"Dog-Eat-Dog Shake-Out"

By Barbara Rudolph

The U.S. computer industry has been a source of profound national pride in recent years. While other parts of the economy have sagged, computer makers have maintained the tradition of American ingenuity and skill. But last week even they seemed badly shaken. Buffeted by plummeting profits, slow sales and excess capacity, the industry resembled a sophisticated data processor suddenly gone awry.

The manufacturers' problems are deep and astonishingly widespread. At midweek, IBM, the world's largest computer maker and the prototype of a successful company, shocked Wall Street by announcing that its earnings for the first nine months of this year will be below those for the same period in 1984. The news helped send the Dow Jones industrial average down more than 23 points in two days. Shares of IBM stock tumbled 7 3/8.

Then, at week's end, Apple Computer, a pioneer in personal computers, revealed the extent of its woes. Apple said it will lay off 1,200 of its 5,800 employees and shutter plants in Texas, California and Ireland. The company said it would report a loss for the third quarter of this year.

Sandwiched between those developments was word that Burroughs and Sperry, two older computer makers that have long lived in IBM's shadow, were engaging in merger talks in hopes of competing more effectively together than apart. Such a combination would create the second largest manufacturer of data processing machines in the U.S.

Analysts viewed all these events as proof that the once glamorous computer industry is in a serious skid. "This is not a slowdown," said Esther Dyson, editor of the trade journal Computer Industry Daily. "This is an old- fashioned, dog-eat-dog shake-out. Before it's over, there's going to be a lot of red ink and some casualties. It's not going to be a pretty sight." The industry is still growing, to be sure, but at a dramatically reduced rate. It will show an estimated 23% gain this year, in contrast to a 56% increase in 1984.

Still, new firms continue to flock to the field. "There are 375 to 400 companies manufacturing or marketing personal computers," says Ken Lim, an analyst at Dataquest, a consulting firm. "That's 300 to 350 more than anyone needs." Though sales of personal computers are slumping, they remain much healthier than those of mainframe machines.

In today's computer world, nothing sells as well as it used to. Recent dips in economic growth have taken the edge off companies' appetites for new large machines. Consumers, meanwhile, seem baffled about just what to do with the personal computers that were being snapped up just two years ago. "Customers are confused," says John Boyd, sales vice president of AT&T computer systems. "There are too many companies with too many products and too many claims."

While the slump has left few firms untouched, none seemed more battered last week than Apple, the company whose founders began by tinkering with a circuit board in a California garage and went on to live a new version of the American dream. Among the problems that now plague the manufacturer are the gradual aging of its mainstay Apple II home computer and the recent failure of its Macintosh model to make much headway in the office market.

The company has also been torn by internal dissension. Co-Founder Steve Wozniak, 34, left Apple in February following disagreements concerning the direction the company was taking. Chairman Steven Jobs, 30, was kicked upstairs last month during a power struggle with President and Chief Executive John Sculley, 46, a former PepsiCo executive hired in 1983 for his marketing skills.

Sculley now seems in clear command. After heated discussions with Jobs, Sculley persuaded the board to relegate Apple's co-founder to the murky role of "global visionary," as one analyst put it. Jobs lost his day-to-day duties, a change that some say came none too soon. "Jobs is too much out in the ozone," says Joseph Levy, an analyst for International Data.

Apple (1984 sales: $1.5 billion) is often characterized as the corporate equivalent of a gawky adolescent. Though no longer a youthful entrepreneur, it remains in many ways immature. "Apple is feeling growing pains and is losing its innocence," says Ulric Weil, a computer analyst who watches the company for the Morgan Stanley investment banking firm.

Sculley has launched a sweeping reorganization as he has consolidated power. Gone are the two separate divisions that produced the firm's Apple II and Macintosh models. They reportedly feuded frequently. Apple will now be divided along more traditional manufacturing and marketing lines. Wozniak applauds the change. Says he: "I think the reorganization immensely strengthens the company. There's been this feeling at Apple, largely spearheaded by Steve Jobs, that we're so powerful."

Last week's layoffs were handled with some of the same generosity that marked Apple's employee relations during its high-growth years. Instead of issuing a single terse announcement to all workers, Apple supervisors individually informed many of those who were being let go. The computer maker also opened a placement center and staffed it with newly hired consultants. Free for all resume writers: use of Apple's Macintosh computers and high- quality printers.

Apple must now rectify some embarrassing past mistakes. Its creation of a direct-sales force to snare corporate accounts did little more than alienate the company's existing dealers. Apple's attempt to salvage its foundering Lisa computer by renaming it the Macintosh XL proved futile, and the machine was abandoned seven weeks ago. The original Macintosh, introduced with great fanfare last year, may have been too dependent on a single software supplier to make major inroads into offices. The impact of the cumulative errors has been to take much of the polish off Apple's once bright image. Says Don Sinsabaugh, a partner in Swergold Chefitz & Sinsabaugh, an investment firm: "The company suffers a crisis of confidence among managers, dealers and Wall Street."

While IBM's problems may pale beside those of Apple, its own drop in profits was sobering news. IBM (1984 sales: $45.9 billion) accounts for some 40% of all U.S. computer sales and 70% of the industry's profits. Just seven weeks ago, during the company's annual meeting, Chairman John Akers confidently predicted "solid growth" for this year.

That now looks unlikely, according to Akers. IBM apparently succumbed to the same overly optimistic forecasts for industry growth that misled its competitors. The company, for example, had projected that the 30% gain in shipments that it recorded in 1984 would be repeated this year. But the company now expects its growth rate to be only 20%. "IBM blew it just like , everybody else," says Tom Crotty, a Gartner Group analyst. "I guess it shows they are human too."

The strong dollar and capital spending cutbacks have been painful to IBM. Some of the company's latest product introductions also seem to have been timed poorly. In February IBM unveiled its Sierra line, a family of mainframe computers to be delivered this fall. The announcement sharply curtailed sales of existing systems as prospective buyers waited for the new machines. IBM expected only a mild slowdown in such business.

Despite its setbacks, IBM still dwarfs all its rivals. That fact probably contributed to the decision by Sperry and Burroughs to begin merger talks. Under a plan discussed last week, the two companies would exchange stock in a $3.4 billion deal. The new corporation would have an estimated 8% share of the U.S. computer market, which would make it still a very distant runner-up to IBM.

Critics doubted that the merger would do much for either company. One problem: Sperry and Burroughs make mainframe computers that are largely incompatible. "It's a mismatch, like plaids and stripes," says Howard Anderson, chief executive of the Yankee Group, a research firm.

As the current shake-out continues, the strongest manufacturers will naturally survive at the expense of weaker ones. The experts' unsurprising choice for the company most likely to succeed? IBM. Says Anderson: "It is becoming increasingly apparent that there are two types of computer companies, the haves and havenots. The haves? IBM. The have-nots? Everybody else."

With reporting by Robert Buderi/San Francisco and Thomas McCarroll/New York