Shake-Out in the Hardware Wars

By Philip Faflick

A fierce pricing battle claims a major casualty

At Olympic Sales in downtown Los Angeles last week, an Atari home computer that cost $630 three years ago carried a price tag of $77.95. At Lechmere Sales in Cambridge, Mass., Texas Instruments micros that retailed for $525 in 1981 could be had for less than $100. Gemco stores in California were selling Commodore 64 computers for $199 each, two-thirds off their price of six months ago. In Chicago, K mart was unloading tiny Timex Sinclair 1000s, listed last year at $99.95, for $29.97 each.

The market for the smallest computers, always competitive, has finally blossomed into a full-scale price war. Manufacturers have been trumpeting price cuts and rebates and spending heavily on TV ads. Until recently, the high-pressure strategy seemed to be paying off: sales of 5 million home computers were predicted for 1983, a huge increase over last year's record-breaking 2.5 million.

Lately, however, there have been signs that the market may be approaching saturation. Consumers are beginning to complain that without expensive printers and disc drives, many of the low-priced machines are little more than video-game players with built-in keyboards. Talmis Inc., an Oak Park, Ill., market research firm, estimates that small computers have been selling at a monthly rate of 275,000, but manufacturers have been shipping more than 450,000 a month.

Last week the fragile market cracked. Reacting to news that Texas Instruments, suffering from disappointing hardware and software sales, had predicted a $100 million loss in its current quarter, Wall Street turned negative on the company's stock. Shares of TI, one of the world's largest manufacturers of silicon chips, dropped 40 points in one day, trimming nearly $1 billion from the company's paper value. On the heels of Atari's multimillion-dollar loss last quarter, it looked as if one segment of the computer revolution was wobbling.

Fortunately for the industry, higher-priced microcomputers have not succumbed to the price cutting that has bedeviled the bottom portion of the market. Apple and IBM continue to sell full-price personal computers ($1,500 to $4,000) as fast as they can ship them. Even among the low-end companies there have occasionally been flashes of rational pricing strategy. Timex, for example, has systematically reduced its prices on the Timex Sinclair 1000 to help clear the way for more powerful and more expensive models due later this year.

Not so Commodore and Texas Instruments. Says William Bowman of Spinnaker Software, a leading publisher of home-computer software: "They aren't responding to the market but to each other." The Commodore-TI donnybrook began last August, when Texas Instruments offered a $100 rebate on the TI 99/4A, bringing the machine's price down to $149. Commodore answered with a $50 trim on its VIC 20, making its tag $149. Then as Christmas approached, Commodore sliced an additional $20 off the VIC 20 price. Then $30 more. "The bottom line," says Bowman, "is that the VIC was cheaper than the TI during the height of the Christmas season." Commodore Founder Jack Tramiel, a veteran of the pocket calculator wars of the 1970s, adopted the slogan "Microprocessors for the Masses" and boasted that he had sold more than 1 million VIC 20s in 1982, nearly double the sales claimed by his nearest competitors, Timex and TI.

Tramiel moved again early this year, cutting prices on his Model 64 computer and offering rebates for trade-ins on his competitors' machines. He had also pulled out of independent computer stores and concentrated on mass-market outlets such as K mart and Toys R Us. TI machines, hobbled by second-rate software, suffered a further blow in February, when the company disclosed that users were vulnerable to possible electrical shocks. TI corrected the defect, but the damage to the machine's image was not so easily repaired.

Many analysts believe that an industry shake-out is due. Atari, trying to stage a comeback with a series of lightweight, foreign-built models, remains beset by shipping delays and management turmoil. Timex, having cut back production on its model 1000, will face tough competition in the under-$200 market for its new line. Tandy, whose Radio Shack TRS-80 Color Computer sold sluggishly at $399.95, has dropped its price to $199.95, a level some observers believe is still not low enough to ensure the machine's survival. Says Talmis President Jeanne Dietsch: "They seem to bring in new products with total disregard for their competitors' pricing."

More complications are on the horizon. Earlier this month Coleco, a vigorous competitor of Atari in the video-game business, introduced a $600 home computer and word-processing system that includes a typewriter-quality printer. Coleco's entry, named Adam, may signal the spread of the price war from basic computer units to plug-in peripheral devices. And last week a consortium of 14 Japanese manufacturers, led by NEC and Matsushita, announced a technical agreement that will result in interchangeable game cartridges and programs for their home computers. The new standards were developed by Microsoft, a programming house based in Bellevue, Wash., that designed the software specifications for IBM when that giant firm entered the medium-price personal computer market two years ago. IBM, interestingly, is quietly working on its own low-end machine, developed under the code name "Peanut." While it is not clear which standards IBM's machine will follow, one thing is certain: whichever way IBM goes, a good portion of the industry is sure to follow.

--By Philip Faflick.

Reported by Tom Johnson/San Francisco and Jamie Murphy/New York

With reporting by Tom Johnson, Jamie Murphy This file is automatically generated by a robot program, so viewer discretion is required.