COVER

AT HOME WITH IBM

GILLIAN MACKAY,JAMES FLEMING November 14 1983
COVER

AT HOME WITH IBM

GILLIAN MACKAY,JAMES FLEMING November 14 1983

AT HOME WITH IBM

COVER

At cocktail parties in California's high-tech Silicon Valley, through the offices of Wall Street investment analysts, in obscure trade jour-

nals and the popular press, the rumors ran like wildfire. Mere speculation that the giant International Business Machines Corp. was poised to enter the $2billion home computer market with a product code-named “Peanut” whipped the jittery computer industry into a frenzy of fear. Variously dubbed Peanut Panic, Peanut Mania, even Peanut Envy, it struck hard at IBM’s already beleaguered rivals, causing their sales to fall and stock prices to plummet in recent months. Competitors complained that the speculation about Peanut’s overblown attributes in the media amounted to little more than free publicity for IBM, which refused to acknowledge that the product even existed.

Inevitably, when the highly secretive company finally lifted the veils last week on the computer—prosaically titled the PCjr—it was an anticlimax. But even as industry analysts poked fun at

its appearance and criticized it as overpriced, they predicted that one factor would virtually guarantee its success: the brand name of IBM.

IBM may already be three of the bestknown letters in the history of business, but increasingly the mighty colossus

seems bent on stamping them on the world. With $34.4 billion (U.S.) in sales in 1982, IBM dominates a staggering 40 per cent of the world market for computer equipment and leads the market in almost every one of the 130 countries where it does business. But during the 1970s the company lost some of its momentum. While blue-jeaned inventors in Silicon Valley were revolutionizing the industry, IBM executives seemed by contrast to be dozing at their desks. Then, over the past three years, the corporation has awakened determinedly and shaken the entire industry in the process. Free of the restraints of a 13year battle with U.S. antitrust authorities and invigorated by a major internal reorganization, IBM has become the most aggressive player in its field. Stephen McClellan, author of a forthcoming book on the industry, captures the emotions of competitors who are watching IBM with increasing alarm. “In the 1970s,” he says, “IBM was a battleship in mothballs. Today it is a fleet of killer submarines.”

IBM’s most dramatic conquest has

taken place in the fast-growing $8-billion personal computer market. It first waited for the market to develop during the 1970s and moved in with its Personal Computer, better known as the PC, in August, 1981. From that standing start, IBM has shocked all manufacturers, including itself, by leaping into first place in only two years and becoming the dominant force in the world market. IBM’s PC, which retails for $2,000 and up, has become a standard feature of offices around the world and has captured 29 per cent of the Canadian market. Its phenomenal success has led to widespread predictions that the cheaper and less complex PCjr will gain the same grip on the chaotic and still emerging home computer market.

Still, PCjr’s debut last week brought only scattered cheers and more than a few catcalls. Some critics dismissed its main innovative feature—a cordless keyboard which can be used from as far as 20 feet away from the screen—as gimmicky. Others complained about the rubberized keyboard which California computer columnist John Dvorak described as feeling “dubious and cheap.” Priced in Canada at $998, the basic model, which uses cartridges similar to those for videogames, is considerably more expensive than comparable home computers on the market. Although it can display up to 13 colors, it is inferior to the Commodore and Atari computers for playing games. Says Kenneth Williams, president of Sierra On-Line Inc., a leading U.S. software manufacturer: “There is no way that our game Frogger will look as good on the PCjr as on the Commodore 64.”

Enhanced: Although analysts were generally disappointed by the basic model, they gave slightly higher marks to an enhanced version with a disc-drive storage device, priced at $1,918. Although IBM has deliberately limited the PCjr’s capabilities so that it does not compete directly with the pricier Personal Computer, the enhanced model can take some of the same programs and can use telephone lines to plug into information banks. Some analysts foresee executives using PCs in their offices and taking discs home in their briefcases for further work on the PCjr. But, because its memory is limited to 64 K bytes (64,000 characters, or 32 typed pages) in the basic model and 128 bytes (128,000 characters) in the enhanced version, the PCjr cannot accommodate some of the most popular business programs now on the market—such as the Lotus Development Corp.’s 1-2-3, a sophisticated accounting program for small businesses. As well, the enhanced model has only one disc drive, which

limits its power and prevents it from making copies. For its part, IBM insists that it did not design the machine for serious business applications. Says IBM Canada spokesman Janet Vereshack: “It is for use in a family environment, for games and household management, with just some business applications.”

Despite the PCjr’s alleged inadequacies, and the fact that no machines will be available until the first quarter of next year, the industry consensus is that it will sell. Kenneth Sonenclar, program director with the Gartner Group, Inc., of Stamford, Conn., estimates that IBM will sell more than one million PCjrs by the end of 1984. “Everyone laughed when IBM brought out its original PC,” concurs Mark Stirling of Toronto’s Evans Research. “The industry said, ‘It’s overpriced, it will never sell.’ Well, today in Canada it has 29 per cent of the market and we project that by the end of 1984 it will have 38 per cent. I see people reacting to the PCjr, but people should never underestimate IBM’s marketing capability.”

Big Blue: The inherent stability of the IBM name will be a key selling point with consumers who are already confused by the dizzying array of products in the home computer market and concerned about the staying power of certain manufacturers. Late last month Texas Instruments Inc. abandoned its home computer division after losing $111 million in the third quarter of 1983. Of the remaining producers, Commodore International Ltd. of the Bahamas is the strongest. Admits Brian Clarke, president of Coleco Canada, which manufactures the recently unveiled Adam home computer: “When consumers are overwhelmed, awed and confused they are likely to head for the Rock of Gibraltar.” As well, IBM’s reputation is likely to prompt leading software manufacturers to create the programs that are the real key to the machine’s success. The chicken-and-egg nature of the business gives PCjr an excellent chance of becoming the industry standard, as the PC has become in its field. Said Coleco’s Clarke: “The PCjr is a product we or Atari would not dare introduce—our Adam, for example, has twice the memory at about half the price—but IBM will probably get away with it.”

IBM, nicknamed “Big Blue” after the corporate color it puts on most of its products, is transforming itself into a corporate marauder, mixing new strategy with the other ingredients for success developed over the firm’s history. Few people paid much attention back in 1910 when one of Wall Street’s early

conglomerate builders, Charles Ranlett Flint, arranged the merger of a triad of small companies: the Computing Scale Company of America, a maker of scales and food slicers; the International Time Recording Company of New York, the United States’ leading maker of time clocks; and a fast-growing young firm called the Tabulating Machine Company, best known for selling its punchcard calculators to the U.S. government for use in the 1890 census. The new company’s name, Computing-TabulatingRecording (CTR), aptly reflected its disparate elements. And, since many wary investors were convinced that CTR was little more than a scheme to score a stock market killing for Flint, its beginning was hardly auspicious. Such was the birth of what has become IBM, whose $4.4 billion (U.S.) in profits on sales of $34.4 (U.S.) billion made it the most profitable industrial company in the United States last year.

Struggling: IBM’s astounding rise was largely the legacy of Thomas Watson Sr., a paternalistic visionary who joined the still tiny CTR in 1914, renamed it International Business Machines a decade later and moulded it into a successful corporation. He assured his nonunion workers—they remain so in North America—that the company would care for them from cradle to grave. They received everything from

cial extensive IBM country retraining club programs memberships. to speWatson systemized every aspect of their lives. He decreed what employees wore (dark suits), what they drank (no alcohol) and even what they sang. Watson used to lead employees in group renditions of Ever Onward, the company song he commissioned. It featured such lines as: “Our reputation sparkles like a gem ... for the ever-onward IBM.” Watson himself came to the struggling firm while facing a one-year jail term on antitrust charges stemming from his

role as a bare-knuckled marketing executive at National Cash Register. Eventually, those charges were dismissed and Watson went on to stamp his imprimature on IBM, stressing an intense commitment to sales and a hard-nosed willingness to undercut rivals.

Coup: Throughout the office equipment boom of the 1920s, Watson’s careful husbanding of

nance cash enabled customer IBM leases to fiof its equipment. That gave the company a significant edge on such firms as National Cash Regis-i

ter and Burroughs, which relied mainly on sales. Moreover, IBM prospered throughout the Great Depression. Costconscious companies sought its products to trim their payrolls, and Washington’s burgeoning New Deal bureaucracy developed a huge appetite for cal-

culators and typewriters. In one key coup, IBM won the 1935 contract to supply the new Social Security Administration with the machines to track payments to millions of U.S. pensioners. But the firm also felt the first lash of the justice department’s antitrust whip in 1933, in a case that forced IBM to divest itself of a highly profitable punchcard monopoly.

Ironically, IBM initially was bested in the postwar “computer revolution” by Remington Rand (predecessor of today’s Sperry Rand

Corp.), whose Univac computer became the first commercial model. But, in what would become a familiar pattern, IBM caught up quickly and by 1956 had captured 85 per cent of the U.S. computer market—largely on the strength of Watson’s intensely motivated sales force. By the mid-1960s, under the direction of Watson’s son, Thomas Jr., IBM was the bluest of Wall Street’s chips, and its global network made it number 1 in most other countries as well. But on the last day of Lyndon Johnson’s presidency, yet another antitrust suit hit “Big Blue.” The action seemed to stall IBM’s growth throughout the 1970s as the litigation dragged on for a record 13 years.

Roaring: The Reagan administration decided last January that the government’s antitrust suit was “without merit” and dropped it. IBM came roaring out of the court with all the esprit of—and vastly more cash than—its once smug, young competitors.

Still, in the view of IBM Chairman John Opel, analysts are wrong when they attribute the company’s revitalization to the dropping of the antitrust

suit. A more crucial cause, says Opel, is the firm’s breakthroughs in cost. Indeed, starting in 1977 IBM poured $10 billion into plants and equipment in a bid to become the industry’s lowest-cost producer. Author Robert Sobel describes the drive for renewed pre-eminence in his book, IBM, Colossus in Transition, as “one of the greatest construction and expansion programs in corporate history.” In a three-year period, says Sobel, IBM expanded manufacturing plant and laboratory space by more than 25 per cent.

Commanding lead: But perhaps the most remarkable success story in recent IBM history was the company’s belated entry into—and sudden dominance of— the personal computer market. IBM strategists watched with interest in the 1970s as fledgling firms pioneered the new machine. The technological triumph that spawned the explosive personal computer business was developed in the myriad research labs in California’s Silicon Valley. There, tiny devices called microprocessors were engineered to pack thousands of circuits onto a postage stamp-sized silicon chip. One of the first entrepreneurs to recognize the potential of the chip was Steven Jobs, founder of Apple Computer Inc. Apple jumped into the business of marketing personal computers in 1977. Since then

its well-known family of products has boosted Apple’s sales from $1 million in 1977 to $582 million last year. The new IBM entry in the market helped to clear up consumer confusion. Despite the PC’s late arrival, says Ulric Weil, an analyst with New York-based Morgan Stanley & Co., it quickly became “the standard

for the personal computer market.” In 1982 IBM sold 200,000 PCs and 1983 sales are projected at $1 billion. IBM has already tied Apple for market share in the U.S. personal computer market. In Canada, IBM Canada, headed by Chairman Lome Lodge, has taken a commanding lead (page 46). Not content with the PC’s success, IBM introduced two new personal computer products last month: the XT/370 and the 3270.

In a clever management stroke, IBM executives realized that in order to compete in a fast-changing entrepreneurial market, they would have to introduce greater flexibility into the company’s traditional centralized corporate structure. In a radical departure, since 1981 IBM has created 15 small specialized units within the corporation to explore such ventures as industrial robots and directory assistance equipment sales to telephone companies. Says computer industry analyst Robert Djurdjevic of Phoenix-based Annex Research: “They recognized that if you want a good product in a hurry you cannot burden your team down with top-heavy management.” When IBM decided to enter the personal computer market, it turned the task over to a 12-member team in July, 1980, with directions to develop the PC within a year.

Bankruptcy: The PC itself was not technologically innovative. In fact, it was nothing more than a compilation of parts from other suppliers. But the group broke sharply with established practice by permitting outside firms to produce software programming and by marketing through retail stores—two important factors in the PC’s overwhelming success. As well, the PC entered the market at a time when a profusion of products with such new names as Osborne, Eagle and Epson confronted consumers.

The result was more turmoil in an already volatile marketplace. Once highly favored by analysts and investors, in the past year computer manufacturers have suffered losses, plummeting share prices and, in some cases, bankruptcy. In the past 10 months such major firms as Atari, a unit of Warner Communications, and Texas Instruments have reported heavy losses. Last week Texas Instruments announced that it will cease production of its 99/4A home computer. Apple Computer’s profits have plunged in the most recent quarter by 73 per cent and it suspended payments to its employee profit-sharing fund. And Digital Equipment Corp. of Massachusetts reported a similar profit slump last month which sent its stock price plummeting $21 (U.S.) per share in one day of panicky trading. As well, in September Osborne Computer Corp., the pioneer of portable personal computers, declared bankruptcy. What

is more, analysts expect more shakeups. According to Alexander Stein, an expert with the San Jose-based Dataquest Inc., the 300 firms making computers in the $l,000-to-$5,000 price range could shrink to 100 by 1987.

When it begins selling the PCjr, IBM may begin to dominate the home computer market. Analysts predict that IBM’s entry will not hurt Commodore International, whose $200 Commodore 64 offers many of the same capabilities

home Peanut personal as the may and higher hurt the computer office priced sales of markets. that PCjr. the Apple bridges But II, the the a

Misinformation: But, now that the PCjr has been unveiled, rival firms at least know what their competition is. They will not have to endure the rumors about its abilities that have added to the recent volatility of their share prices. Says Djurdjevic of Annex: “The Peanut has been described in speculative terms for the past five months; that hurt the competitors. Now that we all know what it looks like, the competition is not fighting a ghost. The competitors can adjust their marketing strategy.” Added George Morrow, president of Morrow Designs, a California-based microcomputer company: “The rumors of the product and the business of withholding it from sales until after Christmas cripples the rest of the marketplace.” Charged Morrow: “There is

no question that [IBM’s] retail strategy is predatory. The rumors were not manufactured. They were deliberately leaked. It was misinformation in the sense that IBM would show pieces of the Peanut but no one knew exactly what was happening. So the rumors built an image from all the best pieces. ” Adds Morrow: “The press is responsible for the success of the strategy—it is IBM’s tool.” Despite IBM’s unquestioned clout, the introduction of the PCjr is not without risks. The home computer market is perhaps the most unstable in the industry. It is characterized by heavy promotion and severe price-cutting. In the under-$l,000 price range, stores are flooded with products ranging in cost from Timex’s Sinclair TS-1000 to the PCjr. Although a few models, such as Coleco’s $1,100 Adam, which includes its own printer, offer considerable word-processing capacity for their price range, manufacturers have yet to persuade consumers that the machines are useful for much else than playing games. Says consultant Stirling: “The home computer market just has not taken off. The reason is simple: what can you use them for? I don’t know.” Much-touted uses like home banking, personal budgeting and catalogue shopping via television sets have failed to rouse widespread interest; indeed, Ontario’s Infomart venture into computerized home shopping, VISTA, died amidst

failing retailer support late last month. John Bear, author of The Computer Wimp, cites the story of one Toronto man who was so desperate to find new uses for his $4,000 personal computer that after he had indexed his addresses and Christmas lists he turned to cataloguing all of his neckties. Even Philip Estridge, president of IBM’s home computer division, acknowledges the difficulty of persuading consumers to buy a home computer. “Their chameleon-like ability to change functions makes it difficult to position the market,” he says.

Titan: But, even if the home market never fully develops and PCjr is a failure, it would constitute no more than a small miscalculation in the corporation’s massive growth campaign. “Given its size and strength, IBM can afford to advance on all fronts at once,” said the Gartner Group’s Sonenclar. He predicts IBM will grow by at least 15 per cent a year for the rest of the decade, a phenomenal pace given its current magnitude. In its bid to dominate all sectors of the computer industry, the corporation will inevitably crush some competitors and send others scurrying to find specialized niches that IBM has overlooked. With the titan on the march again, the IBM label is likely to remain printed on the public’s mind for years. -GILLIAN MACKAY and JAMES FLEMING, with Val Ross in Toronto and Lenny Glynn in New York.