Cut-Rate Computers, Get 'Em Here

By Gordon M. Henry

It is the most profitable corporation in the world, but lately IBM has been giving more than receiving. Without fanfare or explanation, the computer giant revealed last week that it was cutting wholesale prices on several of its personal computers, including its top-of-the-line PC-AT, as much as 18%. At the same time, sources within Big Blue's network of 2,500 dealers said that the company will now allow them to return unsold inventory without penalty, and that it will shoulder a larger share of their advertising and promotional costs.

Despite the lack of official comment from IBM, the reason for its generosity was obvious: the company is trying hard to rebuild its dwindling share of the $10 billion-ayear personal-computer market. Only 14 months ago, IBM commanded 40% of sales, largely on the strength of the $1,995 PC, which had become an industry standard. Since then, however, a slew of small, feisty computer makers have stolen away a hefty chunk of IBM's business by building personal computers that run software written for IBM PCs but sell for a fraction of the cost. The sellers of these so-called IBM-compatibles, companies such as Leading Edge, Epson and Kaypro, have snared an impressive 36.4% of the personal-computer market, while IBM's share has fallen to 33%. Says John Roach, chairman of Tandy, which manufactures a $999 model: "1986 will be the year of the PC-compatible." In the past few weeks the field has grown still more crowded. Two big California retail chains, Businessland and Compu terland, said they would begin marketing IBM-compatibles under their own names.

By replicating the guts of the IBM machine and offering it at a lower price, the compatibles have ushered in an era in which personal computers are commodities that are differentiated not by quality but by price. Indeed, true bargain hunters can even buy so-called clones, which are ultracheap compatibles that lack the service and repair guarantees that higher-priced units offer. In the past 18 months or so, many former customers of IBM have decided that they do not need to buy high-priced machines when more affordable compatibles or clones will suffice. Says Michael Geran, a computer-industry analyst for E.F. Hutton: "The IBM label has lost some of its magic. The three initials I, B, M, no longer justify the price differential."

Many top sellers of compatibles and clones are able to put low prices on their computers because they are produced by low-wage laborers in Asian countries, notably South Korea and Taiwan. Perhaps the most aggressive of these firms is the Canton, Mass.-based Leading Edge, which is run by Michael Shane, a wealthy entrepreneur who first made big profits by selling blue jeans and wigs. In early 1985, while other companies like Compaq were making IBM- compatibles and selling them at IBM prices, Shane began buying state-of- the- art computers from Daewoo, the South Korean electronics giant, and offering them in the U.S. for $1,495. Although the personal-computer market was virtually comatose at the time, Shane stunned industry experts by selling an estimated 50,000 units in his first year of operation.

Leading Edge, however, is by no means the least expensive of the IBM- compatibles. That distinction goes to a group of 100 or so plucky manufacturers, 60% of them Asian, that produce machines with typical price tags of less than $600. Carrying obscure labels such as Thompson, Harriman & Edward, Computer Dynamics and American Mitac, these firms' products are called no-names by the industry because they have virtually no name recognition. Despite the pejorative description, computer experts suggest that the no-names may pose the greatest threat to IBM. Says Margaret Rodenberg, a vice president at Entre Computer Centers, a large retailer: "We're convinced that there's a growing market out there that is less brand loyal and more price conscious."

IBM may have unwittingly spawned the clones. When the company began producing its first personal computer in 1981, it designed the machine around two widely available components, the Microsoft Disk Operating System (MS DOS) and the Intel 8088 microprocessor chip. Reason: IBM wanted to use standard equipment so that software companies would write programs for its computer. The only element of the PC that IBM copyrighted was the integrated circuit called the Basic Input Output System (BIOS), which controlled how the software interacted with the hardware. But by building circuits that simulated the BIOS, enterprising computer jocks created machines that could legally run the same software as IBM's machine.

Not all the makers of IBM-compatibles simply clone the features from the PC. Chatsworth, Calif.-based Tandon, which originally built disk drives for IBM, announced last week that it would begin marketing an IBM-compatible that features its own integrated circuit technology. Tandon, which expects to charge $1,155 for its new machine, is able to curb costs by manufacturing some of its components at plants in India.

In slashing wholesale prices, IBM hopes to enable dealers who have been hurt by industry-wide price cutting to recoup some of their losses. Says Anthony Morris, a major IBM retailer in New York City: "We were beginning to eat our own margins." Moreover, IBM will probably unveil additional measures to compete with the clones. Although the company with its vast resources (1985 sales: $50 billion) depends on PCs for less than 10% of its revenues, IBM does not intend to abandon the market. Industry insiders believe that it is about to market a new version of the PC-AT, with improvements that competitors will have difficulty matching.

Experts question, however, whether bargain-conscious consumers will flock to an improved IBM PC. They feel that Big Blue may have to pare prices even further before many buyers will forsake the inexpensive IBM look-alikes. Boot up and watch the results on the screen of your choice.

With reporting by Thomas McCarroll/New York