IBM's Personal Computer Spawns an Industry

Information Processing

Computers

Business Week

August 15, 1983

Two years ago, International Business Machines Corp. announced its Personal Computer with some trepidation. After all, the company was coming late into an already booming market and its product, uncharacteristically, was not designed by the company from the ground up but was an amalgam of parts purchased from outside suppliers.

Not only has the Personal Computer been successful beyond anyone's wildest expectations, but just as important, IBM has created a so-called PC-compatible computer market that is growing even faster. Hundreds of companies, from giants to startups, are churning out products that work with, look like, or plug into the desktop IBM computer. Some of the PC-compatible computer makers have grown up almost overnight. Columbia Data Products Inc. will shoot from $9 million in 1982 sales to an estimated $50 million this year, while Compaq Computer Corp., which had zero sales in 1982, could reach an astounding $100 million in sales in its first year of production (page 89).

The thousands of products cover everything from programs that enable the PC to play games and run accounting programs to plug-in boards that add memory capacity or automatically "dial" another computer. That tidal wave of products coupled with the million or so owners of IBM PCs and PC look-alikes has also created an insatiable desire for information that a half-dozen new publications dedicated solely to the IBM PC market are fighting to fill.

'BOTTOMLESS PIT'

The demand for these computers is phenomenal. This year IBM will probably build 600,000 Personal Computers, more than twice as many as it originally planned. Even so, most of the company's dealers are on allocation, says one major retailer. The PC-compatible models are selling so well as a result, industry analysts predict that in five years this market will hit nearly $7 billion -- or equal to the estimated IBM sales in 1988 of the Personal Computer. "We are struggling to get production up," says Robert Harp, president of Corona Data Systems Inc., whose new Westlake Village (Calif.) company is building PC-compatible computers. "The market is a bottomless pit."

IBM laid the cornerstone for this PC-compatible market in 1981, when it surprised most observers by publishing the PC's technical specifications, showing how the machine was built and how it operated. This allowed other manufacturers to write applications software and make additional products for it.

IBM had always fiercely guarded the designs of its products in its traditional mainframe computer markets. But it now realized that to sell large numbers of its Personal Computer, it would need an army of programmers outside IBM to write the software needed to make its desktop model dominant. "The decision to publish the design was fundamental to our success," acknowledges Douglas R. LeGrande, vice-president of operations for IBM's Entry Systems Div.

"IBM set a standard in what was an unstandardized industry," says Kenneth B. Waters, vice-president for operations at Computerland Corp., the largest computer store chain. Before IBM entered the market, software and peripherals for one brand of computer rarely worked on another. " IBM's move presents a tremendous opportunity for new companies to come in and quickly establish a market position," Waters says. One such company is Lotus Development Corp., inventor of a popular software package for the IBM PC. Since the Massachusetts company began selling its 1-2-3 program last year, its annual sales rate has shot up to more than $30 million.

CLONING

Computer makers that want to develop clones of the Personal Computer to take advantage of this flood of software and hardware products have a tougher job. While IBM has published enough information to enable programmers to write software, it has kept important parts of the design secret in order to prevent outsiders from easily copying the machine. But by using the same microprocessor, or computer-on-a-chip, and the same operating system that IBM employs, engineers can come up with machines that run most of the applications programs developed for the IBM PC without having to modify them.

Piggybacking on the IBM PC software is the best strategy for a small company that does not have the clout to attract software developers. More established computer makers, however, such as Texas Instruments Inc., do not have to stick so closely to IBM's design. Because of its power in the marketplace, TI has been able to persuade software developers to convert packages for use on the TI Professional Computer, even though it is not close to being a clone of the IBM PC.

For the moment, at least, PC-compatible makers can take advantage of IBM's inability to keep up with the demand for its Personal Computer. "We could sell more IBMs if we could get them," says John H. Rollins, national manager of Sears, Roebuck & Co.'s Business Systems Centers. So Sears also stocks the PC-compatible model made by Compaq Computer. Dealers, too, are ordering PC compatibles to make up for the lack of IBM PCs. "I'm trying to get 125 Compaqs a month, up from my initial order of 75," says Seymour Merrin, president of Computerworks, a Westport (Conn.) computer store.

IGNORING HISTORY?

The shortages of the IBM Personal Computer will not last forever, though. IBM is increasing its production of the PC, and some analysts estimate that it could catch up with demand by spring. When that happens, the market could get highly competitive. "The PC-clone makers will be ignoring past history if they count on an unbroken path to success," warns John Kiefer, an industry analyst at InfoCorp Inc., a Cupertino (Calif.) market researcher.

The first indication that IBM is preparing to get tough in personal computers came in March when it introduced a more powerful XT model and cut the base price of the original PC by 20% to $1,894. That prompted a round of price-cutting by the other manufacturers (BW -- May 30). "It is scary as hell being vulnerable to IBM's pricing strategy," says Ronald G. Petersen, vice-president for product planning at Eagle Computer Inc., a Los Gatos (Calif.) maker of PC-compatible computers. "But," he maintains, "we can lower prices, too."

SACRIFICES

However, IBM can take advantage of far larger manufacturing economies than its smaller competitors can. Competing with IBM on price alone, therefore, is a dangerous game. "You have to offer more performance for the price," says Eagle's Petersen. One way in which IBM's competitors do this is by differentiating their products from the Personal Computer. For example, some of them are designing keyboards to make their computers easier to use. By doing this, however, these companies jeopardize their computers' precious compatibility with the IBM desktop, since they run the risk of not being able to use the many PC programs that make their machines more useful. "We sacrificed additional features on our Compaq computer so that we could use IBM software off the shelf," says J. Rodney Canion, president of Compaq Computer.

With the IBM Personal Computer and the PC-compatible market booming, it is the rare manufacturer that is worrying about tomorrow. Old-timers, however, remember the early days of the IBM mainframe market, when the thriving makers of compatible computers said they needed only a 10% share of the market to stay prosperous. But too many companies were fighting for the same 10% and, in the end, the majority dropped out.

Today, history is repeating itself. The PC-compatible makers are repeating the same kind of market share claims. "We can survive on 5% to 10% of IBM's market, given its size," predicts Corona's Harp. But Eagle, Compaq, Columbia, and several other manufacturers are all basing their business plans on the same 5% to 10% of the market that Corona is going after. As a result, says Peter Norton of Norton Utilities, a one-man software company that turns out programs for the IBM PC, "you are going to see a real bloodbath."

GRAPHIC: Graph, IBM AND ITS MIMICS TAKE A BIGGER PIECE OF THE PERSONAL COMPUTER BUSINESS, DATA: FUTURE COMPUTING INC.