The Pc War WinnersRichard Brandt
There's an upside to the personal- computer price wars--and not just for customers. As PC vendors slash prices and their own profit margins, prices of some disk drives, chips, and software are holding firm while volumes surge. That means fat profits for component makers with the right products.
One of the major beneficiaries is Con- ner Peripherals Inc. (table). Last year, the maker of premium disk drives looked like just another fallen star. Fourth-quarter revenues were running flat, and earnings had dropped 72% from the prior year. Among those who had apparently lost faith: Chairman Finis F. Conner, who has sold 350,000 Conner Peripherals Inc. shares, or about 22% of his stake, since the first of the year.
But 1992 is a different story. When PC makers began slashing prices in the spring, customers started buying more powerful computers. Result: Demand for larger disk drives surged, and Conner saw its second-quarter earnings rebound 72% from a year ago, to $46 million. Revenues gained 36%, to $551 million. Conner predicts that "some of these changes are going to yield very long-term positive results."
RIGHT ON TOP. Those changes have been fast and dramatic. PC prices dropped as much as 40% from June, 1991, to June, 1992, according to International Data Corp., with major players such as Compaq Computer Corp. offering machines for less than $1,000. Even IBM joined the fray, cutting its prices up to 30% on its PS/2 line on July 21.
Consumers are clearly happy. PC retailer ComputerLand Corp. reports that its unit sales soared 45% from May to June. And the trend should continue: IDC now predicts that U.S. PC sales will rise 8% in 1992, up from the 4.7% gain projected earlier in the year.
That translates into profits for Conner and rival drivemakers Seagate Technology Inc. and Maxtor Corp. All three started 1991 swimming in unsold inventory. This year, their big problem is meeting demand. "The computer industry just went gangbusters," says Alan F. Shugart, CEO of Seagate, which went from a $47.8 million loss for the quarter ended last Sept. 30 to a $59.3 million profit for the fiscal fourth quarter ended June 30. Maxtor turned a profit of $28.5 million for the quarter ended June 27, after losing $10.7 million a year ago.Lower PC prices are giving a lift to chipmaker Intel Corp. too, as customers move to more powerful models that use the newest Intel microprocessors. This summer, the new generation of 486-based PCs fell within the $3,000 budget of many corporate buyers, meaning added sales for Intel's proprietary 486 chip.
Intel could use the business: A price war in older 386 chips drove second-quarter earnings down 8%. Daniel L. Klesken, an analyst with Robertson, Stephens & Co., estimates that sales of Intel's 486 microprocessors will increase to 1.5 million units in the third quarter from 900,000 units in the second. He says that should be enough to boost third-quarter profits by 7%.
And don't forget Microsoft Corp. As the supplier of the leading PC operating system DOS, any unit sales increases go directly to its bottom line. Price cuts also enable more buyers to pick up machines with enough power to run its Windows graphics program, now offered at no extra charge by 9 of the top 10 PC makers, according to Microsoft Executive Vice-President Steven A. Ballmer. On June 22, Microsoft reported a gain in second-quarter earnings of 48%, to $210 million, on sales of $815 million, a 55% jump.
The price war has not been a windfall for every software vendor, however. Those who failed to offer products for high-end machines are watching the parade pass them by. Borland International Inc., which came late to the Windows market, reported an 85.5% drop in earnings, to $1.7 million, on a revenue drop of 16.3%, to $114.8 million.
Even the beneficiaries must be wondering: What happens when the rush is over? Drivemakers face the biggest risks if capacity grows too much. But summer is usually slow, making the current spike especially encouraging, and further price cuts are expected this fall. That should add up to more easy pickings for companies selling the right stuff.