TIME: Almanac 1990/1990 Time Magazine Compact Almanac, The (1991)(Time).iso/time/103089/10308900.021

Text File | 1990-09-18 | 10KB | 174 lines

BUSINESS, Page 72

Just Squeaking Along

Computer companies are launching more products than ever, but

are they really new?

By Thomas McCarroll


    The twin fetes had all the glitz and hoopla of a Hollywood
premiere. Champagne flowed freely, and soft jazz whispered in the
background. Guests nibbled on caviar and smoked-salmon quiche. The
big bashes, which took place on the same day this month in New York
City and Los Angeles, were staged by Commodore Business Machines
to kick off a $15 million advertising campaign, starring
celebrities ranging from the Pointer Sisters to Tommy Lasorda,
manager of the Los Angeles Dodgers. But instead of coming off as
a preview, the event seemed more like a benefit for an aging star.

    In this case the focus of attention was the Amiga, a personal
computer introduced by Commodore four years ago, whose sagging
sales and fading image the company is trying to repair. Said
Commodore president Harold Copperman: "This is not a celebration
of new technology. This is a strategic repositioning and
repackaging."

    The Commodore show was symptomatic of what is taking place at
many companies in the computer industry. After a decade of rapid
expansion and explosive product innovation, the business has lost
some of its pizazz. Many established companies are repackaging old
technology rather than developing daring new products.
Manufacturers of such big machines as mainframes and minicomputers
are suffering from stagnant sales as customers turn to powerful but
less expensive workstations and personal computers. At the same
time, many customers are reluctant to buy new hardware because of
a shortage of innovative software to provide fresh applications for
the machines.

    All told, the computer industry is entering a shake-out phase,
in which slowing growth will force some companies to restructure
or combine with healthier partners. Instead of the robust annual
sales growth of 15% to 20% that the industry enjoyed in the early
1980s, computer revenues will expand an estimated 6% to 8% during
the next few years. That pace would delight most industrialists,
but among computer makers it represents an abrupt comedown. Profits
are being squeezed even more. Last week the world's No. 1 and No.
2 computer makers announced sharply lower earnings during the most
recent quarter. IBM said its profits declined nearly 30%, to $877
million, and Digital Equipment's earnings were off more than 32%,
to $150.8 million.

    While the industry has a few sizzling products like laptop
computers, the overall sluggishness is hurting many businesses,
ranging from supercomputers to software. Cray Research, the largest
supercomputer maker, said early this month it will cut its work
force about 7% because of slack demand. Mainframe manufacturer
Unisys, which has reported operating losses of $79 million so far
this year, plans to slash its payroll by 8,000 workers, or 9%.
Wang, which lost $424 million during the past fiscal year, may be
pushed into a merger. Former rising stars in personal computers,
notably Commodore and Wyse Technology, are losing money. So are
major software developers, including Ashton-Tate and WordStar
International.

    A prime reason for the slump is that corporate customers are
cutting back on spending as they go through buyouts, mergers and
restructurings. "Big customers are hanging back because they don't
have any money," says Robert Noyce, chief executive of Sematech,
a consortium of computer-chip makers. At the same time, the
industry has graduated from an "original placement" business, in
which many companies rushed to automate for the first time, to a
"replacement" business, in which corporations buy computers only
when they need new models.

    Many companies are still trying to figure out how to use
effectively the computers they bought during the go-go era of a few
years ago. The head of Eastman Kodak's computer operations,
Katherine Hudson, says her computer budget barely grew at all this
year, in contrast to an increase of more than 15% last year. Rather
than buy new hardware, she is "looking for ways to make past
investments pay off first."

    When companies do buy new gear, they are rapidly downsizing,
junking their mainframes in favor of smaller, more flexible
workstations, made by companies like Sun Microsystems. Because of
this shift, mainframe sales are expanding only about 5% annually,
less than half the rate of a few years ago. Says Rod Canion,
president of Houston-based Compaq: "The rules are changing, and
it's very difficult for the big-computer makers to accept." At the
other end of the spectrum, some PC makers are getting hit with a
different problem: a glut of machines. Says Michael Dell, who heads
an Austin-based PC maker that bears his name: "There are no more
places on the shelf for another computer. There are more than you'd
ever want to name."

    To some extent, the industry has made customers leery by
engaging in esoteric debates over formats and components. Case in
point: the controversy over an industry-wide computer "operating
system." While the selection of this format is critically important
to computer companies, customers tend to be confused by the endless
discussions over the relative merits of such systems as OS/2 and
UNIX. The same goes for the rivalry between the two fastest chips,
the Intel 80486 and the Motorola 68040. "The industry is so busy
talking inside baseball that it has forgotten the customers.
They're thoroughly confused by all this alphabet soup," says James
Morris, a computer-science professor at Carnegie Mellon University.
In many cases, he says, customers are postponing purchases until
one format emerges dominant, the way VHS surpassed Beta as a
videocassette standard.

    In the same vein, many computer customers believe the
industry's innovative efforts at the moment are failing to fill
users' needs. They believe the expansion during the early and
mid-1980s was based largely on the proliferation of such
breakthrough products as the Apple II personal computer (1977);
WordStar, the wordprocessing program (1979); VisiCalc, an
electronic accounting ledger or spreadsheet (1979); the IBM PC
(1981); Apple's Macintosh, with its advanced graphics capability
(1984); and desktop-publishing gear like Aldus PageMaker (1985).

    That pace of innovation does not exist today, many experts
contend, in part because of the industry's maturity. Since most of
the easy problems have been solved, the next major advances will
come harder and slower. Rick Martin, who follows the industry for
Prudential-Bache Securities, points out that software is still
produced in the same four categories as it was nearly a decade ago:
spreadsheets, data base, communications, and text or graphics
processing. "There's no knock-'em-dead technology out there," he
says. "There's nothing out there that makes you feel like you're
missing something if you don't have it."

    While the computer industry offers more products than ever
before, the vast majority represent incremental improvements or
product refinements, "not leaps and bounds," contends Mitchell
Kapor, the creator of the top-selling Lotus 1-2-3 spreadsheet.
Kapor believes the industry has failed to develop products that
would make technology easier to use. Says he: "The industry is
shooting at the wrong target. It continues to emphasize power at
the expense of usability. It's paying too much attention to the
engine and not enough to the dashboard."

    As the industry cools off, entrepreneurs are no longer so eager
to enter the business and can no longer so readily get financing.
Many venture capitalists are shunning computer companies, largely
because of mounting losses on recent start-ups. Says Houston
venture capitalist Edward Williams: "Compaq and Apple -- those
opportunities in hardware have come and gone. It's too risky at the
moment. It's an industry that's maturing." Adds Sematech's Noyce:
"Nobody's going to be very interested when the last people in it
got stung." According to Venture Economics, a market-research firm,
the number of computer-hardware makers receiving venture financing
fell from 397 in 1984 to 215 last year, and software start-ups
getting such funding dropped from 258 to 215.

    Some executives contend that innovation is alive and well,
citing such advances as notebook-size computers and high-speed RISC
microprocessors. Says T.J. Rodgers, chief executive of Cypress
Semiconductor: "What the bean counters who make projections forget
is that in the next two to three years, we will have the next set
of innovations, which will make them abandon their projections. It
has happened before, and it will happen again." Don Valentine, a
partner in Sequoia Capital, a venture-capital firm, contends that
creative stagnation is confined mostly to the big corporations,
including IBM, Wang and Unisys. Says he: "There is no innovation
at the dinosaur companies that are run by Neanderthals. Perhaps
they have outlived their function."

    Many experts see great potential for innovation in relatively
unglamorous, peripheral parts of the computer business. Among them:
more lightweight batteries to power portable machines, crisper
viewing screens and new graphics capabilities. The biggest field
for breakthroughs will be software, which is immensely time
consuming to produce but crucial for making today's powerful
machines reach their full potential. Says Kevin Campbell, president
of American Business Technologies, a Texas computer-service firm:
"The hardware that we've had since 1985 is really all the
horsepower that we've needed. The growth isn't in new boxes but in
making them more productive." Since customers seem nearly unanimous
in their demand for easier-to-use programs, smart innovators should
realize that a new frontier is ripe for exploration.