The Great IBM-Xerox Race

A SECRETARY in a mail-order house slips pages of its newest catalogue into a duplicating machine hooked up to a specially programmed computer and presses a button. Within seconds, copies begin popping out of inexpensively rented duplicating machines in homes round the nation--with the U.S. Postal Service never getting involved. That will not happen next week or next year, but office-equipment experts insist that it is a serious prospect circa 1980. Indeed it is only one of the intriguing possibilities that they see resulting from the inevitable next step in office technology: a marriage of the computer and the photocopier to produce a hybrid system that could be called either a computer that copies or a copier that computes. The computer in such a system would store items in its capacious memory bank--a monthly mailing list in the case of the mailorder house--and electronically direct either nearby or distant copiers to reproduce material. The major questions are how soon such a system can be developed, and which of two corporate titans--IBM, the computer colossus, or Xerox, the copier king--will do it.

They are fateful questions for both companies. The potential applications of a computer-copier system add up to an enormous new market--and some striking changes in the American office. For example, such a system could do away not only with the need for bulk mailings of advertising material but also with the necessity for office managers to keep bulging files of letters and memorandums. The wording of such documents could easily be stored in the memory bank of the computer part of the system and reproduced instantly on the copier part whenever necessary. Whichever company wins the research battle to develop the system will thus get first shot at enough new business to bolster its accustomed huge sales and profit gains far into the future.

At present, Xerox and IBM are only in the early rounds of the battle, but it is already proving costly. Each has been forced into an expensive invasion of the other's special turf. In order to acquire the necessary technology to produce an eventual hybrid system, Xerox has had to go into the computer business, and IBM has had to produce photocopiers. IBM has been the more successful, though neither has done especially well.

Tough Challenge. Xerox clearly faces the greater problem. It is the smaller company--though size in this league is strictly relative; Xerox's 1971 sales of nearly $2 billion and profit of $213 million would compare favorably with almost anything except IBM's figures of $8.3 billion gross and $1.1 billion net. Xerox also confronts a tougher technical and financial challenge. Computer technology is much more sophisticated than copier-making expertise, and computer manufacturing is vastly more expensive. Moreover, most computers are leased to customers rather than sold, and it takes a long time for the manufacturer to recover in rentals the cost of making and installing the machines.

Xerox nevertheless has gamely plunged ahead. In 1969 it paid stock worth nearly $1 billion in order to acquire Scientific Data Systems, a maker of small and medium computers, which has proceeded to lose $100 million under Xerox's ownership. Undaunted, Xerox five months ago paid another $29 million in stock to buy Diablo Systems, a computer disc-drive manufacturer. Xerox has won barely 1% of the world market for U.S. computers, compared with IBM's two-thirds, and the computer operation will gobble up $26 million in Xerox research and development funds this year alone.

The strain has not yet told on Xerox's profits, which rose 18% above the 1971 period in this year's first six months, but Chairman C. Peter McColough recently warned securities analysts that profit gains in the second half will not be quite so large as Wall Street had been expecting. McColough frankly concedes: "We are not happy about what we have to do, but the simple truth is that we have no choice. If we do not do it [develop a computer-copier system], IBM will, and then we will be nothing more than a company that makes duplicating machines for tiny little offices and businesses."

IBM has done better at making copiers. Though it has only one model and has marketed that for only about two years, IBM is believed already to be No. 3 in the field, behind Xerox and 3M. (Its gains, however, seem to have come at the expense of such concerns as 3M, Addressograph Multigraph, SCM, Sperry Rand and Dennison, rather than Xerox, which retains three-fourths of the global copier market.)

IBM Chairman T. Vincent Learson will not talk about the company's copier program, but IBM's chief problem in getting a computer-copier system on the market seems to be neither financial nor technical but legal. Xerox has built a fence of patents and copyrights around its duplicating technology, and already is suing IBM for alleged patent infringement. Conceivably it can tie IBM in legal knots until its own technicians perfect a computer-copier system--though no one can be too sure who remembers the long line of corporate giants that have lost competitive battles with IBM. In any case, both the legal contest and the research race probably will last for years, during which executives and stockholders of both companies will have ample reason to chew on their nails.

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