Sales Soft, I.B.M. Cuts PC Prices

By David E. Sanger
The New York Times

July 10, 1986

A rapid erosion of the International Business Machines Corporation's lead in the personal computer market has forced company officials to take a series of urgent actions in recent weeks to restore I.B.M.'s position, computer retailers and industry analysts said yesterday.

Their comments came a day after I.B.M. notified its dealers that it was cutting the wholesale price of several of its personal computer models, including one version of its top-of-the-line PC-AT, by up to 18 percent. It is unclear whether the action will result in any price savings for consumers.

The price cut was apparently prompted by complaints from retailers that widespread price-cutting in the industry - sparked largely by the unexpected success of low-priced personal computer ''clones'' from overseas - had cut deeply into their profits in selling I.B.M. equipment.

'Profits Are Eroding'

''Dealers, not just Businessland and Computerland, can no longer make money selling the I.B.M. PC,'' Esther Dyson, a widely read industry analyst, said yesterday. ''Profits are eroding, for them and for I.B.M.'' In recent weeks, both Businessland and Computerland, two of I.B.M.'s largest retailers, have introduced ''private label'' I.B.M.-compatible computers for their stores that will compete with I.B.M. models.

But in a telephone interview yesterday, the president of I.B.M.'s Entry Systems division, which is responsible for personal computer operations, denied that the company's price cuts were a sudden move or that changes in the personal computer market had taken the company by surprise.

''I have not seen anything that surprised me,'' said the executive, William Lowe. He described the cuts as a ''continuation and extension'' of a promotion that started in April, though he said that the action was taken after an ''inquiry'' by dealers.

That inquiry seemed sparked in part by what analysts call an unexpected reversal of fortunes for I.B.M.

'A Big Drop' in Market Share

Surveys by Inforcorp, a market research firm in Cupertino, Calif., indicate that in the first five months of 1985, I.B.M. commanded about 30 percent of the personal computer business, a figure that fell to 25 percent during the same period this year. ''It's a big drop,'' said David A. Carnevale, the director of microcomputer research at Inforcorp. ''Suddenly this year, 'clone' is no longer a dirty word.''

That change in attitude, many believe, marks a significant turning point for the personal computer market. Through most of last year, the biggest purchasers of personal computer equipment, large businesses, trusted only I.B.M. or its major PC competitors, companies like the American Telephone and Telegraph Company and the Compaq Computer Corporation. And neither of those competitors significantly underpriced I.B.M., instead offering machines with additional features or greater power.

In recent months, however, lesser-known brands such Leading Edge and Epson, produced in Asia, have gained increasing respectability, largely on the strength of favorable reviews from trade journals and consumer magazines.

''Companies realized that for their low-end 8088 machines,'' Mr. Carnevale said, referring to the computers powered by the Intel Corporation's basic 8088 microprocessor, ''they didn't need I.B.M.'s umbrella of warmth, comfort and service. They just needed something that worked.''

At I.B.M., Mr. Lowe insisted that such changes had been fully expected. ''The key for our business has always been I.B.M. value-added and product differentiation,'' he said, ''and that's still the direction we intend to head.''

New PC-AT Expected

According to industry reports, I.B.M. will soon introduce a new version of its PC-AT, its most profitable personal computer, that will include technical changes that competitors will probably have a difficult time matching. ''We haven't seen I.B.M.'s last shot at the clones,'' said Anthony Morris, the head of Morris Decision Systems, a Wall Street personal computer retailer, which sells mainly to large businesses. I.B.M., citing longstanding policy, declined to comment on future entries.

The wholesale price cut is only I.B.M.'s latest move to mollify its retailers, who say that they have increasingly found themselves competing against I.B.M.'s own direct sales force for the largest personal computer accounts.

Last month, the company announced a new program that allowed customers, for the first time, to get volume discounts on I.B.M. equipment regardless of whether they purchased the equipment directly from I.B.M. or through a retailer. I.B.M. sales personnel will be allowed to credit those sales toward their own quotas, even if the retailer made the sale.

''Over the long run, it should bring more business to computer retailers,'' Mr. Morris said. ''It validates the role of the retailer, and it might even make us more profitable.''