IBM Leaves the PC Market Guessing; Price Cuts and Flagging Sales

Computer Articles

IBM Leaves the PC Market Guessing; Price Cuts and Flagging Sales

IBM HAS signalled a new round in the personal computer markets battle by beating a hasty retreat from the home computer segment. Competitors and customers were surprised and confused by IBM's sudden decision to end manufacturing of the PC Jr home computer next month. Competitors, while not mourning IBM's apparent defeat in the market, were unsure whether to celebrate or fear the aftermath of the big company's decision.

The immediate effect might be to give a much needed boost to Apple Computer, IBM's chief competitor. Apple declined to comment on the IBM move, but the company is keenly aware that competition from the PC Jr has caused many of the current hardships that have forced it to shut its factories for a week. The PC Jr represented 3 to 4 per cent of U.S. retail sales for personal computers until last September but rocketed to 17 per cent of the market in December when IBM reduced the price of the computer. According to InfoCorp, of Cupertino, California, a market research organisation, PC Jr sales grew largely at the expense of the Apple II.

The PC Jr was introduced in November 1983 at a price of over $1,600 but the must heralded "Peanut" was quickly recognised as a resounding flop. It took massive price cuts, dealer rebates, a multi-million-dollar advertising budget, a redesigned keyboard and a direct mail campaign to 20m U.S. households to rescue the product. IBM sold about 265,000 PC Jrs last year but its profits on the home computer were marginal.By Christmas 1984, the home computer was selling for under $800 - less than half its original price. Competitors complained that IBM was selling the PC Jr below cost, although IBM strenuously denied it.

In February, IBM raised the PC Jr price to $1,400 and, InfoCorp says, "killed sales." The products market share has now fallen back to 4 per cent. Apple II sales have, however, increased only slightly, according to Apple. Now, competitors and retailers alike are worried about what will happen to the hundreds of thousands of PC Jr Units that they believe IBM still holds in stock. A "fire sale" of the units might cause further disruption, delaying any advantage that Apple Computer might feel from the withdrawal of products and affecting sales of other home computers such as those offered by Commodore International.

There are also industry rumours of a new IBM home computer. Mr Norm de Witt, a personal-computer industry analyst at DataQuest in San Jose, California, predicts that IBM will launch a $800 to $900 home computer in time for Christmas. Other analysts expect IBM to reduce the price of its standard IBM PC, which currently sells for about $2,000. The demise of the PC Jr may be closely connected with the widely rumoured introduction of a new IBM personal computer, know as the PC-2, expected in April or May. Yet another theory links the withdrawal of the PC Jr to the April introduction of an IBM portable personal computer.

The decision to discontinue the PC Jr is also widely seen as another step in IBM's efforts to rein in its maverick entry level systems division, which produces personal computers. After the recent reorganisation of the division, which lost control of personal computer sales, Mr Philip Estridge, president of the entry level systems division, was reassigned to a corporate staff position last week. Although Mr Estridge received much of the credit for creating IBM's $5bn personal computer business, he was also held responsible for the troubles surrounding the PC Jr and supply difficulties that have severely curtailed sales of IBM's latest "PC AT".

IBM's corporate management has reportedly been highly embarrassed by the widespread publicity surrounding the PC Jr. Industry analysts also believe that the personal computer division has built up an unacceptably high $1.6bn worth of parts inventory because of the difficulties of predicting personal computer sales strengths. Although IBM's withdrawal from the home computer market highlights the same difficult market conditions that have caused Apple Computer's current hardships. IBM's ability to withdraw the PC Jr without any anticipated financial impact upon the company clearly demonstrates IBM's superior strength. Apple Computer cannot afford such failures. Last year, Apple earned well over half of its profits from sales of the Apple II, which directly competed with IBM's PC Jr.