I.B.M. Suffering in PC's Despite Its New Line

By John Markoff
The New York Times

August 19, 1988

The International Business Machines Corporation's PS/2 computers, introduced 16 months ago, are in trouble.

The machines with which the computer giant has sought to maintain its domination of the personal computer industry are losing ground to competitors.

The problem lies in three areas: a key software component that would make the computer easier to use is not yet finished, little software designed especially for the new line has yet been made available, and other manufacturers are holding off on bringing to market machines that are compatible with the PS/2.

I.B.M. is working to repair the damage. I.B.M. officials deny that things have gotten so bad that they plan to bring out soon a new computer that will fall back on the four-year-old technology employed in the popular PC/AT. There have been persistent reports in recent days that I.B.M. planned such a machine.

''We clearly are not going to be building an AT-style machine and we've made that clear to our dealers,'' said William Lowe, president of I.B.M.'s entry systems division. The PS/2 line is based on the 32-bit family of microprocessors. The AT line is based on the older and less powerful 16-bit family.

Market research surveys and reports from large computer dealers about the PS/2 computers' sales problems come at a time when I.B.M. officials are reporting that the company has sold more than two million PS/2 machines.

The recent surveys show that I.B.M. has lost ground in the personal computer market this year to competitors like the Compaq Computer Corporation, Apple Computer Inc., Epson, the Tandy Corporation, the Dell Computer Corporation and others.

''It's down 10 points from 40 percent last year,'' said Michele Preston, a computer industry analyst at Salomon Brothers. ''The new products haven't picked up their market share at all.''

A top executive of I.B.M.'s largest computer dealer, Computerland, which sells more than $400 million worth of I.B.M. computers annually, said I.B.M. had slipped against Compaq and Apple recently in its stores. ''In the short term, the PS/2 is taking a beating,'' said Ken Waters, Computerland's president and chief executive.

''The worst problem is that they have lost hearts and minds of the customers and dealers,'' said Seymour Merrin, a computer industry analyst at Merrin Resources Inc. in Southport, Conn.

I.B.M. on the Defensive

Since the introduction of the Personal System/2 line in April 1987 amid a barrage of publicity and high expectations, I.B.M. has found itself continuously on the defensive about the computers. Critics have picked holes in the company's personal computer strategy and even challenged I.B.M. on the accuracy of the two-million-plus sales figure it released to defend its claim to the success of the new computer line.

Industry executives have suggested that I.B.M. may not yet have sold all the PS/2 computers it has manufactured - a charge the company disputes.

''I think that all the market share that I.B.M. gained is in warehouses,'' said Ed Juge, vice president of marketing at Tandy. ''They have a greater market share of warehouse floor space than anyone else.''

Success Could Still Come

Still, analysts and competitors say it is premature to say the PS/2 line has failed. They point out that it took more than three years for Apple to build momentum for its line of Macintosh computers.

Underlying I.B.M.'s woes lies the slow acceptance of a new internal architecture known as the Micro Channel computer bus. A computer bus is a set of wires that carry data between the machine's microprocessor and its other components. Most of the PS/2 models are based on the Micro Channel, although the less expensive models are not. I.B.M. says that more than half of all PS/2's sold now contain the new computer bus.

Mr. Lowe said I.B.M. was having difficulty keeping up with demand for its Model 30, the inexpensive member of the PS/2 line that does not use the Micro Channel architecture. At the same time, he said, sales of Micro Channel-based computers would significantly surpass those of non-Micro Channel machines this year. ''We are very pleased with the acceptance of the Micro Channel-based products,'' he said.

While definitely ruling out a PC/AT product, an I.B.M. spokesman said that it would not be unlikely that the company would decide to offer an upgraded version of the Model 30, which uses a bus similar to that of the original I.B.M. PC, introduced in 1981.

Significant Potential Seen

Despite the problems, many analysts continue to think that the Micro Channel architecture will prevail, largely because of the potential for high-speed computation incorporated in modern microprocessors. The Micro Channel is well suited to take advantage of this power.

''The Micro Channel has a number of advantages even before the software gets here,'' said Michael Murphy, editor of the California Technology Stock Letter. A lack of sophisticated software that can take advantage of the Micro Channel has slowed its spread, such analysts contend.

In fact, I.B.M.'s biggest problem lies at the top of its product line, where the Micro Channel is meant to take most advantage of the fastest microprocessors. The PS/2 Model 80 - based on the powerful Intel 386 processor - drew lukewarm reviews, in part because it was outclassed by competitors and because part of it must sit beside the desk rather than on top of it.

In June, the company introduced a range of faster machines designed to shore up the PS/2 line by adding performance. The Model 70, a slimmed-down 386-based computer, got better marks for performance, but a number of analysts said that I.B.M. had erred again by adding only three slots into which specialized circuit boards can be inserted to expand the machine's capabilities.

Competitors like Compaq and Apple say they are making their greatest inroads against I.B.M. in these top-of-the-line models used by ''power users.''

''I.B.M is losing the price/performance war,'' said Leslie Fiering, assistant vice president of advanced technology at the Bankers Trust Company. ''Compaq burns I.B.M. at the high end, and although I.B.M. has promised to drop prices, they haven't. I think it's going to hurt them.'' I.B.M. may have only itself to blame for falling behind in the marketing wars. Last year, the computer maker introduced a quota program for its dealers, intended to increase sales at each store. Dealers that exceeded quotas were to receive higher profits on each sale.

The strategy backfired. The program created deep price discounting as dealers tried to move the machines. This pushed dealers to competitive brands like Compaq or Apple on which profit margins were higher.

Mr. Lowe said the company was ending the current incentive program on Sept. 30 and designing new incentive programs to replace it.

GRAPHIC: Graph showing the manufacturer market share of personal computers sold through computer specialty stores (source: Storeboard Inc.) (NYT)