No More Downtime

By Gordon Bock

Order a round of Dom Perignon. Put on a party hat. Grab a noisemaker. Get ready to shout "Happy Anniversary!" After all, it was just ten years ago that Americans walked into retail stores and saw the first fully assembled personal computers sitting on the shelves, waiting to be taken home and plugged into the socket. It was the beginning of the computer era for millions of people, ranging from sixth-graders learning to log on, to secretaries spinning out reams of letters, to hopeful authors plugging away at their novels on the screen.

Nowadays a zippy chorus or two of Happy Days Are Here Again would not be out of order either. After its initial burst of prosperity, the computer industry | fell into a two-year slump that some feared might signal a permanent slowdown in growth. The good news in computerdom is that the sluggishness appears to be over and many makers of personal computers are once again registering record revenues and plump profits. The companies' stock prices have recovered, and some firms are hiring factory workers and sales people after a long spell of layoffs and attrition. Best of all, as far as customers are concerned, the computer companies have parlayed several recent technological breakthroughs into a passel of affordable, easy-to-use new machines that seem to be leaping through dealers' doors and into U.S. homes and offices. Says William Lempesis, an analyst with the Dataquest market-research firm: "There's been an upswing in the entire industry."

Two of the biggest players certainly came out swinging last week in Manhattan, where both IBM and Tandy staged long-awaited product announcements. In a much ballyhooed presentation party at the Waldorf-Astoria hotel, Tandy introduced two personal-computer models targeted for use in high schools and colleges, another aimed at the office market and a lap-top model designed for executives on the go. The occasion gave the Texas-based company a chance to renew its claim of having pioneered the mass marketing of personal computers with the August 1977 introduction of its model TRS-80. For Tandy Chairman John Roach, the unveiling was also an opportunity to let loose a not so subtle shot at the industry's Goliath. When someone in the audience asked about IBM's next move, Roach jumped to his feet, grabbed a microphone and drawled, "I can hardly wait."

He did not have to. The next day IBM also made a major foray into the world's $9.8 billion-a-year educational and home markets with two of its own new low-cost machines. The company hopes the models, which start at $1,350, will generate much more excitement than its PCjr series, which fizzled 16 months after a November 1983 introduction. The new IBM Model 25, for example, which sells for a suggested list price of $1,695 with a color monitor, boasts five to eight times the memory of a PCjr, a larger, easier-to-use keyboard and greatly improved graphics. On the same day IBM added a high-end $13,995 model to its much touted Personal System/2 series, the line of office gear introduced in April to replace the old IBM PCs.

Such feisty competitiveness is a sign that the computer slump is history. From 1984 through 1986, worldwide unit sales of personal computers stayed virtually flat. But this year sales are expected to rise nearly 13%, as customers plunk down $35 billion to buy about 17 million machines, according to estimates from Dataquest. Slugging it out for many of those dollars are personal computing's Front Four: IBM (which had a 26% slice of last year's market), Apple (which had 8%), Tandy (5%) and Compaq (3%). The remaining 58% of the world market has been carved up by about 150 other firms, including AT& T, Zenith and Commodore in the U.S., Japanese firms like NEC and Toshiba and South Korea's Daewoo and Hyundai. Although the growth of IBM's sales has been inhibited by the hordes of competitors, Apple, Tandy and Compaq have seen sales, earnings or stock prices surge in recent weeks.

It was not long ago that such a resurgence seemed improbable. In June 1985 Apple laid off 1,200 of its 5,500 workers (the company has since expanded to a work force of 6,500). Retail computer stores suffered a shake-out that forced an estimated 1,600 of them out of business by 1986. California's famed Silicon Valley suddenly felt more like Death Valley to some of its denizens. The problem: most Americans felt no need to spend hundreds of dollars to install computers in their homes, and chief executives of FORTUNE 500 companies began insisting that underlings make better use of the plethora of machines they had already purchased. "They bought too much and ended up with indigestion," explains Esther Dyson, an industry consultant. "Now they've digested lunch and are getting ready for supper."

What has helped improve customers' appetites is the diversity of new products available. The most exciting ingredient, which will be the heart of 50 different computer models by year's end, is a $235 piece of silicon known as the 80386 microchip. It is this flat, black chip -- smaller than a matchbook -- that has powered the biggest advance in computer technology in recent memory. The 80386 brings to personal computers the speed and power that were once available only in larger and much more expensive minicomputers. IBM, Compaq and Tandy have built new high-end machines around this chip, which is made by California-based Intel. Apple uses a Motorola-produced chip that gives its Macintosh machines comparable speed and power.

Innovations in software are also driving the demand for computers. Snazzy graphics packages now enable computer users to become publishers in their dens, churning out newsletters with bar charts and photo-like illustrations. So-called computer-aided design programs help engineers, scientists and architects design everything from sink drains to jet planes. "Customers come in and say, 'Wow, look what we can do!' " reports Tim Le Tourneau, assistant manager of a Home Computing Centers store in San Bruno, Calif.

The beauty of all the latest whizbangs is that they can be bought without taking out a second mortgage. Fierce price competition has enabled customers to pay less than they would have a few months ago, or to get a better machine for the same amount of money. Compaq's new Portable III computer, which is being pitched to executives, sells for as little as $3,200. In February the same model sold for $3,999. Prices on other computers that have been introduced this year are also falling. Some Houston retailers will sell an IBM Model 50, one of the machines in the Personal System/2 series, for $2,995, down from $3,595 in June.

IBM's announcements last week were a strong signal that the company has no intention of surrendering the educational and home markets to cut-rate competitors. The moves were also evidence of the aggressive strategy adopted by Chairman John Akers, 52, a Yale-educated former Navy pilot who has a low tolerance for mediocre performance. Instead of allowing IBM (1986 revenues: $51 billion) to rest on its dominant position in the market for large computers, Akers decided the company should revamp its entire product line and go after all segments of the business.

What particularly disturbed Akers and his lieutenants were the inroads being made in the office market by rival machines that can use IBM software -- the so-called IBM-compatibles such as those made by Tandy and Compaq. In response, IBM decided to make its Personal System/2 computers strikingly different from its original PCs. It did: the new models are more powerful and versatile. Their software, which will not run on the old machines, comes on 3.5-in. hard- case diskettes instead of the 5.25-in. floppy disk that had been IBM's standard.

So far, the line looks like a smash. IBM has shipped more than 300,000 Personal System/2 models since April. United Airlines has ordered 40,000 of them for use in reservation centers. The Travelers insurance company plans to buy 2,000 this year, and more in 1988. Says Travelers Senior Vice President Joseph Brophy: "We have a lot of sophisticated, computer-hungry workers who can't wait." Some customers are holding back, though, because a more advanced version will be available next year. Meanwhile, competitors will scurry to develop models that will be fully compatible.

Compaq President Rod Canion, 42, seems ready for the challenge. Only 4 1/2 years ago Canion, a former Texas Instruments engineer, joined two associates to found Compaq. He led the company to quick success by bringing out compact, top-performing IBM-compatible machines at competitive prices and by cultivating a loyal network of dealers. Today the company (1986 revenues: $625 million) is enjoying its second year in the FORTUNE 500 (ranking: No. 409). Its $51 million in profits for the first six months of 1987 represents a 185% gain over the year earlier.

Tandy (1986 revenues: $3.3 billion) has become the king of the retail market by selling computers through its chain of 4,798 Radio Shack stores in all 50 states. Tandy Chairman Roach, 48, an outgoing Texan, makes unexpected visits to about 200 stores a year, helping ensure that Radio Shack employees offer courteous and knowledgeable service. Roach's latest mission is to keep business customers happy with machines like the new $2,599 Tandy 4000, while he pumps up efforts in the educational market.

While IBM, Compaq and Tandy fight it out in the IBM-compatible marketplace, Apple (1986 revenues: $2 billion) continues to thrive by going its own way with machines that run on different software. The company's products have long been favored by educators and hobbyists, but now more corporate customers are taking a shine to the newest machines at the core of Apple's line: the Macintosh SE and the Macintosh II. Many executives have decided that Apple's machines are more user friendly than comparable IBM models. Apple's success in the office market is largely the work of Chairman John Sculley, 48, the hard- driving ex-Pepsi-Cola president. At first, his strategy of going after sales at major corporations created a legion of skeptics. But now Sculley, who wrested control of Apple in September 1985 from Co-Founder Steve Jobs, can afford to feel vindicated. Partly on the strength of burgeoning corporate sales, the company, based in Cupertino, Calif., posted second-quarter revenues of $637 million, an increase of 42% over the same period a year earlier. Only a year ago numbers like that would have seemed unimaginable. In fact, doubts were rising about whether upstarts like Apple could survive in the rough-and- tumble business. But now that sales are on an upswing again, there seems to be room for several major competitors. Says Stewart Alsop, editor and publisher of the California-based P.C. Letter: "I don't think the personal- computer industry is mature. It's a very young business." Indeed, at the tender age of ten, the industry still has plenty of growing to do.

With reporting by Thomas McCarroll/New York and Charles Pelton/San Francisco