Makers say economy, clones put brakes on zooming sales


May 27, 1991|By Lawrence Edelman | Lawrence Edelman,Boston Globe

The sexy personal computer industry is looking a lot less glamorous after a week in which some of the biggest names in the business took a trouncing.

Consider: Loss-plagued Businessland Inc., once the largest franchiser of PC retail stores, said it may have to file for bankruptcy protection.

Compaq Computer Corp.'s stock, for years a Wall Street favorite, plunged 27 percent after it warned that second-quarter earnings may be 80 percent below last year's level.

Apple Computer Inc. was reported to be considering layoffs of up to 2,000 employees, or 12.8 percent of its work force, as part of a cost-cutting plan to offset falling profits.

No, PCs aren't headed for a minicomputer-style bust. With shipments expected to grow 10 percent or more this year, there is still money to be made peddling desktop and portable computers, industry analysts say. But they say last week's headlines make clear that the PC business is being whipsawed by slowing sales, price slashing and changes in customers' buying habits.

"This is a tumultuous time for the PC world," Bruce Stephen of International Data Corp. said.

Ironically, as stars such as Compaq stumble, Digital Equipment Corp. is taking a fresh run at becoming a serious PC player. Last week, the Maynard, Mass., company unveiled new models and a refined strategy that won immediate applause -- even from some longtime critics.

Digital executives say they won't make the same mistakes that sunk its two earlier forays into the market, when ho-hum products and lackadaisical marketing yielded poor results. The company is taking aggressive aim at midsize and big organizations with models designed to plug into computer networks.

Says Geoff Burr, group manager of Digital's PC business unit, "We are definitely not in the business of selling PCs to mom-and-pop customers."

That's important because while Digital has sold relatively few PCs, it brings in a lot of cash -- about $1.2 billion last year -- helping big customers tie together PCs with software, networks and service.

Analysts think Digital could exploit the turmoil in the PC market. As Businessland's woes show, many buyers are shunning storefront retailers. In some cases, they are going to bare-bones wholesalers; in others, they are turning to suppliers with the kind of expertise in software and networking that is Digital's forte.

Of course, success for Digital is far from a sure thing. Besides its poor track record, it is mounting a new campaign at time when the always-heated competition among PC vendors is getting even hotter. The days of 30 percent annual sales growth are over; the reality for the next few years will be gains of around 10 percent.

"It is a commodity market, profit margins are slim and there are too many players in it," says Boston consultant Patricia Seybold.

She says many large corporate customers are no longer willing to pay the 20 percent or more premium commanded by name brands such as Apple, Compaq and International Business Machines Corp. That's because many clone vendors can now build models that are virtually indistinguishable from name brands. Meanwhile, the recession is squeezing capital spending budgets and buyers are playing vendors against each other to get the best price.

That's good news for cloners such as Dell Computer Corp., which early on faced customer fears of poor quality and lack of technical assistance. Noting that Dell's sales are expected to nearly double to $750 million this year, Dell's founder, Michael Dell, says: "Customers think it is no longer a risk doing business rTC with Dell."

In response, Apple, Compaq and IBM have slashed prices, in some cases by up to 50 percent. This has boosted their volume but eaten away at profit margins. Dell also has cut prices.

At Apple, unit sales in the most recent quarter soared 87 percent, but revenue rose 19 percent and profits were flat with the year-ago period. Apple is now speeding up plans to cut costs.

Compaq is also feeling the squeeze. It warned investors that second-quarter profits would fall to less than 25 cents a share, compared with $1.18 a share a year ago. Compaq's chief executive, Joseph Canion, blamed the decline on mergers among several key dealers, which have left them with excess inventories. The strong U.S. dollar, which reduces the value of sales made overseas, was also a factor, he said.

But Compaq must learn to live with sharply reduced margins. "People are not buying the line any more that they are getting more by buying IBM and Compaq," says International Data's Mr. Stephen.

But that doesn't mean the brand-name vendors are doomed. Analysts say they have a lot more money than the cloners to survive a price war.

And the IBMs of the world are better positioned to address the high-end of the market: network servers, which link desktop PCs, and system integration, which is tying PCs and servers into cohesive networks along with mainframes and minicomputers.

"The guys who will last will be the ones who can manufacture in high quantity and high quality, who can afford good research and development and be first with new technologies," said Ms. Seybold, the consultant.

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