The End Of The End For `Big Iron'

Louis V. Gerstner Jr. has a tough balancing act ahead. The IBM chief executive has to turn around a company that still gets some 40% of its sales from high-margin mainframes and minicomputers even as it introduces a new generation of low-margin personal computers that can do many of the same tasks as the bigger machines. Big iron, as the industry likes to refer to mainframes and minis, has been sinking in popularity for a decade, and in 1994 it will officially become a niche.

Just look at the trend lines. Sales of PCs and workstations will reach $42.8 billion in 1994, or 58.4% of all U.S. computer hardware sales, according to market researcher International Data Corp. That's up from 56.6% in 1993, and 50.2% five years ago. Mainframe and minicomputer sales, at $23.1 billion, will constitute less than 20% of the total, while the remaining $7.4 billion will be spent on data-communications equipment.

Even worse for IBM, Digital Equipment, Unisys, and other big-iron makers, the five-year compound change for minicomputer and mainframe sales as of 1994 will be a negative 1.8%, compared with a growth of 7.5% for PCs and workstations, and a 4.3% growth for the industry overall, estimates IDC. "It's the end of the end for mainframes," says George F. Colony, president of market researcher Forrester Research Inc.

IDENTITY CRISIS? That is one reason why Wall Street thinks IBM lost 20 a share in 1993 and will post a profit of only $2 to $2.50 in 1994. Granted, that's a lot better than 1992's loss of $12.03. But compare IBM to PC maker Compaq Computer Corp. Analysts say Compaq earned about $5.20 a share in 1993 and should post a profit of $6.03 in 1994.

PCs will even begin to take on the characteristics of big iron in 1994, thanks to a group of powerful microprocessors now hitting the market. IBM's own PowerPC chip, built in partnership with Motorola and Apple Computer, along with DEC's Alpha chip and Intel's Pentium, are an order of magnitude faster than the Intel 80486 chip that now powers the most popular PCs. "PCs based on the powerful new microprocessors, connected over networks, will become the new mainframes," says Kenneth A. McPherson, president of consultancy Redbrook Technologies Research Ltd. in Framingham, Mass.

The new chips also will make the demarcation between workstations and PCs even blurrier. IDC analyst Nancy Battey says the "personal workstation" will emerge in 1994, aimed at business customers who do high-volume number crunching. "We expect this to be the big growth area in workstations," she says. This means that Sun Microsystems Inc., Hewlett-Packard Co., and other traditional workstation makers who have long sold primarily to engineers will have to go head-to-head with PC companies. Sun is already feeling pressure--analysts say it earned $1.49 a share in 1993, down 13%, but should recover to $2.16 in 1994. Overall, workstation sales should grow from $9.9 billion worldwide in 1993 to $11 billion this year, according to market researcher Dataquest Inc.

MOMENTUM WORRIES. There is still a big question concerning just when this year the newest PCs will start selling, since so many 486 PCs were purchased in 1993. Lower prices, powerful new software, and pent-up demand all drove sales far higher last year than anyone expected--a total of 14.8 million units in the U.S., up 25.8% from 1992, says IDC. Indeed, the biggest headache in 1993 for both manufacturers and customers was frustratingly big backlogs. Now, with backlogs whittled down, IDC expects PC sales to grow around 10% in 1994, to 16.28 million units. "The challenge is going to be getting companies to replace 486s that they just bought with the Pentium," says IDC analyst Richard Zwetchkenbaum.

On the home front, however, PCs will continue to sell like hotcakes. The home market exploded in 1993 and is expected to keep roaring in 1994. The home PC of choice is a multimedia system equipped with a CD-ROM player, sound card, and video. Link Resources Corp. estimates that one million multimedia PCs will be sold for home use in 1994, vs. 718,000 in 1993. And 45% of PCs shipped in the U.S. will be equipped with a CD-ROM player, up from 39% in 1993.

With all this attention on new chips and new markets for PCs, there is finally something for the industry to talk about besides price wars. As Dell Computer Corp.'s CEO, Michael S. Dell, puts it: "Last year, I had the feeling the industry had run out of innovation." But with multimedia, digital video, and the Pentium chip, "there's a lot more excitement. We're entering a whole new wave of innovation and growth." Now if only Lou Gerstner could get the same kind of buzz going over all that aging big iron.