Going after the small business market

Special Report

Business Week

May 16, 1977

A growing percentage of home computers is not really going to the home at all, but into business applications instead. The trend has not been lost on several producers. A growing number of them are changing their market emphasis to concentrate on this newly emerging market for low-priced microcomputer kits and systems. The biggest move in this direction came last month when Pertec Computer Corp. signed a deal to acquire MITS Inc., the leading home computer maker.

"Our grand design," explains Ryal R. Poppa, president of the Los Angeles manufacturer, "is to become a major computer systems supplier to small business." To move strongly into this market, Poppa in the past year had already acquired Computer Machinery Corp. for its national sales network, and iCom, a producer of microcomputer peripheral hardware, to go along with his existing business of making memories and display terminals for minicomputer systems. The addition of MITS and its central-processor line will complete the package at the low-price end of the market.

Poppa's move seems to be timed just right because the long computer business is rapidly dividing in two. He estimates that up to 80% of the $500-To-$2,000 microcomputers sold to hobbyists already end up in business applications. The market that Poppa is going after -- companies with annual sales in the $200,000 to $5 million range -- is untapped so far but could end up being one of the largest computer markets ever.

There are 600,000 companies with 10 to 250 employees, and 3 million even smaller firms, that still are candidates for their first computer, according to a study by Venture Development Corp. "Those businesses that have been buying calculators can buy a MITS machine with printer, CRT display, and two 'floppy' disks [memories] for about $4,000 and get computing power that 15 years ago would have cost $400,000," Poppa points out. "And we can provide software," he claims, "that allows a layman to start using a machine within hours."

Continuing growth

Sales of preassembled business systems at MITS have increased four to five times in the past few months, says H. Edward Roberts, president. This has put a strain on the company, which began in Roberts' garage in Albuquerque eight years ago. Sales rose last year to $6 million, double those of 1975, the first year that MITS sold hobbyist kits. And that growth rate is continuing. "We don't have the product experience to run at $12 million a year, which is what we are doing now," he says.

MITS "could go along for two or three years and do fairly well," Roberts suspects, but ultimately he believes that the industry will be owned by "the strong, vertically developed companies." By hitching up with Pertec, which is now doing business at the rate of $100 million annually, MITS gains vertical integration in selling complete microcomputer systems, access to 66 more service outlets, stronger financial backing, and a big company's production skills. "We end up with the same level of vertical integration of some companies of more than $1 billion sales," Robert says.

Several of MITS' competitors, too, are moving away from the hobbyist market to go after the small-business market. Sphere Corp. is planning to focus entirely on industrial applications, but first it must solve its cash-flow problems. "We are now looking for a financial backer or sugar daddy," says Douglas S. Hancey, executive vice-president.

IMSAI Mfg. Corp. started selling home computer kits strictly to hobbyists and universities, but half of sales now go to the business market. William H. Millard, president, claims that "any company with 20 employees can afford an IMSAI computer." Other companies in this market are introducing new products aimed specifically at small business. Byte Inc., the pioneering retailer of home computer kits, introduced a $7,000 Byte File system last month for what Paul J. Terrell, president, calls "grass-roots data processing." And Cromemco Inc. is building a $6,000 business system ($5,000 in kit form) that Roger Melen, vice-president, insists offers as much power as most minicomputers but at a third the cost.

Big orders

At the same time, the computer shops are selling more and more computers to business. Alan Tarsky, general manager of Computer Mart in Orange, Calif., says that his store sold 12 systems to a medical equipment manufacturer for controlling X-ray machines, and is selling 50 more microcomputers to another company for distributed-data-processing applications.

Between 40% and 50% of sales at Computer Mart of New York Inc. are to business, says Stanley S. Veit, president and not just to small enterprises. "IBM is one of our best customers," he says. "And we've sold computers to Perkin-Elmer [which also builds its own computers]."

Although the mainframe computer makers are becoming very interested in pursuing business applications using the small microcomputers, IMSAI President Millard tosses off the threat. "The entire hobby market would not feed IBM for a day," he says, adding that "an elephant cannot afford to be a mouse." At current desk-top computer prices of $10,000 and up, the major computer houses face a dilemma, according to Robert F. Wickham, president of Vantage Research Inc., a Palo Alto (Calif.) market research firm. "A large part of the personal computing market is closed to them, but if they lower prices it could be difficult to generate sufficient margins to support their sales, software, and maintenance forces," he says.

However, one of those companies, Hewlett-Packard Co., is aiming its new $20,000 integrated accounting systems at small companies with $25,000 to $5 million in annual sales. While HP's product is far more expensive. Alex Sozonoff, marketing manager for HP's Loveland Calculator Div., insists that it does more and has a complete, proven software package. "Small companies going from manual to automated systems are very sensitive to a safe buy like IBM and others who are well established in the market," he says.

The new breed of personal computers admittedly does not have nearly the performance of such products or of existing minicomputers, nor is there any assurance of service or software. Yet Alan Kaplan, market researcher at Venture Development Corp., sees them nibbling away at the market because they are so much cheaper.

But Pertec's Poppa questions whether selling on price alone is the key to success. "All the small companies could be gone in five years," he warns, "just as most of the early participants in the pocket calculator business dropped out. Only large companies with full integration full marketing capabilities, and strong finance will make it," predicts Poppa, who clearly is describing the same kind of company that he is trying to make out of Pertec Computer.

GRAPHIC: PICTURE, Perfec's Poppa: Integrating vertically to survive. Leonard Nadel