Higher-Quality IBM 'Clones' Put New Pressure on Computer Prices

By Brenton R. Schlender, Staff Reporter
The Wall Street Journal

May 13, 1986

In 1981, when International Business Machines Corp. introduced its personal computer for $2,205, few people imagined that more-powerful machines would sell for $500 within a few years.

Today, however, dozens of IBM "clones" -- machines that are almost identical to the company's standard-setting PC -- are available and selling well in the mail-order market for as low as $499. That's less than one-fourth of IBM's current suggested retail price for an equivalent "bare-bones" machine (consisting of a keyboard, disk drive and central processing unit).

The cut-rate computers -- smorgasbords of parts from Korea, Taiwan, Hong Kong, Malaysia and Singapore that are often assembled in the U.S. -- are winning respect in the marketplace. Although well-known makers of IBM compatibles question the reliability of the less-expensive clones, analysts say the large computer makers may have to cut prices to stay competitive.

"The manufacturing companies in the Orient have made it to the point that their product quality measures up to what the American consumer demands," says Donald F. Harper, president of Computer Dynamics Inc. The Austin, Texas-based company sells an IBM clone with 640,000 characters of memory (more than twice the memory of IBM's basic $1,845 model) and a disk drive for $595. Adds Stephen Dukker, president of Thomas, Harriman & Edwards Computer Products Ltd. of Chicago, which makes a $506.50 machine: "This is an IBM PC selling for what it should be selling for."

For several years, other large computer makers here and overseas have thrived by selling IBM-compatible machines that undercut IBM's prices by 10% to 30%. But never have so many small companies been able to make a similar machine for a price more befitting a color television.

"The low-end clones are seeping in through the floorboards," says Peter Teige, a microcomputer market analyst for Dataquest Inc., a San Jose, Calif-based unit of Dun & Bradstreet Corp. "They're having the effect of drawing the whole market down because people are beginning to see behind the veil obscuring how much these things really cost to build."

Some analysts expect well-known manufacturers to cut their prices for IBM compatibles to less than $800 before Christmas. Tandy Corp. is already creeping in that direction. The Fort Worth, Texas, electronics company is offering an IBM-compatible Tandy 1000 with 256 kilobytes of memory, one floppy disk drive and a color monitor for $999. Executives at Compaq Computer Corp. and ITT Corp. decline to speculate about year-end prices.

"I think for once the business market is going to take the back seat, and consumers and small-business buyers will drive the market," says Stephen Bosley, a microcomputer analyst for International Data Corp. of Framingham, Mass. At the same time, the clone makers, from Tandy to ITT and American Telephone & Telegraph Co. to tiny Computer Dynamics, which has sold all of 2,000 computers, should increase their already growing share of the IBM-compatible market.

(According to Mr. Bosley's estimates, sales of IBM-compatible machines will total nearly two million in 1987, surpassing IBM's own sales of 1.7 million PCs that year.)

While customers might rejoice at the prospect of buying a complete system for less than $1,000, retailers are dreading it. "Nobody's making any money selling computers at today's prices," contends Seymour Merrin, a former computer retailer who is now a market analyst for Gartner Group of Stamford, Conn.

Most retailers say they need high margins to pay for the support that customers require after the sale: instruction, repairs and general handholding. "The computer is one of those rare consumer products where the relationship between the buyer and seller starts at the point of sale rather than ends," says Garland Asher, director of finance and planning at Tandy.

Judging from the rock-bottom prices of the "no-name" clones, both manufacturers and retailers have been operating for years on sales margins often exceeding 50%. Michael Dell, president of PC's Limited Inc. of Austin, Texas, which makes a $795 equivalent of IBM's $2,145 PC XT, says he can give dealers a 32% discount off the $795 price and still "get by."

Most of the low-end clone dealers are mail-order houses that only offer mail-order service. And makers and sellers of well-known clones contend that most inexpensive clones are so shoddily made that breakdowns are inevitable.

"When you get down under the $1,500 level, we found you were taking some risks," says Michael McConnell, senior vice president of ComputerLand Inc., the big computer retailer. "Either the power supply is inadequate or you run into software compatibility problems." Later this year, ComputerLand will market a PC clone under its own name. To that end, the company recently evaluated 14 clones and will pick its model from among them. It will probably be priced at around $1,500.

Other dealers and manufacturers maintain that the inexpensive clones don't measure up to federal safety requirements. At a recent computer show in Atlanta, for example, Federal Communications Commission enforcement agents found 2,500 computers and peripherals that either weren't registered and approved, or failed to meet FCC radio-frequency emissions standards. Many of the offending devices were clones of IBM PCs.

But many clone customers are just as delighted by the performance of their machines as by the bargain prices. And lately, businesses, governments and schools have even begun buying clones in quantity.

"We've had nothing but a positive experience," says Sister Joanne Golding, who heads the business department at Saint Mary-of-the-Woods College near Terre Haute, Ind. The business department has 32 personal computers, and 18 are from PC's Limited. "For our college it has been a godsend because we couldn't have afforded to have half that many paying the full IBM price."

Sister Joanne says that only one of the clones has had a problem and that PC's Limited replaced it, no questions asked. Indeed, PC's Limited and many other clone makers offer one-year limited warranties, hoping to dispel fears about the reliability of their computers.

"I can't complain," says John Peyton, an engineer from Santa Barbara, Calif., who bought a PC's Limited computer three months ago to complement his IBM PC at work. "In fact, I just recommended one to my daughter and she bought one."

IBM VS. THE CLONES

System includes central processor with 640 kilobytes of memory, keyboard and one 360 kilobyte floppy disk drive, unless otherwise noted.

Model (Maker) Price

IBM PC-XT $2,145.00 (International Business Machines Corp.)

Leading Edge Model D* 1,495.00 (Leading Edge Hardware Products Inc.)

Tandy 1000** 999.00 (Tandy Corp.)

PC's Limited Turbo PC 795.00 (PC's Limited Inc.)

Standard PC-XT 629.00 (CompuAdd Corp.)

Dynamic XT 595.00 (Computer Dynamics Inc.)

THE PC+ 506.50 (Thompson, Harriman & Edwards Computer Products Ltd.)

* Includes two 360K floppy disk drives rather than one

** Includes 256K of memory, one 360K floppy disk drive and color TV monitor

Sources: International Data Corp., Tandy Corp., PC Magazine