A Power Surge In Home P Cs

Awhile back, when sales of pricey personal computers for big businesses began to slip, IBM and Apple Computer Corp. arrived at the same conclusion: Time to jump back into the home-computer market. So the No. 1 and No. 2 PC makers set up crash programs to design new low-cost models for the 1990 Christmas season.

Good thinking. Despite the recession and the conflict in the Persian Gulf, home-PC sales soared. Last summer, market researcher Link Resources Inc. predicted that consumers would spend $2.8 billion on home PCs in 1990. Now, Link says the total was closer to $4.9 billion.

There was a hitch, though. The millions of dollars that IBM, Apple, and home-computer perennial Tandy Corp. spent on advertising did drag thousands of consumers into stores. But most of them didn't end up buying those brands. Instead, they opted for IBM clones that, like the IBM Personal System/1, Macintosh Classic, and Tandy 1000 RL, carried price tags starting at $1,000--only with far more power and many more standard features.

STRONG START. Even so, IBM and Apple aren't discouraged--or even unhappy. Big Blue got off to a strong start with the PS/1, selling about 100,000 units between its July rollout and the end of the year (chart). "Sales started out way above expectations," says Marvin M. Stern, vice-president of Sears Brand Central, the Sears, Roebuck and Co. unit that was among the first to carry the PS/1. Echoes consultant Bob Orbach, president of Orbach Inc. in New York City: "When it first came out, people literally crowded around it in the stores."

Then, sales ground to a halt. Even IBM admits that January and February were terrible months for the PS/1. The company thinks a big part of the problem was the conflict in the Middle East. "Everyone was home watching the war on television," says Skip Gladfelter, marketing manager for IBM's PS/1. Retailers also say that after their surprising success at Christmas, makers of inexpensive PC clones began focusing more intensely on consumer markets. "As the year progressed, a lot of other manufacturers, such as Packard-Bell and Laser, got very aggressive," says Sears' Stern.

Apple's Classic fared better--once the company was able to ship in volume. Because manufacturing shortfalls limited shipments through Christmas, Link figures Apple sold just 70,000 Classics in 1990. Other analysts say demand was so high for the first low-priced Macintosh that the company could have sold three times that number. Indeed, since then, the Classic has become one of Apple's hottest-selling computers ever. Link says it expects the company to move nearly 250,000 Classics this year.

Now, Apple and IBM are getting ready for another Christmas bonanza. On Oct. 21, when Apple is expected to announce its first notebook computers and some powerful Macs to run computer networks, it is also expected to unveil an updated Mac Classic. It will be based on Motorola Inc.'s 68030 processor--a big step up from the current model's 68000 chip, the same type that was used in the original 1984 Macintosh. The price will go up, too: With a hard-disk drive, the machine will list for nearly $2,000, say dealers.

IBM is planning a power boost, too. Its new PC, dubbed the PS/1 1/2, will use the 80386SX chip instead of the venerable Intel Corp. 80286 processor that powers the PS/1. Dealers say they've been told that IBM hopes to ship the new machine, which will also offer more hard-disk storage than the current model, in October. But they say the company has been cautioning them about production problems that could cause delays. "If they miss October, they'll be dead in the home-computer water," says one dealer.

Tandy has already updated its home-PC line. In April, it supplemented the badly underpowered 1000 RL with a home model that uses the 80286 chip, and in August, it added a $1,299 80386SX-based computer that should go head to head with IBM's PS/1 1/2.

If Big Blue grabs more of the market this year, it will be because it learned from last year's mistakes. The biggest change will be in how its home PCs are sold. When the PS/1 was released a year ago, IBM's strategy called for the machine to be sold through department stores and a handful of traditional PC dealers.

Competition with dealers has forced department stores to slash PS/1 prices and, despite a recent IBM wholesale price cut, margins on the machine are "not what we would wish them to be," says Michael E. Flynn, electronics merchandising manager for Dayton-Hudson Corp.'s department stores. Margins are higher on a line of Smith-Corona Corp. clones, says Flynn.

In a bid to build sales in the home and small-business markets, IBM and, to a lesser extent, Apple, are moving toward a new category of retailer: warehouse-like computer superstores. These no-frills outlets are emerging as an important distribution channel for consumers and many businesses. Apple just signed up one of the biggest superstores, Comp USA, to carry the Classic and other Macs.

STRAINED RELATIONS? Overall, IBM has greatly expanded its home-computer distribution network. With new superstores and other mass-merchandise retailers such as electronics chains, IBM has tripled the number of nontraditional PC outlets that carry the PS/1 to 2,000. The competition from new discount stores could strain IBM's relations with department stores, however. "We are concerned, to a degree, over the profitability of this line," says Dayton-Hudson's Flynn.

Of course, the weak U. S. economy remains a wild card in this fall's home-computer outlook. This year, Link figures the market will contract a bit, to about $4.4 billion, because of consumer belt-tightening. On the other hand, if Link's estimates turn out to be as conservative as they were last year, home-computer makers have little to worry about.

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