JOHN DALY November 27 1989



JOHN DALY November 27 1989




The glittering gambling mecca of Las Vegas was an ideal setting for a gathering of competitors in a multibillion-dollar industry in which the risks rise daily. Last week, representatives from 1,740 computer firms added an extra splash of excitement as they displayed their new wares at the industry’s largest trade show—Comdex 89. Not surprisingly, International Business Machines Corp. (IBM) mounted the largest display, spread over 18,600 square feet at the Las Vegas Convention Centre. For the beleaguered Armonk, N.Y.-based giant, it was a chance to regain some of the momentum it lost after it reported a 30-per-cent decline in its third-quarter profits last month. But the display represented only a tiny portion of the company’s promotional capabilities, which are being pushed flat-out as all manufacturers tempt buyers with deep discounts and a dizzying array of new products. Said IBM Canada Ltd. chairman John Thompson: “The technology is exploding. So you have to cover your bets in a lot of different areas.”

But as competition heats up on all fronts, investors are becoming increasingly wary of placing their bets on the world’s largest computer manufacturer. Last month, the price of IBM’s shares on the New York Stock Exchange closed below the important psychological barrier of $100 (U.S.) ($117 Cdn.) for the first time in five years after it reported that its thirdquarter profit declined to $1.2 billion from $1.5 billion for the same period last year. IBM Corp. chairman John Akers blamed part of the decline on delays in shipments of a new model of data storage disk drive that IBM was supposed to introduce last July but that was only introduced last week and will not be available until December. As a result, industry analysts say that the

firm is headed for its fourth year of weak earnings out of the past five. And they note that bold new challenges from rival firms, including Apple Computer and Compaq Computer Corp., continued to squeeze IBM’s profit margins in its two most important product lines— personal computers and large mainframe systems.

In order to respond to the challenge, IBM is relying more and more on help from outsiders, including some of its former rivals. Computer genius Steven Jobs, who cofounded Apple Computer at the age of 23 in 1976 and who is now chairman of Los Altos, Calif.-based Next Inc., is currently helping IBM develop graphics for a new line of high-powered engineering work stations. As well, last year, IBM formed an alliance with Steve Chen, who completed his design of the giant Cray X-MP supercomputer in

1985, to develop a high-speed supercomputer of its qwn. And last month, Redmond, Wash.based Microsoft Inc., led by its billionaire chairman, William Gates, 34, unveiled a new line of word-processing software that boasts so-called user-friendly features similar to those of Apple’s popular Macintosh line. That has prompted industry analysts to joke that IBM now stands for “I want to be a Macintosh.” Even with some of the brightest minds in computer business involved, the challenge to IBM’s supremacy keeps mounting. The latest threat came from Maynard, Mass.-based Digital Equipment Corp., which last month unveiled its first line of mainframes—large machines that can support hundreds of users at once and that often sell for several million dollars each. In doing so, Digital moved into a market that IBM has dominated for more than three decades. Earlier this month, Houstonbased Compaq—which beat IBM to the market in 1986 with the first personal computer based on the revolutionary quarter-inch-square Intel

80386 microchip—introduced a personal computer based on two even more powerful 80486 chips, which allows it to rival the far larger mainframe computers. Over the past two years, Compaq’s aggressive promotion of its new computers has propelled it into the third place in the red-hot personal-computer market, behind IBM and Apple.

But although IBM’s competitors no longer have any doubts about their ability to introduce new products ahead of IBM—a move once unheard-of because of IBM’s dominance—the 75-year-old giant is still the industry’s top seller, particularly in mainframe computers. Indeed, despite a drop in its share of the market in recent years, IBM’s mainframe sales are still growing by close to 10 per cent a year, and it still has a commanding 70-per-cent share of the more than $20-billion market. Its mainframe revenues are still more than six times greater than those of its nearest rival, Amdahl Corp., which is half-owned by Japan’s Fujitsu Ltd.

In the crucial personalcomputer market, which is growing roughly twice as fast as the mainframe market, IBM is also the leader, but its sales have not grown as fast as its competitors, and its profit margins have dropped drastically since 1984. And analysts predict that its lead in the critical sector, which is worth an estimated $27 billion worldwide, could erode even further next year. According to statistics compiled by Dataquest Inc., a San Jose, Calif.-based computer market research firm, IBM’s share of worldwide sales declined to 15.5 per cent last year, compared with 25.3 per cent in 1984.

Industry analysts say that IBM’s loss of market share is cause for grave concern. Worldwide personal-computer sales by all companies first outstripped mainframe sales in 1984. And although IBM still earns more revenue and profits from mainframe sales, industry analysts and executives agree that the fate of IBM and the other major manufacturers will be determined by their performance in the personalcomputer market. Said Richard Shaffer, editor of the New York City-based Technologic Computer Letter: “IBM dominates other competitors in mainframes, yet it is the tail of the dog in the fastest-growing end of the business.”

In Canada, IBM chief Thompson told Maclean ’s that the advent of the personal computer has already forced DBM to alter dramatically the way it designs, produces and sells computers in order to maintain its market leadership. Two decades ago, IBM Canada had only a few thousand customers and hardly any rivals. In those

days, Thompson said, an IBM sales representaexpensive personal computers, so-called tive could simply sell a corporate client an IBM clones, that were based on the IBM model, mainframe system and leave him to get it forcing all manufacturers to lower prices and running. But now, Thompson said, large-busienhance performance. Today, for approxiness users have many more options, and it is mately $4,000, consumers can purchase a becoming more difficult for IBM to hold on to them as customers. No longer totally dependent on mainframes, buyers can use increasingly powerful midsized computers, or networks of personal computers, to perform many of the same tasks. At the same time, customers now spend about 50 per cent of their purchasing budgets on computer programs, and numerous small companies have developed specialized software.

Specialized computer manufacturers have also introduced more advanced products than IBM in such market segments as engineering work stations.

Thompson said that IBM can no longer be “all things to all people.” Instead, Thompson said that the company “pulls all the parts together, whether they are made by IBM or someone else, to do the job that the customer wants.”

But having to rely on outside suppliers has

reduced IBM’s profit mar__

gins. And Thompson said that growing sales of personal computers are also squeezing IBM’s overall earnings, because they are less profitable than its larger systems. IBM introduced its first personal computer in 1981, almost four years after Apple unveiled its first model. But Thompson said that, in order to get its personal computer onto the market quickly, the firm had to assemble it from parts made by other companies. _

To develop software, IBM § had to form a partnership g with Gates and Microsoft, “ and to sell its personal com3 puters to millions of custom° ers, it had to market them through independent dealers and retail outlets, rather than its own sales force. Said Thompson: “We brought it to market very quickly; the downside of it was that we didn’t make as much profit.”

Still, IBM quickly became the market leader in personal computers on the sheer strength of its name. But hundreds of competitors soon be gan manufacturing and selling in-

expensive personal computers, so-called clones, that were based on the IBM model, forcing all manufacturers to lower prices and enhance performance. Today, for approximately $4,000, consumers can purchase a

complete computer system that includes a display screen, disk drive, keyboard and printer that has 10 times as much power as IBM’s original personal computer.

Still, in a bold attempt to regain its lead, IBM launched its “clone-killer” Personal System/2

in 1987, incorporating some specialized hardware that it did not share with its competitors. But nine of IBM’s competitors, led by Compaq, quickly responded by designing products that were compatible with IBM’s old personal computer line. As a result, many of IBM’s customers, using the older lines, did not upgrade, but industry analysts say that no clear winner has emerged yet. Said Andrew Toller, vice-president of the Toronto-based market-research firm Miller, Toller & Evans Inc.: “IBM lost sight of the fact that they were not the force to make such a brutal change.”

At the same time, IBM is also fighting off new challenges in the mainframe 2 market. Increasingly ag| gressive competitors, in5 eluding Digital, Amdahl and I Japanese-owned Hitachi Data Systems, have forced IBM to cut prices and reduce its profit margins, producing bargains for buyers. Edward Bmdiar, assistant vice-president of information services at Sun Life of Canada, said that IBM began offering dramatic discounts on all its products in recent years to maintain its market leadership.

_ But IBM is relying on more

than discounting in its efforts to increase sales and improve profits. Although the company has never formally laid off any employees, it reduced its worldwide staff to 387,000 from 405,500 in 1986, by offering generous incentives for early retirement. At the same time, it is continuing to retrain and transfer many of its technical and production staff into marketing jobs. And although it is under siege on several fronts, most analysts agree with Thompson that no other manufacturer boasts the same awe-inspiring range of technological expertise as IBM. Still, if IBM cannot reverse its downward trend, one of its fast-rising competitors could soon overtake it in the critical personal-computer market.