IBM Cuts Prices of Personal Computers In Response to Inroads Made by 'Clones'

By John Marcom Jr., Staff Reporter
The Wall Street Journal

July 9, 1986

New York -- International Business Machines Corp. slashed dealer prices of its personal computers, marking its first strong response to the inroads made by popular low-priced "clones."

The cuts weren't publicly announced and won't necessarily be passed along by all dealers to the same extent. Moreover, the size of the decrease varies with dealer sales volumes and model, and a promotional allowance from IBM could result in further cuts at retail.

But some dealers said the changes mean they can profitably sell basic IBM PCs as cheaply as leading clones. For instance, the Ithaca, N.Y., ComputerLand franchise plans to sell a basic IBM PC with monochrome monitor for $1,495, the same as Leading Edge Products Inc.'s much-publicized South Korean-made clone. IBM's published retail price, which hasn't been changed by IBM, was reduced earlier this year to $1,995, excluding the monitor.

The price cuts, which IBM told dealers expire at the end of the year, may be the first salvo in what some analysts expect to be an IBM campaign against clones.

The company's weakening market position was highlighted again by Tandon Corp.'s announcement of its own line of PC clones.

But Tandon and several other clone makers emphasizing price competitiveness could face unexpectedly fierce competition. IBM's price cuts are "amazing," said Grant S. Bushee, analyst with InfoCorp, a Cupertino, Calif., market-research concern. InfoCorp estimates that competition from lower-cost IBM-compatible machines had sliced the company's share of personal-computer retail revenue to 33% in May from 40% a year earlier. The cuts are "very significant" because they demonstrate a renewed IBM commitment to the low-priced end of the market, he said.

A spokesman for IBM's Boca Raton, Fla.-based Entry Systems division confirmed that wholesale price cuts on basic units ranged as high as 18%, but declined to discuss the measures or the reasons for them. He said IBM considered its communications with dealers "confidential."

Computer Retail News, an industry publication, said IBM also cut dealer prices on its high-end PC AT by as much as $400, or about 17%. The PC XT, which falls in between the basic PC and the PC AT in price and data storage capacity, apparently isn't included in the promotion.

Not all dealers are planning to trim IBM PC retail prices as sharply as IBM cut wholesale prices. Some may prefer instead to use the lower wholesale prices to bolster profit margins. "IBM would have to come down another $800" to match the clones, said an Entre store owner, who declined to be identified. IBM "is still not in the ballpark," she added.

The next big move from IBM is expected by many to come later this year when it introduces a new version of the PC that takes advantage of technological advances made since the original machine was designed six years ago. The new machine would use fewer parts and could be assembled by robots, according to speculation. As well, some say, IBM could make technical changes in the machine design or software that would frustrate makers of compatible computers.

Some analysts wonder why IBM waited so long to move. "IBM knows how to get tough," said Richard A. Shaffer, publisher of an industry newsletter. "It's beyond us why the company hasn't fought harder."

Others said IBM erred in allowing clone makers an opening in the market. "The reason they are having these problems is because of policies pursued two or three years ago that were short term in thinking," said Seymour Merrin, an analyst with Gartner Group Inc. and a former IBM dealer who sold his dealership in the wake of the competitive problems he says were caused by IBM's actions.

Among other things, he criticizes IBM for allowing too-wide distribution and letting retail prices slide, thereby increasing retailers' willingness to carry competing products with more attractive margins. "If you just take basic merchandising rules and apply them, IBM did everything wrong," he said.

IBM won't get any long-term benefits from the latest price cuts, he added. "IBM needs to cut back and redirect distribution, without channel conflict," so dealers can make more money selling and servicing IBM machines, he said.

Although IBM has vowed repeatedly "to grow with the industry" in all its segments, John F. Akers, chairman, president and chief executive officer, recently raised doubts about the company's eagerness to slug it out in low-priced personal computers. If certain market segments "become conclusively commodity-like, you'll probably see the IBM company departing (from) that part of the industry," he told securities analysts at a meeting last month in San Jose, Calif.