Confused customers, capital cuts confound computers

Press, 2 July 1985, Page 28

Confused customers, capital cuts confound computers

From the “Economist” London

Computer companies are unsure whether the severe slump in their business in the past six months is a sign of the industry’s maturity or of its youth. It is probably both.

The computerisation of the United States has gone sufficiently far for purchases of computers now to move in line with over-all capital spending (the industry was much more reces-sion-proof in 1981-1982). The computer business is also suffering from upheavals common in young and growing industries. Rapid technological change is upsetting established markets and too many companies are jostling for a share of them. Customers are buying less because they are baffled by many new gadgets and fed up with computers that cannot talk to each other.

The industry’s size now leaves it more exposed to shifts in capital spending. IBM, which is trying to explain why it keeps cutting estimates of profit growth this year, notes that the share of computers in the United States’ spending on capital equipment rose from ten per cent in 1980 to 15 per cent last year. So the industry is hurt when buyers cut capital investment.

Orders in the United States for non-defence capital goods in March fell by eight per cent from the previous month, and by another seven per cent in April. Spending on computers fell even faster. IBM believes that orders for office machinery in April were 30 per cent lower than in March. Data Resources, a consulting firm, now predicts that growth in computer orders will be only three per cent this year, down from 16 per cent in 1984. Computer buyers are on strike.

They may stay out for a while. According to statistics collected by the Gartner Group, demand in

the United States for mainframe computers in 1984 rose by 7.3 per cent (in nominal terms) to $U523.2 billion; for mini-computers by 24 per cent to SUSIB.3 billion; and for microcomputers by 56 per cent to SUS 9.2 billion. In the next 12 months, the Gartner Group predicts an increase of 4Va5Vz per cent in sales of mainframe machines, no more than five per cent in minicomputers and around 20 per cent in microcomputers. So most of the industry’s hopes for this year depend on higher sales of personal computers. Nearly half of those computers will be bought by companies employing 1000 people or more. That could be bad news. The Boston Consulting Group believes that demand for personal computers will be weaker than it has been as long as big businesses remain the largest buyers. They already have plenty of personal computers, the argument goes, and now aim to make better use of them. They want to wait until the technology for linking these machines into office networks catches up. Lower prices should help to keep up demand for small machines. The Gartner Group calculates that in 1981 the cost of a personal computer was

equivalent to 18 per cent of the average annual cost of employing a white collar worker. That ratio has now fallen to 10 to 12 per cent and should be less than five per cent by the end of the decade.

Computer makers specialising in mini-com-puters are doing badly because of changing technology as well as lower capital spending. More powerful personal computers, among them IBM’s PC AT and Compaq’s compatible version of the AT, are eating away at the minicomputer market. Data General is cutting 1300 jobs (seven per cent of its workforce) and may make its first loss in the quarter ending this month. IBM admits that sales of its own mediumsize computers are weak; on June 18 it announced price cuts and new products — including a desk-top version of its System/36 minicomputer — to revive demand. All United States computer makers are suffering from the capital spending slump, the digestion problems of companies that have swallowed too many computers too quickly and the high dollar. Computer makers that are not IBM are also suffering from something else — IBM. In a market in trouble, IBM is even more frightening than

usual. One indication of the squeeze at the top end of the market was the merger negotiations between Sperry and Burroughs, which failed last month. In the middle, IBM’s strategic push in office automation is doing especially severe damage to Wang, which has enough problems of its own making. Wang has announced 1600 layoffs in the past month and predicted a loss for the quarter ending in June. The main victim at the low end is Apple Computer. Apple is firing 1200 people, closing three plants and has shed its image as the boy wonder of the industry by removing its young cofounder, Mr Steven Jobs, from his executive post. Apples sell best in small businesses and schools, where demand is down. The company is still baffled by the problem of catering to IBM-dominated big firm offices.

Some computer makers admit that customers are confused by different technical standards and the inability of most computers to talk to each other, but computer companies are wary of rushing ahead with grandiose plans for linking computers together into office networks. They are concentrating on piecemeal integration of machines instead.

AT and T, for example, is expected to announce several new products to link its computers with IBM mainframes. IBM’s new plan for a desk-top version of its medium-size System/36 — which it is using as the core for its office-automation products — brings the integration of personal computers into bigger systems one step closer. This all suggests that what may, eventually, rescue the industry is a new technological wave — one involving easy links between computers and userfriendlier machines (which would be easier to absorb into the office routine). Eventually, however, will not be soon enough for many of today’s unfortunates.