comdex, the huge trade show at which personal computer makers display their wares to dealers, has always been a high-spirited affair overflowing with hype and hoopla worthy of a glamorous growth industry. But at last week's extravaganza in the Georgia World Congress Center in Atlanta, the glamour was tempered by a touch of gloom. Attendance was disappointing, most of the new products were unexciting, and exhibitors were hard pressed to drum up enthusiasm. Even the shapely brunet in a bright-red leotard who was posted in front of the NEC Corp. booth did not attract a crowd. Summed up Morton Goldman, vice president of Elek-Tek, a Chicago-area retailer: "We're very disappointed. This business is in trouble right now."

After years of rolling on what seemed like an unstoppable joyride, the personal computer industry is going through a bumpy stretch of slowing growth, sagging profits and ruinous competition. Rough times have arrived for almost everyone in the business, from computer manufacturers and retailers to the semiconductor companies, which supply the microchips that make the machines work.

Personal computer sales rose 11% in 1984, to 7.5 million. That rate would be high for an industry like steel or rubber, but it was much less than the 107% gain in 1983 and far below expectations. Moreover, the growth came primarily from computers for office use. The once sizzling home computer market now seems to be fizzling. Sales of machines targeted for the home actually declined by 4% last year, to 4.8 million. The industry originally expected to sell 7 million home computers in 1984. Says Charles Martin, editor of Personal Computing magazine: "The business has now returned to earth."

During the go-go days of the early 1980s, when the market seemed unlimited, the lure of making a fast fortune enticed hordes of companies and entrepreneurs into the industry. The bruising competition that resulted has turned into a battle for survival. Future Computing, a Dallas-based market research firm, says that in the past two years the number of personal computer manufacturers has shriveled from more than 200 to about 150. Some companies, including Mattel and Timex, have simply dropped their home computer lines, but several smaller firms like Gavilan Computer of Campbell, Calif., and Beehive International of Salt Lake City, have filed for bankruptcy. Last year 570 of 3,800 computer retailers in the U.S. closed their doors or were taken over by large chains. Even the number of computer magazines has tumbled from some 150 in 1983 to about 40.

The shakeout is most severe in the home computer business, where price competition has been fierce. Coleco slashed the cost of its Adam computer from $750 to $500 last year in an unsuccessful effort to spur sales. In January the company decided to drop the Adam altogether after suffering a 1984 loss of $259 million on the machine. Commodore lost $20.8 million in the first three months of this year, partly because it reduced the basic price of its model 64 by 25%, to $145. And even IBM two months ago halted production of the PCjr, which had sold poorly with its price tag of up to $1,200.

The home computer is a long way from living up to the industry's original hopes that it would become as ubiquitous as the television set. Professionals ! use computers to work at home, and young people like to play games on the machines. But companies are struggling to find applications that will make computers an essential part of the household. Most families still prefer to keep grocery lists on paper or balance checkbooks with a pencil.

Softness in the home market could bring trouble for Apple Computer, one of the industry's superstars. The company outperformed most rivals with an 11% profit gain, to $10 million, in the first three months of the year, but new orders from dealers have slowed down. "It's clearly a period when the industry is pausing," says Apple President John Sculley. To keep inventories from piling up, Apple ordered weeklong shutdowns at three of its factories in March and at a fourth plant in April. In addition, the company canceled production of its top-of-the-line Macintosh XL, originally called the Lisa. Apple had cut its price by more than half, to $3,995, in an effort to boost sales, but the machine was not profitable.

Meanwhile, morale at Apple's Cupertino, Calif., headquarters has been sagging. In recent months several executives have sold part or all of their company stock, and some senior managers and engineers have resigned. Stephen Wozniak, who co-founded the company in 1976 with Chairman Steven Jobs, has left his day-to-day duties to start a new company. Since February the company's stock has plummeted by one-third to close last week at 20 1/4. That has generated talk in the industry that Apple will become the target of a takeover attempt or merger bid, possibly by AT&T or Xerox.

Apple is betting a large part of its future on its remaining Macintosh models, which have sold well since their introduction 15 months ago. Prices range from $1,490 to $2,090. Many consumers consider the Macintosh, which is based on a new generation of technology, more versatile and easier to use than any other personal computer. But Apple now faces a challenge from Atari, which made the only big splash at last week's Comdex show. Dealers gathered around for a peek at a new Atari machine that is similar to the Macintosh but will cost only $800 to $900. Though its official name is the ST, the computer has already been nicknamed the Jackintosh, after Atari Chief Executive Jack Tramiel. He built Commodore into a home computer powerhouse, but left last year and bought Atari from Warner Communications. Commodore, meanwhile, is expected to square off against both Atari and Apple with yet another low-price Macintosh-like machine, called the Amiga.

With competition in the home computer field growing more intense, Apple plans to try for a major foothold in the office market. The company has a networking system that will enable as many as 32 Macintoshes to communicate with one another and a high-quality printer known as the LaserWriter. But Apple will have to go head-to-head with IBM, which dominates the corporate computer scene the way Hulk Hogan lords over a wrestling ring. IBM holds about 40% of the market for office sales of personal computers, compared with Apple's 13%.

The slowdown in computer sales has been most devastating for the semiconductor industry. When the market was strong, computer firms were all wildly optimistic in placing their microchip orders. Says Ken McKenzie, an associate director of the Dataquest research firm in Sunnyvale, Calif.: "Every company that produced a clone of the IBM Personal Computer expected to get 22% of the market, and there were 60 of those companies." When computer makers realized that their sales would not come close to expectations, they started canceling chip orders, leaving the semiconductor companies to sit on mountains of inventories. The glut of chips drove prices down almost to giveaway levels. The cost of a 256K RAM memory chip, for example, plunged from near $40 to as little as $5.

As chip prices dipped, profits in much of the semiconductor industry all but disappeared. In the first three months of this year, Texas Instruments' earnings fell 89%, to $9 million, and the company has laid off about 2,000 of its 85,000 employees since December. Mostek, the chipmaking division of United Technologies, lost more than $40 million in the first quarter. It said last week that it would furlough 1,600 of the 4,800 workers at its Carrollton, Texas, plant. National Semiconductor of Santa Clara, Calif., shut down most of its plants for two weeks in February and is currently imposing a six-month pay freeze and a four-day work week.

One of the few major parts of the computer business with continued strong sales is the software industry, which develops the programs that tell the machines what to do. Because 18 million personal computers are already in use, software manufacturers can prosper merely by selling new programs to old customers. Software sales jumped 36% last year, to 62 million programs. Even so, stiff competition has given the industry a high mortality rate. In the past two years the number of major software producers has shrunk from more than 200 to about 50.

Sales of both hardware and software will undoubtedly go on growing, and the industry is expecting a rapid recovery in 1985, but the ranks of the competitors are likely to keep dwindling. History shows that many new industries go through an exuberant expansion phase followed by a shakeout. In the early 1920s, there were at least 300 automobile companies in the U.S., but by 1960 the industry had consolidated into four big firms. If that pattern repeats in computers, only the savviest of the industry's current whiz kids will survive.

CHART: TEXT NOT AVAILABLE

With reporting by Robert Buderi/San Francisco and B. Russell Leavitt/Atlanta, with other bureaus