Mike Baumgartner left no stone unturned in his six-month quest for a new computer. The Seattle-based pilot, who has used an IBM PC for six years, read reviews and compared ratings of mail-order suppliers. He checked out an obscure model at the Costco Wholesale Corp. warehouse club as well as the top brands at a computer dealer. Baumgartner finally took home a no-name clone built by two guys working out of a storefront. For $1,600 he got just what he needs: a 486SX processor, fax modem, 8 megabytes of memory, and a 130-megabyte hard drive, "plus great support." Says Baumgartner: "Not a bad deal, huh?"
Such deals have sent marketing executives at Compaq and other PC makers back to the drawing boards. These days, the market is full of consumers who have bought PCs before and businesses that have ordered hundreds. "Buyers are smart," says Ted Waitt, chief executive of direct marketer Gateway 2000. "They can't be fooled."
NO BELLS. With hundreds of vendors to choose from, customers are ruthless in their search for value. Some 650 business and home computer buyers surveyed last summer by market researcher Frost & Sullivan Inc. listed cost and warranty as their top criteria. Not brand, not bells and whistles. "It's perhaps the closest example in the U.S. to a free market," says Amy D. Wohl, president of market researcher Wohl Associates Inc. in Bala Cynwyd, Pa.
In short, personal computers "are fast becoming like VCRs," says Gary Curtis of Boston Consulting Group Inc. As with VCRs, there are too many suppliers vying for market share. And since most PC brands differ from one another about as much as brands of VCRs do, competition turns on price. A Gateway based on a 486 chip that sold for $3,000 last year is now $1,495. Customers are conditioned to expect more of the same, says Michael S. Dell, chairman of Dell Computer Corp.: "Prices go down in this industry. It's a fact of life."
So, how will PC makers make a living? Fortunately, the analogy to consumer electronics isn't a perfect one. It's most accurate for newer markets--consumers and small businesses. There, PC companies may have to act like Sony or RCA, spending heavily on advertising to stand out. But a big chunk of the market, the corporations that bought most of the PCs over the last decade, doesn't behave like your typical couch potato. Business buyers love a bargain, but because personal computers are so vital to their operations, they have other considerations.
Some are even willing to pay for extra service. Last spring, when Centel Corp. wanted a local-area network of 40 PCs for its top executives, it looked for an IBM dealer, instead of cutting corners. "The support and training was really important," says Executive Vice-President A. Allan Kurtze. Still, he scoured the country for the cheapest dealer for the job.
The trick for PC makers will be to segment the market deftly. Not easy, as IBM learned with its PS/1. To make sure the home computer would not draw buyers from the pricier PS/2 line, Big Blue gave PS/1 limited upgrade capability and an undersized keyboard. PS/2 buyers weren't tempted--nor were consumers who snapped up Packard Bells and other inexpensive clones.
DANGERS. Compaq's ProLinea line has, so far, straddled both worlds. It was originally meant just for the mass market, but Compaq's dealers insisted on carrying it, too. If the company had not given in, Compaq customers probably would have tracked down ProLineas wherever they were, says Debbie Meagher, merchandise manager for computers at Best Buy Co. Computer makers, she warns, will trip up by "trying to put buyers into little cubbyholes that don't make sense."
It's tough to outfox a marketful of know-it-alls. But there's an upside. Savvy buyers can spot the subtle differences that spell extra value. Take Rabbi Martin I. Sandberg, who snapped up two of Gateway 2000's most advanced PCs for desktop publishing and other chores. "I want the best value," he explains. "But that doesn't just mean price. I buy to get the newest capabilities." Ah, sweet reasonableness. PC makers would welcome more of it.