An Easy-Come, Easy-Go World

By Alexander L Taylor III

Once hot personal computer firms lose out as IBM wins more of the market

In the frenetic and ferocious world of personal computers, everything happens at hyperspeed. The machines operate in microseconds, and success or failure for a personal-computer manufacturer sometimes seems almost as rapid. More companies, new machines and a fresh crop of millionaires appear regularly. Last week Andrew Kay of Kaypro became the latest company founder to cash in, when he made an estimated $245 million on paper from the initial public offering of his company's stock. More than 200 American companies are now manufacturing personal computers, double the number of only two years ago. Among the latest entries are Telcon Industries, which makes a desktop model called the Zorba, Corona Data Systems' PC, and Pied Piper I, made by STM Electronics.

Along with such explosive growth comes unusually high risk. With technology changing rapidly, a delay in a product's introduction can cause premature obsolescence or instant eclipse. Entrepreneurs often stumble when they are unable to follow up on a first successful machine by producing a second hit product. In a world of easy-come, easy-go, yesterday's high-flyer can become tomorrow's casualty.

Some well-known makers of home computers priced under $1,000 have already run into trouble. Atari, Texas Instruments and Mattel have suffered huge losses this year because of market miscalculations. In the past two months Timex has seen sales of its 1000 model fall by as much as 50% even though its price has been cut from $99 to $49.95. Two larger Timex machines, scheduled for introduction this month, are generating little interest among retailers.

Now some manufacturers of larger desktop machines in the $1,000 to $5,000 range are staggering. Vector Graphic, Victor Technologies and Fortune Systems, three of last year's stars, have suffered unexpected setbacks in the business and professional market. Even though its sales for the first six months have increased sixfold, the stock of Apollo Computer (1982 sales: $18 million), a Massachusetts-based maker of expensive machines for scientific and engineering applications, has fallen 35% from its 1983 high. Osborne Computer, which introduced the first successful portable machine in July 1981, has been hit by a string of reversals and had to cancel plans for a public stock offering. Around California's Silicon Valley, the talk is that North Star and Cromemco, both suppliers of office systems, are hurting.

"It's a deadly market right now," says James Lally, a partner in Kleiner, Perkins, Caufield & Byers, the San Francisco hightechnology, venture-capital firm. "Everybody believes they're going to get 10% in this huge marketplace. The only problem is that there are 150 manufacturers all expecting to get 10% of the market." Egil Juliussen, chairman of Future Computing Inc., a consulting firm in Richardson, Texas, offers an equally blunt assessment. Says he: "There are just too many small-and medium-sized companies that don't have enough financial resources to make it. The next six months will decide who will be the major players."

The emerging winners will be those that adapt most quickly to rapid growth and the changing market. With 1983 sales forecast at 7 million machines, the personal computer is already well on its way to becoming a mass consumer product.

Marketing and distribution have become more important than research and development. Exotic features like high resolution, phosphorous monitors and floating-point coprocessors are less important than getting a good position on a dealer's shelf or mounting an effective national advertising campaign.

Some companies have already recognized this change. Scientists and technicians, who often founded the firms and built the first products, are being eased out of top management jobs and replaced with executives skilled in packaging and selling goods. In the past eight months four of the largest computermakers (Apple, Osborne, Atari and Mattel) have lured away marketing experts from major consumer-products firms to run their companies.

The biggest challenge is getting the attention of dealers and consumers. Says Lally: "It is not enough any more to come up with a better product, with a better cost-performance ratio and new capabilities. Whoever controls the channels of distribution controls the market." The sheer volume of machines is clogging the market. Because of limits on shelf space and trained personnel, most computer stores can handle only three or four brands. Admits Sandow Ruby, the president of Tech Hi Fi, a chain with 65 outlets: "No one likes to look like a fool in front of his customers."

IBM, the company with the longest experience and the greatest mastery of distributing and marketing computers, is gradually developing a hammerlock on the personal computer segment of the market. The IBM PC, introduced in August 1981, has grabbed 26% of sales, dislodging Apple from the top position. Were it not for the fact that IBM cannot produce machines fast enough to keep up with demand, the company might be even further ahead of its competition.

IBM's astounding success along with its well-known name and its dominance in larger computers have combined to make its PC the industry's standard. When buyers today cannot get a PC because of the short supplies, they want one that works just like it and operates the same programs. Some 20 companies make machines that are compatible with the IBM.

Now the industry is bracing for IBM's entry into the market for home computers. Although IBM still refuses even to confirm the machine's existence, the company is expected to introduce a smaller, less expensive version of the PC, once code named the Peanut, as early as this month. One outsider claims that Peanuts have already been shipped to independent software developers so that they can work out bugs in programs for the new machine.

The Peanut is expected to sell for $600 to $700 stripped down; $1,300 with a monitor and other extras. Anticipation of its arrival has already driven down the stock price of competitors like Apple, Coleco and Commodore. Says Esther Dyson, editor of RELease 1.0, an industry newsletter: "It is like living under Mount St. Helens while it is rumbling. You can't rebuild your house until after the eruption."

Still trying to rebuild its house after the eruption caused by the IBM PC is Osborne Computer (1982 sales: $100 million). Osborne is one of several companies that have seen profits slip or disappear since the introduction of the PC. Concedes Founder and Chairman Adam Osborne: "The rapid emergence of the IBM standard was far more than we anticipated. IBM did it with an awesome speed, which took most people unawares."

To recoup, Osborne has designed a version of its new Executive model that will run IBM programs. But getting the machine to market has not been easy. When news of the Executive leaked last spring, sales of the firm's original machine, the Osborne 1, slowed even as the company was dropping the price from $1,795 to $1,295, and profits evaporated. With the IBM-compatible Executive now due in November, the ever confident Osborne says, "It's such a fast-moving business that in two months you can be flying as high as ever." Others wonder whether Osborne can get up to takeoff speed again. Rumors have started that he is trying to sell his firm.

Another company squeezed by IBM is Vector Graphic (fiscal 1983 sales: $33.6 million). Admits Dick Hahn, a senior vice president: "When IBM came into the market it took a lot of business that we had." Sales fell $2.5 million in 1982, and a $2.4 million profit turned into a $3 million loss. One-quarter of the company's 400-person work force has been laid off.

Nothing seems to have gone right for Vector Graphic lately. Lore Harp, one of the founders, was divorced from her husband, the company's chief designer, remarried, then got out of day-to-day operations for nine months before taking over control again last year. Her partner Carole Ely also was divorced, then married a company officer; she has since retired, though she still sits on the board. In an attempt to get back on track, Vector Graphic is stepping up its marketing and distribution efforts as well as considering an IBM-compatible model.

Victor Technologies (1982 sales: $65 million) decided to attack IBM head on in 1981 by building its own sales force and dealer network to match the computer giant. Says Founder and President Charles Peddle: "You're playing for enormous stakes so we took a risk in order to become a major player." But the company recorded an $11 million loss during the second three months of 1983 and expects to lose money during the third quarter as well. Peddle has shaken up the firm by abolishing 350 jobs and bringing in new managers. Now he says he is ready to take on IBM again.

For several years Fortune Systems (1982 sales: $26 million) profitably went its own way selling budget-price office systems. But when development of some new software was delayed early this year, second-quarter sales tumbled by $8 million, and a $3 million profit turned into a $3 million loss. Another loss is forecast for the third quarter because not all of the software will be ready until October. President Gary Friedman admits that falling behind in the current market can be devastating, but insists it will not be fatal. Says he: "We still think there's a window of opportunity."

The personal computer business today is much like the automobile industry in the early years of the 20th century. Then as now, a new technology was being developed with potentially revolutionary effects that attracted hordes of companies; some of them even had names like Apple and Commodore. Of course only a few of those early automakers survived. No one doubts IBM has become the General Motors of the personal computer industry. Now the question is who will become the Ford or Chrysler and who will be the Locomobile or Stanley Steamer? The next six months may provide the answer. --By Alexander L Taylor III. Reported by Robert Buderi/San Francisco and Cristina Garcia/New York

With reporting by Robert Buderi/San Francisco, Cristina Garcia/New York This file is automatically generated by a robot program, so viewer discretion is required.