IBM's weakening PC retail sales go code blue

OUTLOOK

Tough competition forces Aptiva from store shelves

October 24, 1999|By Amanda J. Crawford

IBM Corp. announced last week that it will stop selling its money-losing Aptiva home computers through U.S. retail stores and will sell them exclusively over the Internet. The PCs will be pulled from stores Jan. 1, while the company's profitable ThinkPad laptops will continue to be available on shelves.

IBM fell from the consistent first or second spot in the consumer market in the early to mid-1990s to fourth this year, with a market share of about 10 percent. The company's consumer and corporate PC group lost $69 million in the third quarter and nearly $1 billion last year. "We don't know what the problem is, but we need to go back to the drawing boards and figure it out," spokesman Trink Guarino said.

Why did IBM take such a drastic cost-cutting move? What are the prospects this will be successful?

Ulric Weil

Senior technology analyst, Friedman, Billings, Ramsey & Co.

The consumer PC business has never been IBM's strong suit. Its customer base has always been businesses and government, where they are holding their own. The big losses are all attributed to their consumer-oriented retail business.

Other companies are more suitable to the vicious environment of falling prices, falling profits in the consumer sector. For Dell, Compaq, Gateway, that's how they grew up, and they can live with it, although they still experience those pressures.

On previous occasions the chairman and CEO, Louis Gerstner, when asked why don't you get out of the consumer PC business, his answer has been "No." Having said that, they cannot go out of that business all at once, at a click of a finger. So they're going to do it more gradually to save face. They will still sell the Aptiva on the Web. It is going to reduce some of the red ink flow in that division, but it is not going to significantly alter the landscape as far as profit is concerned.

Sheldon Grodsky

Director of research, Grodsky Associates Inc.

Everybody's happy that IBM is exiting or reducing its presence in the consumer PC market. It has not formally said it's going to exit the consumer PC market, but it is conceivable that that could be the next step. They've been losing money in this business. If they can exit or reduce their position gracefully, that would be a plus for the company.

IBM is not used to being an also-ran in its industries. In the PC business, especially the consumer PC business, IBM is not a leader in any sense. I think they've decided that the future does not lie in selling through stores. IBM is very strong and they have strong offerings through many of their product lines and service lines. They just haven't figured out how to do this. I think that everyone is looking at the Dell business model and thinks that that's a better way to go. Dell doesn't sell in stores. Selling in stores doesn't seem to be a passport to prosperity.

Stephen Baker

Director of hardware, PC Data Inc.

IBM did this because they felt like there was not enough profit in the consumer retail PC business for them to continue. IBM doesn't seem like they have a solid marketing plan or strategy to take advantage of the IBM brand name. They have staked out a decent niche for themselves by being one of the first consumer PC makers to have the fastest or the latest processors. Over the last eight to 10 months, they have tended to be on the high end of prices, but you would expect IBM could command a premium because they are IBM.

My guess is they couldn't make the numbers because they couldn't produce the products at the right prices to make them profitable. They've held about a 10 percent market share over the last eight to 10 months. They were not going to have a large market share because most of the market is moving to below $800 products. Their average prices have tended to be higher than some of the others.

Harry McCracken

Senior editor, PC World

The retail home PC market is incredibly cut-throat right now. There are all those companies like eMachine that are selling computers for $299, $199 and even less than that. It is a challenge for IBM or anyone else to make a buck in this market. Even if the Aptiva is a better computer and has better support, if someone is looking at the Aptiva and a machine that is free after rebate, it is going to be tough for Aptiva.

There has been talk for some time that IBM has been losing interest in the PC market. They are the major supplier of components to Dell, so they are going to make money in this market whether or not there are IBM PCs.

One thing to keep in mind, a lot of this is being driven by companies like eMachine that may not be around for a long time. It's hard to make profits because the prices have gone so low. IBM might find that the waters for retail may be more tempting at some point.

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