Special Report

The Coming Book in Home Computers

Major retailers and electronics companies are about to create a new household appliance

Business Week

May 16, 1977

The spring of 1977 is quite likely to go down in the record books as the time when the home computer began changing from a small, but surging, hobby kit market chased by dozens of small companies to a huge mass market for packaged systems, dominated by the nation's largest retailers and electronic equipment makers.

The change will not happen overnight, of course. But the big companies are beginning to make their moves, and the second-generation products are about to go on sale. The potential for these cheap, general-purpose computer systems is so great that even the commonly accepted name, home computer, may be a misnomer.

Already, a growing number of the first-generation hobby systems are being sold to businesses. There are 3.6 million businesses in the U.S. having less than $5 million in sales, and until now such companies usually could not afford their own computer not even a small one. Now it appears that the so-called home computers -- in particular, the new systems about to emerge -- have a good chance to penetrate that market (box, page 50H).

But the big, totally untapped market for the new, low-cost systems is the home. As prices continue to fall and systems become easier to use, the computer will move into the living room, kitchen, and den as a new home appliance. There it will be the focal point for such tasks as communicating with outside libraries or data banks, controlling major appliances, supervising burglar and fire alarm systems, storing household records, and computing income taxes -- not to mention providing sophisticated TV games.

Heating up the market for home computers, or "personal" computers as they are also called, is the rapidly increasing tempo of activity at large companies. Some key moves expected soon:

In addition, two of the nation's largest retailers may be close to entering the home computer market. Sears, Roebuck & Co. and Montgomery Ward & Co. will say officially only that they are "closely watching" this new retail business. Among big manufacturers, Texas Instruments Inc. is known to be planning a major market expansion centered around a home computer center. Other semiconductor makers are studying similar moves. Timex Corp., the largest U.S. watch company, is thinking seriously about entering the market. And so is Xerox Corp.

It all began little more than two years ago when, virtually unnoticed, the first "hobbyist" computer kit appeared. Long a dream of "computerniks," such an affordable computer was made possible by two developments: the revolutionary, low-priced microprocessor, or computer-on-a-chip; and the high-capacity semiconductor memory. Kits embodying this circuitry soon began to appear at prices ranging from $2,000 all the way down to $300. By plugging in a keyboard, a TV-set display, and other peripheral gear, the home experimenter suddenly had in his hands a computing tool more powerful than the largest computer in existence just 15 years ago.

The computer kit market caught fire last year, but only among as esoteric breed of computer hobbyists -- mostly engineers and programmers. It was still too difficult for the average person to assemble the microcomputer and then program it to do even the simplest tasks. Even so, more than 20,000 kits already have been sold, both for domestic tasks and for use in business and industry. scores of makers of computer kits and peripheral equipment have popped up, along with some 300 retail computer shops, 100 computer clubs, and a dozen magazines on the subject.

Now the hobby kit is evolving into a simpler preassembled system that can be used by the average consumer or small businessman, and a mass market looms ahead. "The impact of the personal computer will be comparable to that of the gun," predicts James C. Warren, who organized a computer fair that was held in San Francisco a fortnight ago. "The gun equalized man's physical differences," he says, "and the private computer will do the same for his intellect."

That may be exaggeration, but Warren's fair showed that interest in personal computers is phenomenal. Crowds stood two deep in block-long lines and paid $9 a head to see the latest products from some 150 exhibitors. more than 12,000 enthusiasts packed the Civic Auditorium, eagerly poring over products from companies ranging in size from Motorola and National Semiconductor to tiny Gimix and Itty Bitty Computers. There were talking computers, computers for the disabled and blind, computers to create art and music, and computers to educate children, as well as dozens of standard models for home and business.

But no one is more excited than the manufacturers. Sam Bernstein, marketing vice-president at Commodore, brashly predicts that 3.5 million self-contained home computers will be in use in five years. "We're entering an age of automation no one dreamed of," exclaims William H. Millard, president of IMSAI Mfg. Corp., of San Leandro, Calif., one of the two leaders in today's market. H. Edward Roberts, president of MITS Inc., an Albuquerque (N.M.) company and undisputed No. 1 in the market, compares the situation to the time when George Eastman opened up the mass market to photography by introducing the box camera. And Alan Kaplan, computer research director at Venture Development Corp., a Wellesley (Mass.) consulting firm, predicts that "by 1985, we will see a true consumer product, a home computer that will make the growth in CB radios look inconsequential."

Already, annual sales of home computers are running well over $100 million, according to Robert F. Wickham, president of Vantage Research Inc. By 1985, he figures, personal computers will be "better than a billion-dollar annual market" (chart) and 15% to 20% of all U.S. homes will have been outfitted with what will then be a $300 computer. By the same time he predicts, the business market for these inexpensive computers will climb to $800 million annually.

With prospects of that order, it is no wonder that so many companies, large and small, are zeroing in on this market. Following the scent of what some are calling the most important new electronic systems market in more than a decade, semiconductor and consumer electronics makers are expected to flood the market with preassembled, ready-to-operate systems. And these companies, not the upstarts, will be the big winners, maintains Wickham of Vantage Research, because they already have shown consumers how to use pocket calculators and how to program their microwave ovens. They also have gained access to home electrical sockets with their video game attachments for TV sets, and, he adds, "introducing homeowners and mom-and-pop businesses to personal computers is only a step away."

But others see the future somewhat differently. "Compared to the video games market, the hobbyist market is infantile," observes Kerry Crosson, new-product manager at Atari Inc., the largest video game maker last year with sales of more than $50 million. But he leaves no doubt that Atari will move in when the time is right.

Within tree to five years Crosson expects to see "canned software" that will make "off-the-shelf" programs available to users for most applications. This would eliminate one of the biggest stumbling blocks to mass acceptance -- the need for the user to program his own personal computer. When this happens, Crosson predicts, "IBM will scale down its systems to fit the mass market from one end and the video game companies will come from the other."

That may be a simplistic view given the incredible diversity and strength of the major companies either planning to enter or already moving into this market. The breadth of the retailing alone, assuming that Sears, Macy's, Ward's, Heath, and Radio Shack make major efforts, seems to guarantee that there will be many manufacturers. Kaplan of Venture Development estimates that "sales of home computers by general retailers like Sears will account for 15% of the units and 23% of the revenues by 1981."

Beyond that, major companies not even in consumer products are working hard on personal computers. In particular, Xerox Corp.'s Palo Alto Research Center has developed an easy-to-understand "higher level" computer language called "Smalltalk." And Alan Kay, manager of the center's learning research group, is trying to develop the ultimate portable computer using that language. Dubbed "Dyna-book" by Kay, this machine would be the size of a large book, no more expensive than a color TV set, and conceivably powerful enough to handle all of an owner's knowledge needs. Such a product is some time off, of course, but exploding semiconductor technology is making it technically possible.

But the real hotbed of development activity is the semiconductor industry, much of it centered in "Silicon Valley" south of San Francisco. Part of the impetus for these efforts came when products aimed at industrial applications stated gaining wide appeal with hobbyists. The products included micro-processor evaluations kits and singleboard microcomputers priced between $100 and $500. Now the big semiconductor makers are trying to figure out how to grab the new consumer market.

Fairchild Camera & Instrument Corp. is currently concentrating on its video entertainment system, a programmable video game player that is still being ordered faster than it can be produced. But James Bowen, Fairchild vice-president, expects the company to enter the market for consumer computers within two years, either as supplier to original-equipment manufacturers or as a maker of end products.

New companies also are springing up in Silicon Valley that are solely dedicated to the new market. Apple Computer Inc. this month is introducing a self-contained personal computer called Apple II which costs $1,300 and plugs into any color TV set. And Astrotech Corp. was formed a few months ago by Howard S. Bobb, former president of American Microsystems Inc., "to get in early on the personal computer market." He currently is designing units that can do everything from answer the telephone to control alarms, lights, the furnace, and lawn sprinklers.

The dominant sellers

What all of this new competition means, of course, is that the industry will go through the usual violent pattern of shake-out. "Of every 100 little guys now in business," says Richard Brown, president of the Computer Store in Burlington, Mass., "one will be a DEC, one will be a Data General, and the other 98 will blow away."

Today, though, there is business for everyone. Starting from zero in January, 1975, when it introduced the industry's first computer kit, MITS expects sales to shoot to over $12 million this year. Its closest competitor, IMSAI, started that same year with a $669 kit, and it will probably do more than $10 million worth ob business with 240 dealers in 1977. The company's first ad drew 3,000 responses, and that was a "shocker," recalls Millard, IMSAI president.

MITS and IMSAI together account for half the hobby market for central processors, but the story is the same for their smaller competitors. Southwest Technical Products Corp., of San Antonio, so far has sold more than 3,000 computer kits, and Daniel E. Meyer, president, says that "it is still strictly a seller's market," with his sales up 38% this year over last. And Processor Technology Corp., of Emeryville, Calif., introduced its firs computer only last July, but already has sold 1,000 systems.

Most of the kit builders depended initially on mail-order business, but this is no longer true. Computer hobbyists -- like hi-fi buffs -- do not stop with a basic system but constantly upgrade it by adding display terminals, printers, keyboards, and more memory. And this is where the neighborhood computer shop fits in. The most visible chain is Paul J. Terrell's Byte Shop, whose logo now appears in 51 locations around the world. But it may not be the most viable: Terrell is having to hustle for additional financing and to improve relationships with suppliers and his loose federation of retailers (box, page 50J).

"Most of the people opening computer stores lacked capital and business experience, but they were still succeeding," says Edward E. Faber, former sales manager of IMSAI, who decided he could do better. With 20 years of experience in the computer business (12 at International Business Machines Corp.), he started Computer Shack Inc. last September. Now called Computerland Corp., the franchising operation has 12 stores carrying kits, add-on equipment, tools, and literature from more than 60 vendors. By the end of the year, Faber expects that his national chain will have 50 to 75 outlets.

Because of the growth of such chains as Computerland and Byte Shop, not to mention Computer Power & Light and Kentucky Fried Computer, "we have a distribution network that didn't exist before," says Kaplan of Venture Development. And some of them are "trying to become the Radio Shack of the computer stores," he adds.

Those who shop at the computer stores are not typical consumers. More than two-thirds of what Terrell calls the "computer-for-lunch bunch" that frequent the Byte Shop in Mountain View, Calif., for example, are industry professionals who, like ham radio enthusiasts, enjoy building kits as much as they enjoy using them.

Most such customers read magazines like Byte (88,000 circulation) and Interface (25, circulation). and most belong to one of the rapidly expanding collection of computer clubs around the country. The Southern California Computer Society, for example, now has 8,000 members, and it has 10 chapters ranging as far away as Tokyo and Anchorage. And every other Wednesday night, 400 members of the Homebrew Computer Club meet at the Stanford Linear Accelerator Center in Palo Alto to talk about new equipment, applications, and assembly problems.

Many of the engineers who get hooked on computers as a hobby find that their personal computers are versatile machines that can also be used professionally. Douglas M. Bell, vice-president of Handi Kup Co., of Corte Madera, Calif., was frustrated with the limited computing ability of his programmable calculator, so he became a hobbyist. Now he plans to use his $900 system to design equipment for making Styrofoam cups.

Other hobbyists are using personal computers to establish their own businesses. John Glick set up Modal Systems Co. in Redwood City, Calif., using three hobby computers for medical research applications. Horace J. Enea bought an IMSAI computer from Kentucky Fried Computer and last summer formed Heuristics INC., in Palo Alto, to sell his own computer peripheral -- a $249 speech-recognition kit.

Obstacles to overcome

Many of these small businesses are becoming important suppliers to the hobby market. And so are some larger companies in the peripherals business. One example is Lear Siegler Inc., whose Data Products Group in Anaheim, Calif., shipped its first cathode-ray tube terminal to the home computer market last summer. The company is now turning out 300 a month of the $845 display terminals for such customers.

Bright as the future looks for the personal computer, several major problems remain to be solved before this business can make a successful transition from the hobby market to the mass market. Without a doubt, software is the biggest of the challenges. Not only is it expensive to develop, but "there is no driving force to standardize language or software systems," Fairchild's Bowen points out. "It is like the old battle between 45-rpm and 33-rpm phonograph records."

Software development on the personal computer front is "a total free-for-all," in the words of Warren, who heads a research company in addition to putting on computer fairs. Adds Norman S. Zimbel, industry analyst for Arthur D. Little Inc., in Cambridge, Mass.: "Canned applications have been a dream of the industry, but in general it has been a mirage because the broad range of needs is hard to satisfy with [standard] programs."

The mass consumer also is not interested in, nor in most cases capable of, soldering together his personal computer -- particularly when the slightest misstep can result in static electricity destroying the computer-on-a-chip, leaving the assembler with nothing but a tiny piece of useless silicon.

Even in the current market, where most of the computer buyers are technical persons, some industry observers have reason to believe that more than half the purchased kits are never finished. And because an increasing number of users want a system that works m ore than they want the fun of assembling a bag of parts, some retailers, like the Computer Mart near Los Angeles, are now assembling 40% or more of the systems they sell.

Problems also afflict factory-assembled systems. Reliability of these computers has ranged from "bad to impossible," claims Warren. And retailers complain that factory repairs can take two months. On the other side of the coin, at least two makers decided to abandon the kit business because of the demands of customers.

"At first we offered kits, but we don't any more," declares Kerry S. Berland, marketing vice-president for Martin Research Inc. The northbrook (III.) company now does 70% of its business with small industrial users. "We found early on that it was more expensive for us to produce kits because of the service required," he says. "The clumsy hobbyist without the knowledge to trouble-shoot causes more problems than he's worth," Berland says.

Sphere Corp., of Bountiful, Utah, has come to the same conclusion and is now selling its personal computers through systems houses for commercial applications. "The first-time computer user often wants more than he can pay for -- our service manager was on the phone from morning 'til night," says Douglas S. Hancey, executive vice-president.

The youth market

The personal-computer industry obviously has a big education job ahead. "The largest potential market is the least knowledgeable," says Kaplan of Venture Development. A pessimistic Richard Brown of the Computer Store, says "the over-35-year-olds are afraid" of the computer and it could easily be five or 10 years before home computers are at all common.

Many people in the industry believe that the real action will come from young people. "Kids will be using computers like we would use a radio," predicts Manfred Peschke, publisher of Byte. And Byte Inc.'s Terrell foresees the day when software programs for personal computers will be sold on carousel racks "like John Denver tapes" and home computers will come "pink for girls, blue for boys."

When that time comes, it will take big companies with plenty of money and marketing know how to do the job. But, while a shake-out is inevitable among the small hobby-computer kit makers and sellers, these pioneers are likely to remain the focal point of the personal-computer market for the next few years until more of the established semiconductor suppliers, video game companies, minicomputer makers, and large retailers move into the market in a big way.

And not all of the little ones will perish. The shake-out most likely will change the personal-computer business into something like the hi-fi market, where consumers can either buy prepackaged sound systems at department stores or go to hi-fi shops for more "handholding" and a much broader line of high-performance components. "We'll still be around because we will provide repair service and individual consultation," maintains Stanley S. Veit, president of the Computer Mart of New York.

Even Macy's Frey concedes there will be room for the small specialty stores in the rapidly expanding personal-computer business. "They will continue to serve the hard-core enthusiasts," he predicts, "and we will become the McDonald's of the computer industry."

GRAPHIC: Illustration, no caption, Drawing by Denise, Orloff; Graph The big markets for home computers, Mario De Vincentis-BW; Picture 1, Commodore's Bernstein: His new model is expected to sell for $495 this summer. Liane Enkells Picture 2, IMSAI'S Millard: "We're entering an age of automation no one dreamed of." Liane Enkelis; Picture 3, Computer kit: Over 20,000 have been sold since they were introduced tow years ago. Liane Enkelis; Picture 4, Computer fair: In San Francisco 12,000 people said $9 each to see the machines. David Powers

Copyright 1977 McGraw-Hill, Inc.