Pc Makers Head For `Soho'

So, you've decided to set up a home mffice, and you need a computer. That used to mean poring over computer magazines, then going to a user-hostile store to pick the right mix of hardware and software. But the industry has come to realize that's not how most people like to shop. So this fall, you can buy a complete PC system in a box at the same place you get your paper clips. Or, for some folks, at a department store while shopping for school clothes. Still others can order from a catalog or an 800 number.

In other words, the personal-computer industry is getting an overhaul, splitting itself into lots of focused fragments as part of a hot marketing strategy called segmentation. That's the industry buzzword for preconfiguring computers and software into different packages for nearly every type of user--and then selling them everywhere. Before, vendors brought out similar models in the same line, differentiated only by speed and power. They shipped the hardware and let dealers worry about the selling. That was fine for sophisticated corporate buyers but didn't suit those with simpler needs. So when corporate demand turned stagnant this year, PC makers realized they had to branch out. "People had been shooting into the middle and missing the market," says William C. Michels, vice-president at consultants Booz, Allen & Hamilton Inc.

To make sure they don't miss again, manufacturers are slicing and dicing their products into different lines for different markets and channels, including, for the first time, mass-market retailers. IBM and Apple Computer Inc. are both adding a third line this fall for the retail market, following the lead of Compaq Computer, Dell Computer, and AST Research. All are offering lines for corporate, small-business, and home users.

Segmentation does carry a risk. There's no reason a manufacturer's traditional corporate customers won't walk into a superstore and buy one of its cheaper, less profitable PCs. But the big guys may have little choice. They feel that if they don't cannibalize their products, they could fall prey to rivals.

Anyway, it's a risk worth taking--if segmentation drives up the overall volume. That could happen if the industry finally succeeds in winning over the elusive home buyer, who has resisted PCs for 10 years now. This time around, vendors are targeting a very specific, highly motivated segment of this market: consumers who want to do a lot more than file recipes or play electronic games.

POWER SURGE. These consumers live in what the industry calls SoHo--meaning Small office, Home office. SoHo's residents are the millions of students, consultants, and workaholics who have computers on their desks at school or the office and want to work at home as well. Manufacturers see SoHo as the only computer market showing significant growth right now: a 22% increase in units shipped in the U.S. this year, to 2 million, according to Alex. Brown & Sons Inc. That compares with a 5% drop in corporate purchases, down to 3.35 million units.

SoHo's emergence results from the convergence of powerful computers, low prices, and a reason to buy. For about $1,200, customers can pick up a reasonable version of the computer system they have at work, so they can keep on fine-tuning those reports in the evening. "Research on all levels has indicated that this new user and channel is just now ready to explode," says Tim Bajarin, consultant at Creative Strategies Research International Inc. in Santa Clara, Calif. Bajarin estimates that some 20 million potential customers live in SoHo territory. They aren't computer experts and don't want to be. "They basically buy on price and functionality," says Bajarin.

AST and Dell were the first major vendors to go after the SoHo market by introducing a retail line of PCs. But industry powerhouse Compaq turned the strategy into an industry must-do in June, when it announced the ProLinea. Until then, Compaq had sold two similar lines, the DeskPro/m and DeskPro/i, through traditional dealers, costing $2,000 and up. The ProLinea started at $899 and marked Compaq's first entry into the mass-retail market, including Tandy Corp.'s Computer City SuperCenters, Office Depot Inc., and Circuit City Stores Inc. It has turned into a huge success, with demand far outstripping supply.

TURF FIGHT. Best of all, the ProLinea was snapped up by new customers, not corporate Compaq owners looking for bargains. Ross A. Cooley, Compaq's senior vice-president for North America, says most ProLinea buyers are from "that so-called SoHo market that we just didn't reach before." The result? Cooley predicts that 20% of Compaq's North American business next year will come from the retail channel.

IBM is taking segmentation a step further. On Sept. 9, it divided its entry-level PS/1 into three separate lines--the Essential, Expert, and Consultant--each with software already installed so the buyer can just take it home, plug it in, and go to work. In October, Big Blue will come out with another new product, the ValuePoint line, its answer to Compaq's ProLinea. Aimed at small businesses, the ValuePoint will start at less than $1,000 and sell through large electronic and computer superstores, as well as through the traditional dealers that already carry IBM's PS/2, its corporate offering.

The ValuePoint will actually be cheaper than a PS/1 machine, but analysts say home buyers are willing to pay extra for the prepackaged, plug-in-and-play design of the Essential, Expert, and Consultant. "Price, service, and ease of use are the three critical success factors in the home," says Steven L. Eskenazi of Alex. Brown. "Customers are paying for the no-brain nature of the machine."

Now, everyone else is getting into the game. On Sept. 14, Apple, which already sells a high-end Macintosh called the Quadra, designed for corporate customers, unveiled a new low-end Macintosh called the Performa, aimed at the home and sold through 11 national retail chains. In addition, on Sept. 28 NEC Corp. will launch a new home line called Ready for the retail market--along with its high-end Select Solution PCs sold through direct response and specially selected dealers.

All this segmentation may seem confusing. But if the PC makers can keep it all straight, they may find themselves a high-growth market once again.

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