Phong Vo (10/1993 - updated 1994)
Perhaps the Personal Computer (PC) is the single innovation of the last decade that has had the most impact on the society and industries. Since its birth, the PC has transformed the way people work, play and communicate. It helps create a vast market for both homes and businesses, and at the same time destructure the entire powerful computer industry. This paper will look at the history and development of the PC industry, its driving technology, the market it helps create, major players, and future opportunities.
After World War II, a new industry emerged. Building computers became a big business for such pioneer companies like Sperry Univac and IBM. With its financial means and management know how, IBM had taken the industry away from Sperry Univac, and soon most computers were IBM machines. The market continued to grow. Other companies developed and soon there were Honeywell and Burroughs, General Electric, RCA, and NCR. It was popular in the computer industry at the time that IBM and the other companies were called "snow white" and the seven "dwarfs". These companies own the large market for nearly two decades with IBM far ahead in revenues. The machines IBM and others built were but "dinosaur" computers because of their enormous size. The transistor breakthrough in the late 50's then gave birth to a new breed of computer, the minicomputer, pioneered by Digital Equipment Corporation (DEC) and Hewlett-Packard (HP). By 1970, there were two distinct kinds of computers: the made-to-order room-sized mainframe computers built by IBM and the other "dwarfs", and the minicomputers built by DEC and HP. It was logical to think that the mainframe and minicomputer companies, with their money and expertise in computer technology, would have the vision of placing computers in everyone's hands and homes. But it did not happen. The next generation of computers, the Personal Computer, was created entirely by individuals working outside the established corporations. As a matter of fact, it never crossed the mind of top management at big computer companies at the time that the PC would create a revolution that was going to destroy the established market of mainframes and minicomputers just a decade later.
In 1974, Micro Instrumentation Telemetry Systems (MITS) in Albuquerque, New Mexico, introduced the Altair microcomputer to the market. The machine was based on the Intel's 8080 computer chip and sold with no software. Bill Gates, a freshman at Harvard, and Paul Allen, working for Honeywell, signed up for the job of writing a software that could run on the Altair. They beat other programmers by finishing their software in six weeks. Their company, Micro-Soft (later to become Microsoft) had made it first sale as a microcomputer software house. Competition then began to emerge. Biggest threats for MITS came from Commodore and especially Tandy Corporation who was building a computer to sell in its hundreds of Radio Shack stores. In 1977, MITS lost its edge and was sold to Pertec, a disk and tape drive manufacturer.
Not only was MITS itself a catalyst that inspired an industry, but it also introduced the first affordable computer, pioneered computer shows, computer retailing, computer magazines, users' groups, software exchanges, and many hardware and software products. The continuing fear in the developing microcomputing industry was that the big companies like IBM or Texas Instruments would come and spoil all the fun. In 1976, Steven Jobs and Stephen Wozniak built the Apple I computer in their garage and sold 50 of them to the Homebrew Computer Club. They continued on to the next computer, the Apple II. During this time, the microcomputer industry had reached a critical turning point. Dozens of companies had come and gone. Among the computer and computer-related companies at the end of 1977 were Apple, Exidy, IMSAI, Digital Microsystems, Alpha Microsystems, Commodore, Midwest Scientific, GNAT, Southwest Technical Products, MITS, Technical Design Labs, Vector Graphic, Ithaca Audio, Heathkit, Cromemco, MOS Technology, RCA, TEI, Ohio Scientific, The Digital Group, Micromation, Polymorphic Systems, Parasitic Engineering, Godbout Engineering, Radio Shack, Dynabyte, North Star, Morrow's Microstuff, and Processor Technology. The majority of these companies had failed. In most cases, it was because of the lack of expertise in marketing, distributing, and selling the products. They alienated their customers and dealers. In October 1976, Mike Markkula, a 34-year old retired "marketing wizard" from Intel offered to help Jobs and Wozniaks to market the Apple II. He drew up a business plan, added $91,000 to the existing $5000 that the pair had for one-third of the control of the company, obtained a line of credit for Apple at the Bank of America. Thereafter, Markkula set the tone for the company. In 1977, Apple established its first office in Cupertino, California. Until the end of 1981, the Apple II carried the company, and worldwide sales of Apple products were increasing at a pace of 186 percent. The name "Apple" had become virtually synonymous with "personal computer." The success of Apple and the proliferation of smaller companies writing software and making add-on hardware for the Apple had notified the world that personal computer were serious business.
In 1980, IBM enrolled Microsoft to develop software languages for its personal computer which was still in the research and development stage. Bill Gates bought an operating system, SCP-DOS, from Seattle Computer Products, and made it MS-DOS, the operating system that has reigned the PC industry until the present day. On August 12, 1981, IBM announced its first personal computer and called it the IBM Personal Computer (PC). With the IBM PC, IBM had defied its deep-rooted tradition of secret design specifications and turned the machine into an open system. The IBM PC was built on an open architecture using a non- proprietary CPU, the Intel 8086, and third-party hardware components.. IBM also departed from its tradition by selling the IBM PC through the most popular computer retail chain, Computerland, and in department stores just like any appliance. On the software side, Microsoft decided to make its MS-DOS an open system, too. Bill Gates' argument was that if people knew the details of the operating system, they could develop software for it more easily. The decision to make the IBM PC an open system would cost IBM a great deal later.
The embryonic state was short-lived. The industry shot up into the growth stage in just a few years. The introduction of the IBM PC radically changed the world of microcomputer makers, software developers, retailers, and the rapidly growing market of microcomputer buyers. It shook up the microcomputer industry at the time, pushing most the early pioneers into oblivion. That left only two companies under the limelight, IBM and Apple, who were setting the course of the industry until the present day. The IBM PC created the opportunities for countless hardware and software companies to flourish overnight owing to the machine's open architecture. It also invited "parasites" to grow at IBM's expense. Thousands of companies emerged making IBM "clone" machines which would provide the same functionality at a lower cost than IBM's machines. This, however, allowed the PC to become extremely popular and expand into all segments of the market. Apple, on the other hand, reverted to a close architecture with its Macintosh machine introduced in 1984. The Macintosh (or the Mac) was built on a proprietary hardware architecture and operating system. It was the Mac's easy-to-use graphics format that set it apart from the PC.
The growth of the personal computer industry can be described as explosive. U.S. personal computer sales grew from $3.9 billion in 1981 to $37.1 billion in 1991. Worldwide sales jumped from $8.5 billion to $93.3 billion in the same period. Competition was fierce with IBM on one side and Apple and the clone makers on the other side. IBM's major competitors included Compaq, Dell, Apple, AST, AT&T, NEC, and Daewoo, etc... In 1987, IBM replaced the original PCs with the PS/2 line. Most PS/2s use the Micro Channel Architecture (MCA), a proprietary bus format aimed at slowing down the clones. The rest of the industry joined force to counter attack IBM by introducing the Extended Industry Standard Architecture (EISA) bus. In the same year, Microsoft and IBM announced the OS/2 operating system with the intention of making it the standard operating system on the PS/2s, replacing MS-DOS on PC machines, and competing with the Mac with its Mac-like graphical user interface. IBM, however, could not enroll many software developers to endorse OS/2, and MS-DOS has continued to be the operating system of choice on both the IBM PC and PS/2. In 1990, frustrated with OS/2 sales, Microsoft broke off its alliance with IBM by promoting its own Microsoft Windows 3.0 graphics.
A characteristics of the growth stage is the rapid technological transition. New and more powerful microprocessors were produced every two years. At first, the IBM PC was built with Intel's 8086 microprocessor in 1981. IBM then introduced its more powerful IBM PC AT using the 80286 chip in 1983. Three years later, Compaq beat IBM to the market with its version of the IBM PC using the new 80386 chip. Then came the 808386sx, 80386dx, 80486sx, 80486dx, Pentium, etc... The cost of processor's speed, measured in million of instructions per second (MIPS), dropped from $18,000/MIPS in 1981 to below $2,000/MIPS in 1990.
Another technological characteristics is the trend towards miniaturization. In 1986, IBM brought out its first laptop computer, the PC Convertible, but Toshiba's laptop clone became a hit. In 1988, sales of IBM-compatible laptops began to climb. A new species of smaller size, the "notebook" PCs, led by NEC's 4.4-pound Ultralite appeared in the market. The trend has continued until now with smaller and smaller PCs - the subnotebook and the palmtop PCs.
The shake-out of the decade-old personal computer industry came earlier than expected. Starting in 1990, a PC price war started to brew. Various companies began to cut prices on their existing product lines and at the same time rolled out lower-priced PC models. In October 1990, a price war exploded with IBM, AT&T, Zenith Data, and Hyundai trimming their personal computer prices as much as 12 per-cent. In the summer of 1992, Compaq dropped its prices by up to 32 percent and successfully tackled the low-end market with its inexpensive line of new microcomputer. The event spurred other computer manufacturers to respond with similar price cuts. In September 1992, IBM brought to the market its PS/1 line aimed at homes and small businesses. With prices from vendors like IBM and Compaq now virtually match those of the no- name clones, consumers are moving from the low-end clones to high-end brands. The raging price war has been continuing until now, bolstering strong players and reducing vulnerable manufacturers to ashes. Already, Everex Systems Inc. and CompuAdd Corp. have filed bankruptcy papers. Dell Computer Corp. - one of the nation's fastest-growing companies before 1993, announced it would report its first quarterly loss ever, sending its stock to less than $16, down from $49 in January 1993. Tandy Corp., one of the original personal computer pioneers, has bailed out and sold its computer operations to AST Research Inc. Historically, Apple had been able to command premium prices for its Macintosh machines because their graphical interface was much easier to use. Improvements in Microsoft Windows 3.1 and the price free fall of Windows machines forced Apple to lower its price as much as 50 percent to keep pace. Taiwanese PC makers, hurt by the price wars, changed their strategy to become the "arms dealers", playing a critical behind-the-scenes role as designers, manufacturers, and suppliers for the U.S. PC warriors.
The downward spiral of personal computer prices can be attributed to the following reasons:
The personal computer market is now highly segmented. The distinction between strategic groups becomes fuzzier. The industry can be generally considered to consist of two overlapping strategic groups with respect to price/quality and number of market segments served. One group comprises the no-name clone manufacturers (or local brands) and the other groups well-known computer powerhouses (or national brands). With the technology used to make the PC cheaper but more powerful and standardized, there are not too many differences between a low-end PC made by a no-name clone maker and one made by a well-known company such as IBM. Almost everybody can assemble a personal computer for themselves using off-the-shelf components. Companies that used to position themselves at the high-end of the market where they could command premium prices are now moving into the low-end. Since there is almost little distinction between a low-end and a high-end market nowadays, the two groups widely overlap. Towards the end of the current bust cycle, the industry will have to consolidate with only a few strong companies left.
In the U.S., IBM and Apple dominate the market with about 32% market share. Other big names like Compaq, Dell, AST, Packard Bell, NEC, Everex, etc. command approximately 30%, and the rest belongs to obscure clone makers. Even though Japanese companies do not own a high market share, Toshiba is the market leader in the fastest growing segment of the PC industry - laptop and notebook computers. The company has enjoyed about 15% market share in terms of revenue, only trailed by Compaq and Apple at 13% and 10% respectively.
In the global arena, the main players are IBM, Apple, Compaq, and NEC who account for about 40% of the market value of approximately $46.5 billion in revenue. The four largest Intel-based PC markets in Europe (by units shipped) are Germany, Great Britain, France, and Italy in that order. Personal computers are not widely used in Japan as in Western Europe or the United States. Factors that have contributed to this limited use include skepticism about the benefits of personal computers among Japanese businessmen and limited office space. Domestic firms have maintained their dominant position in the Japanese PC markets.
TABLE 1. 1991 U.S. market share (source: Fortune Sept. 21, 1992)
Company Market share (%)
------- ----------------
IBM 18.6
Apple 14.0
Packard Bell 5.7
Tandy/Grid 4.1
Gateway 2000 3.6
Compaq 3.5
Everex 3.0
AST 2.5
Epson 2.2
Dell 2.1
NEC 2.1
Note: the current statistics is not knwon but IBM, Apple, Compaq and
AST (after buying Tandy), Dell, and Gateway 2000 should be at the top
.
TABLE 2. Worldwide PC-market share, 1992.(source:
The Economist, January 30, 1993)
Company Market share (%) ------- ---------------- IBM 12.4 Apple 11.9 Compaq 6.6 NEC 5.1 Dell 3.5 Others 60.5 <---- Clone makers
A recent round of price war in the summer of 1992 resulted in a surge in computer sales at the end of 1992. However, gross margin is declining across the board to an average of about 30%. Net profit margin is dropping to about 3% - 7% from 15% or more a few years ago.
The barriers of entry into the personal computer market is low in terms of cost in this shake-out stage, but the risk is extremely high. With profit margin being so low and existing companies trying to fight for market share, no new companies would dare to make any new entry. Nevertheless, personal computer makers do face a great threat from their cousins, the workstation makers. Workstations have been used primarily by engineers and scientist due to their strength in graphics capabilities and performance in scientific calculation. They usually possess proprietary hardware and software. Personal computers, on the other hand, have been mainly employed for home and office use. With the advance of the graphics capabilities of the personal computers and the microprocessors used on them being more and more powerful, the performance of a personal computer has come to match that of an engineering workstation. Seeing this as a threat, workstation makers such as Sun Microsystems and Silicon Graphics have been trying to formulate strategies to counterattack. Sun has been developing business software for its computers with the hope to replace the personal computer market with Sun's workstations. It has also ported its Solaris operating system to the personal computer platform. For companies such as IBM, DEC, and HP who manufacture both the personal computers and engineering workstations, this may nevetheless be viewed as both a threat and an opportunity.
Competition is intense with big companies slashing prices and aggressively moving into the low-end segment of the PC market. Everybody is increasing their portfolios, offering a wide range of products. Without much product differentiation, however, PC makers have to compete on other grounds such as distribution channels, customer service, and advertising. After years of playing down the importance of brands in their struggle to wean customers off IBM, clone makers are currently attempting to cultivate brand loyalty. Brand value is now the critical thing. To keep customers loyal, they are trying to provide the best sales and service backup. Three-year on-site service warranties are becoming increasingly popular and may replace the standard one- year on-site warranties. Even IBM now gives a 30-day money-back warranties. Companies are using virtually every methods including technical support and toll-free numbers, fax services, bulletin boards, and electronic forums to keep in touch with their customers.
Realizing that technology is no longer a driver for their sales, PC makers are reaching out for advise from outside their industry, including such retailed powerhouses as Procter & Gamble and L.L. Bean. They are shaking up their sales channel and product design teams, and hire former food or cosmetics marketers to help gain a foothold in the world of mass merchandisers. Their ads, once designed mostly to praise their products, now are more often aimed as direct slaps at the competition. Ads by Compaq, IBM, and Dell all but ignored the product's technical or operating features. Instead, the ads called attention to competitors' weaknesses, such as Compaq's high prices and Dell's offshore manufacturing.
The fast pace of technology and the instability of the PC market has raised the level of uncertainty for both personal computer firms and their customers. Not only PC makers have to sell their products, but also must they sell their own images. They have become evangelists preaching fervently to sway customers, suppliers, investors, and employees with their vision of the future. As competition becomes fiercer, the number of joint ventures, alliances and marketing agreements has multiplied rapidly. Nearly every firm, small or large, now has a variety of ties with dozens of others, even between bitter rivals, such as Apple and IBM, who stress that their collaboration does not rule out tough competition between them now or in the future.
With hundreds of PC vendors to choose from, customers are ruthless in their search for values. The PC industry depends on the buyers for a large percentage of its total orders. Buyers can switch orders between supply companies at a low cost, thereby playing off companies against each other to force down prices. Increasingly sophisticated and computer literate consumers also exhibit more price sensitive. This has been reflected in the distribution channel where dealer chains like Businessland and Computerland faced new competitive realities as price- conscious buyers, needing less technical support and service, turned toward new computer superstores, like CompUSA and the Computer Factory, and mass merchandizing wholesale and department stores. A survey done by Frost and Sullivan Inc. showed cost and warranty as the top criteria for choosing a vendor, not brand names. Personal computers are becoming like a commodity products, and since product differentiation is small, price becomes the main force of competition. At the high end of the market where most buyers are big corporations, the picture is somewhat different. Because personal computers are so vital to their operations, business people have more considerations other than price. They would then look at quality and reputation of the companies they are buying from.
PC makers are dependent on its suppliers for microprocessors, memory, motherboard, video adapters, terminals, and hard disks, etc. In general, the relationship between PC makers and their component suppliers today is just like bread and butter. One depends on the other for survival. A supplier only possesses the bargaining power when it has a dominant position in the industry. For example, Intel is almost the sole supplier for the heart of the PC, its microprocessor. Computer makers have to rely on Intel for its chips. Except for the big names, most clone makers do not have a lot of bargaining power with Intel. Even Compaq is trying to improve its relationship with Intel to ensure its market leadership with the next generation of Intel microprocessor.PC makers and Intel actually become co-developers, with PC makers helping Intel to test its chips before mass production. Intel's grip on the PC industry will only loosen when many PC makers decide to go with AMD's 486-586, Cyrix's 486-586, DEC's Alpha or Motorola's PowerPC chip. However, the price wars have resulted in an over-demand for Intel's 80486 and P5 chips, and Intel took the advantage this to ensure its dominance in the PC processor market and to thwart off competitors by also lowering its price. Disk drive suppliers themselves have become victims of the PC price wars. PC makers try to lower their costs by forcing disk drive companies to lower their prices, too. Compaq dropped its long time partner Connor Peripherals to make Quantum Corp. its primary disk drive supplier for the reason that Connor's disk drives were more expensive than Quantum's. In face of the volatility of the market, suppliers have been more cautious to whom they sell. Marginal companies actually must pay up front. For example, Connor Peripherals two years ago sued a small Cleveland-based company, Cumulus Corp., for failing to pay its bill. Except for a period during 1987-1988 when the dynamic random access memory (DRAM) market was controlled by the Japanese, memory chips are in excess supply now. The most risk currently lies in the dependence of laptop makers on Japanese suppliers such as Toshiba for flat-panel liquid crystal displays, but the situation will soon change when American flat-panel manufacturers are able to produce more quality displays at compatible costs.
So far, the threat of substitute products is small. The personal computer has established its position as a unique product used in both homes and businesses. The threat may become bigger when new technology allows the workstation industry to produce its products at a much lower price thus enabling customers to make a choice between a personal computer and a workstation. Any move by PC makers to cross their boundary into the workstation market will definitely prompt workstation makers to fight back. This, however, may also be viewed as an opportunity for the PC industry rather than a threat.
When IBM introduced the IBM PC, it also planted its seeds of destruction. With thousands of small companies nibbling at its market share, and with the PC becoming the computer of choice in the computer industry, IBM was forced to rethink its strategy. IBM could no longer rely on its mainframe computers for profits, so it had to take back its personal computer market. IBM's top managers say they are now determined to give customers whatever they want, even if that means selling someone else's product, or helping a customer to scrap an expensive IBM mainframe in favor of a cheaper network of personal computers. Growing up as a vertically integrated organization, IBM had to build its own chips, circuit boards, disk drives, terminals, printers, etc. and wrote software for its computers. In order to be successful in the PC market, though, IBM could no longer afford an in-house PC division. In September 1991, IBM spinned off its personal computer division into the Personal Computer Co., hoping the new company will be able to react to market faster. Personal Computer Co. followed a segment marketing approach, creating small groups within the company to study each market individually and produce products that meet those needs. As a result, IBM is now targeting every buyer imaginable, with more products than ever before. It introduced the low-end lines of PCs, the PS/1s and the ValuePoint line, aimed at homes and small businesses. IBM's new lines became the instant threat to other computer vendors. IBM's market share of the PC has been increasing ever since. The PS/1s are sold in retail outlets such as Sears. The ValuePoint line is moved through superstores and by phone. The existing high-end PS/2 goes to corporate accounts. To make sure the home computer would not draw buyers from the pricier PS/2 line, IBM gave the PS/1 limited upgrade capability and an undersized keyboard. IBM also introduced into the U.S. market an inexpensive line of personal computer called Ambra which was sold in Europe and Canada before it hit the U.S. market. The Ambra was made by some other companies in Asia and did not carry IBM's logo. The company is successful with its ThinkPad portable computer which became so popular that the company once had to stop taking telephone orders for them and they were back-ordered at dealers. Besides making and selling its own computers, IBM is now making computer motherboards for sale to OEM companies. It obtained the licence for the 486 microprocessor technology from Intel and is making better versions of the 486 CPUs. IBM also moves aggressively into the computer service segment. The company provides technical services for ALL brands of IBM-compatible personal computers. This should help IBM to bring its name to market areas that currently belong to other companies.
To guarantee its market share in the future, IBM reached to its foe, Apple. The two companies formed an alliance to develop the next generation of operating system. IBM also allied with Apple and Motorola to produce the next generation of microprocessor, the PowerPC. The new chip is out to take back some of the hugely profitable microprocessor business that IBM lost to Intel when it handed over the responsibility to Intel to produce the heart of the IBM personal computer. It is also intended to give IBM more control over its future personal computers, prohibiting others to clone IBM machines. In July 1993, IBM announced its new Power Personal Systems Division and told it to sell PowerPC- based systems even at the expense of IBM's Intel-based systems.
[Note: IBM has recently consolidated its PC product lines to reduce customer confusion. It has stopped producing the Ambra and dropped the PS/2 and ValuePoint. To target the home computer market, IBM introduced the new Aptiva line which was immediately sold out when it hit the stores. IBM has chosen to bring back the glory of the old days by launching the IBM Personal Computer 300 and 700 series, replacing the PS/2 and ValuePoint lines.
IBM is late for getting a PowerPC-based machine out of the door. It decided its PowerPCs should use the OS/2 operating system to make the OS/2 an alternative to Microsoft Windows. However, the rewriting of OS/2 to run on the PowerPC chip has had many problems.]
Part of Apple's past success on its Macintosh line of personal computer was that it defined the Mac as the alternative to the IBM standard, and has successfully thwarted off any attempts to clone the proprietary Macintosh design. That helped the company to pile up earnings but left it isolated in a market that preferred a standard such as the IBM design - and limited its share of that market to about 12% in 1990. So far, Apple's major market is limited to the education and desktop publishing sectors with extremely loyal customers. The PC price war in 1990 had forced Apple to reduce the Macintosh price to retain its market. Furthermore, it no longer can claim a huge technology edge for its machine since there is no significant difference between the Macintosh graphical user interface and the new version of Microsoft Windows software which is shipped with virtually every IBM-compatible PC. Apple started to move into the home-user market with the Macintosh Classic that costs below $1000. This was also an attempt to compete with IBM's PS/1s and ValuePoints. As a result, Apple's share of the market has increased markedly to approximately 20% share of PC shipments in 1991. The side effect was that not only the Classics themselves were much less profitable, but they also have stolen sales from Apple's higher-margin computer. Without being able to command a premium price, Apple's last resort is to pump up the volume of the Mac as the only way to stop the shrinking profits. However, Apple says Macintosh unit sales already were up 35% in the first half of 1993, and Apple is not able to produce enough of its most popular machines.
Apple's former CEO John Sculley says Apples future will be severely limited unless it moves beyond personal computers. In the short term, to guarantee its position in the next decade, Apple had to team up with IBM for the production of a new operating system to compete against Microsoft Windows. In 1991, Apple and IBM formed Taligent to produce Pink, a new generation of operating system. The joint venture with IBM has a strategic implication - Apple wants to crack the corporate market by making it easier to link Apples to IBM computers. As mentioned earlier, it has also joined IBM and Motorola to make the PowerPC chip. In the long term, Apple's vision is to become a global electronics holding company overseeing multiple businesses. According to Sculley, computers are just one segment of what he sees as a new market of overlapping products which cover computers, consumer electronics, telecommunications, and media and publishing. He wants Apple to get a piece of all these segments. While other companies are busy trying to cope with the aftermath of the price wars, Apple is betting on its future by introducing the futuristic "Personal Digital Assistant" or Apple Newton MessagePad. The Newton is Apple's first entry in a new breed of handheld computer devices that allow users to control with a pen rather than with a keyboard. Apple, however, has to do much better. The market for Newton is not shaping up yet, and Newton whose price is under $1000 would produce revenues of less than fifty-million dollars in the first twelve months of market. Apple also focuses its efforts in the development of the multimedia computer - the technology it had started to invest in seven years ago but only created a market hype recently. As part of its strategy, Apple entered another joint venture with IBM to form a new company, Kaleida, to work on its multimedia computers.
[Note: This year, Apple introduced the PowerMac based on the PowerPC chip. Being late than never, Apple has recently decided to license its Mac's software and hardware technology to other companies, paving the path to a Mac clone market. The reason is that Apple needs to boost the market share of PCs that run Apple software from 10% currently to 20% in order to keep software developer interested in writing sotware for the Mac. Without software, it would be impossible to spur future sales of the Mac.
Note that Apple still dominates the worldwide home PC market with a market share of about 14% and is trailed by Packard Bell and IBM. In the worldwide business PC market, Apple is ranked third with 5.8% market share, behind IBM and Compaq whose market share is 12.8% and 10.4% respectively.]
Compaq is the second largest manufacturer of the IBM-compatible PCs. In 1981, the company hit $111-million in sales just after one year in operation. Its revenue reached $1 billion after five years. Compaq is known for its innovation in the PC business. It was the first to develop a fully IBM-compatible portable, first to integrate a hard drive into a portable, and first to produce a desktop PC built on the Intel 80386 microprocessor. Once the victim of price wars, Compaq now is now an aggressor. Its low cost ProLinea PCs introduced in June 1992 had spurred industrywide price cuts and generated a three-month backlog. In the company's older Deskpro lines, new models and lower prices have produced record sales - shipment was up 40%. In September 1992, Compaq extended the price war to the Japanese market with its ProLineas, undercutting market leader NEC's prices by 50%. However, Compaq's strategy of low price and high volume has paid off at the expense of profits. Gross margins are down almost a third, to 28%, and net margin, at 5%, is only half of what it used to be. That means Compaq could have less money for research and development that gives its PC an edge.
Compaq old strategy was to focus exclusively on improving PC performance and getting its technology to the market first. Its high-priced workstations and file servers were thus aimed at serving corporate needs on information system and database. As a result, it was ignoring a broad chunk of market and losing sales to cheaper brands such as Dell and Gateway. Realized that their PCs had become overengineered and overpriced, Compaq slashed cost across the lines and refocused its effort to producing cheaper models aimed at a wider range of market - homes and small businesses. Just in June 1992, Compaq announced 41 new products (!) and expanded it distribution channels from 3,300 to 8,300 outlets worldwide, pushing its products through mass merchandisers, telephone order, as well as through computers stores such as CompUSA, Circuit City, and Office Depot, instead of just through its traditional dealer channels. In order not to upset relations with dealers, Compaq promised not to sell at prices its dealers cannot match. Compaq so far has escaped the problem of low-end models eating in the profits of the high- ends. Its volume of all existing products is up owing to the generous price cut. This can be explained that Compaq's high end market consists of corporate customers who would not be willing to take the risk of buying a lower quality product. Despite the increase in shipments, Compaq is still facing tough competition from IBM at the high end of the market, and others like Dell and Gateway at the low end. Compaq's fixed costs are about 6.3% of sales, compared with 1.5% for Dell. That limits Compaq's ability to be the low-cost supplier. It's average selling price is some 30% higher than that of Gateway, about the lowest-priced national brand.
Compaq's strategy for the time being and the near future is to continue pursuing the corporate PC market with traditional products and use ProLineas to build a new high volume business among small businesses and consumers. It would meet competitors on price, then up the ante with more features and services. For example, Compaq was first with a three- year warranty instead of the usual one-year plan, and it was the first to dispatch a technician to the customer's site to set up its computer for a price. It would not enter the race for futuristic permutations of the personal computer such as handheld personal digital assistants, yet. While companies like IBM and Dell are looking at outsourcing for their components, Compaq decides to stick to its in-house design and manufacturing. By increasing the level of chip integration, restructuring assembly lines, and reduce testing, Compaq is able to bring its costs down. At the high end, Compaq also plans to shake up the server market by introducing lower priced network servers. Compaq's thinking is that if a Compaq machine is the hub of a computer network, it would be easy for the company to sell the computers and peripherals that connect to it. To further the strategy, Compaq entered the printer market with its low cost laser printer designed to be used in a network.
At its birth, Dell Computer Corp. was different from all other PC companies. It was the first mail-order company selling PCs over the telephone. Since 1986, it has become the fourth largest PC maker in America, behind IBM, Apple, and Compaq. Dell's strategy was to cut out the dealers and distributors, sell its computers at a lower price, and run an operation whose primary focus was customer service. This helped the company stand out against other PC makers. Learning from Dell's success, PC companies including big names started to enter the direct sales business. Dell was the first to realize the importance of service and price, but now everyone does. Dell is facing a big challenge from other seasoned players like IBM, Compaq, and other successful direct-mail order companies like Gateway 2000 (now the number-one mail-order company).
Dell's production strategy is to design most of the computer it sells, but farm out its manufacturing to subcontractors and then assemble the components in its own factories. This strategy avoids the huge costs and inflexibility of building parts in-house that can be easily bought As a result, the company's fixed cost is low (1.5%).It also follows an assemble-to-order, direct-response business model. Instead of building up inventories of finished PCs, its plants only finish machines once a customer specifies which features are needed. In terms of pricing, Dell's strategy is simple: it aims for a net profit margin of 5%, then prices its PCs accordingly. At the same time, while other companies are moving into its territory, Dell is going beyond its traditional markets, trying to lure corporate customers by offering "systems-integration" services and customized software package.
Dell's strategy, however, is losing some of its advantages. The two big draws of direct sales-price and convenience-are now being matched by low price electronics superstores such as CompUSA. Other direct sales companies are also closing on Dell with lower costs. Dell therefore has to change its approach. The company has started selling in superstores such as Sam's Club, Price Club, and CompUSA. Dell's just-in-time idea results in a slower delivery of its products than that offered by other vendors who PCs are ready at the time of the order. Dell's strategy of relying on subcontractors for its parts has also backfired. There has been increasing complaints about quality of Dell's products Its notebook computers and Dimension line of PCs have been plagued by glitches. Both are non-Dell design. The Precision and Dimension desktop PCs are designed and built by an Alabama company while the notebooks are designed and built in Asia. Dell's quality problem therefore hurt its sales. In the fourth quarter of 1992, notebook computers, the fastest growing segment of the PC market, accounted for only 8% of Dell's total unit sales, compared with 25% for Compaq.
When technology is becoming more complicated and powerful, Dell needs to rethink its strategy. Its current strategy places the least emphasis on research and development and forces the company to rely on other manufacturers for design and component production, leaving Dell little control over product quality. The weakness in its notebook sales is a clear lesson which should makes the company aware of the problem. With a continuing depressed profit margin, Dell would find it hard to find money for its research needs. As other companies have already embarked on the quest for the future technology, Dell needs a better vision otherwise it will be left out as a cheap clonemaker.
The PC market towards the end of this decade will be full of challenge as well as opportunities. Whoever controls the PC industry will be king of the whole computer industry. That is why IBM has been fighting back with such vengeance. Actually, a whole new computer industry will emerge in which the boundaries between personal computers, workstations, minicomputers, and mainframes will become extinct. The personal computer will play the main role from home entertainment to manufacturing process control.
Analogous to the pharmaceuticals industry, innovators will collect premiums for new products that become lower-margin generics overtime. Technological leaps give established companies like IBM and Compaq an advantage over the smaller clone makers. Owing to the vast research and development resource, and because they design their own machines, the big names can incorporate a new technology as soon as it is introduced and thereby differentiate their products at once. Clone makers have to wait until they can buy the new technology off-the-shelf. Dell probably will not survive unless it shoves a large amount of money into research and development and produces an innovation breakthrough. Other national-brand companies such as Packard Bell, Zeos, or Northgate may as well find a merger partner (Note: Zeos did).
One of the battles in the coming years will be over standards. Instead of the proprietary hardware and software, "open standards" will be the demand of the market. These standards will allow machines to work together in a heterogeneous computer network. The PC industry's installed base is too large for any PC companies to impose a close architecture for their future systems. Whoever is successful in pushing for the acceptance its standards will reap the most profits. But first, the industry will be split into three warring factions: Intel-based PC makers using the new Pentium chip, Motorola-based PC makers using the new PowerPC chip which is heavily endorsed by both IBM and Apple, and DEC-based PC makers using the new Alpha chip. Intel-based PCs dominate the current PC installed base, but Pentium is more expensive as PowerPC. PC makers using the PowerPC chip will have the cost advantage and they could win the future PC market so long as the new machines are software-compatible with the existing hardware. Whichever becomes the technology of choice, standards will still prevail.
Intel's CEO Andy Grove envisions the new industry as composed of five layers as described in the following paragraph. The model is slightly modified to reflect the author's view of the future industry based on the recent change in technology and competition.
The computer industry of the future is a series of horizontal layers, each containing many companies, rather than the vertical, single-company towers of the old industry. Each layer represents a distinct market which its own barriers of entry; however, no layer is too high to enter. As a result, competition in every layer of the new industry is much fiercer than it ever was in the old. Layer 1 (bottom) represents the microprocessor market which will still be dominated by Intel's chips but RISC chips including the PowerPC will be catching up quickly. Layer 2 represents the computer platform with the Intel-based PCs commanding the major market share owing to the large installed base. The IBM platform, with its new machines, will potentially grow to the same size. The next layer represents the operating software and is divided between the basic software needed to operate a single machine and the network software used to tie different machines together. The network software sub-layer is already the fastest growing segment of the PC software industry. Layer 4, applications software, is the arena in which Microsoft, Lotus, Wordperfect, and Borland compete for market share. It is layer 3 and layer 4 that will actually shape the PC industry in the future. With profit margin being so low in layer 2, there is a very high possibility that PC makers will enter the battle in the higher two layers where both demand and profits will be high. The other advantage for them to do so is that they will be able to guarantee the compatibility of the software with respect to their hardware. As a matter of fact, AST already has plan to compete in the software race. The highest layer is one with the lowest barriers to entry but will probably be the most competitive of all, as firms scramble to find the most efficient way to reach customers with machines and software.
The overall PC industry will experience slower growth due to the saturation of the market. In the U.S., growth will be more likely 6% to 8%. Profit margin will be razor-thin. The current shake-out stage will eliminate most of the weaklings leaving behind only the fittest. Despite all that, the PC industry is presented with many opportunities.
There are still a lot of opportunities for U.S. PC makers to expand their sales to other countries, especially Japan. While Japan has the world's second largest economy and a well-educated population, the number of PCs per capita is less than half that of the U.S and a lot of their PCs still use proprietary software. Prices are roughly 50% higher than in the rest of the world. Forcing down price will be a good strategy to succeed in Japan. U.S. PC makers have already made in road into the Japanese market. Compaq and Dell, which both entered the market only in 1992, have forced the Japanese to slash prices. Besides, the Japanese version of Microsoft Windows have gained popular acceptance in the market, pushing Japanese PC companies to change their machine architecture to support Windows. This in turn will help U.S. PC makers to overcome the incompatibility problems that had locked them out of the market before. Other potential areas for expansion are China and the fast growing countries of the Far East.
As technology becomes more powerful, computers become smaller. The current trend of miniaturization of the computer will continue for years. Today, the sub-notebook computer is already the fastest growing segment of the industry. By 1997, Dataquest estimates that subnotebook annual sales will hit 2.8 million units (comparing to only 23,000 in 1992). The PC market will also be open for a wide arrays of handheld computers (or personal digital assistants) pen-based computers, and voice-recognition, etc... The technology of the new desktop, laptop, palmtop, notebook, sub-notebook, handheld, pen-based... computers of the future will be graphics, multimedia, and wireless communication.
Multimedia, in other words, is the integration of text, graphics, audio, still-images, motion video and data using the personal computer. All of the above-mentioned can be store on CD-ROMs or transmitted via telephone lines, cables or radio wave, and processed by the personal computer. Even though there have been a lot of hype about multimedia in the last five years, starting 1993 the price and capabilities may finally lure everyday customers. PC makers are already racing to produce multimedia machines (or MPC). The number of applications for multimedia is tremendous, ranging from home entertainment and education to telemarketing.The problem right now with the multimedia technology is the lack of standards, but that will be resolved anytime soon. Inteco Corp., a research house in Norwalk, Conn. estimates that from a $4.68 billion market in the U.S. in 1991, multimedia PC gear will balloon to $22 billion by 1995.
Multimedia will allow the increase of the use of personal computers in the education sector even though the education budget is severely limited now. It will allow faster penetration of the home-user market. Video will be the key to those millions of customers who have yet to use a personal computer. For example, the PC will be enable users to watch a video movie or TV program, or receive and record a video message and send it to other users. In general, virtually every source of information into the home - cable TV, videotapes, books, newspaper, radios, CDs, etc... can be the candidate for multimedia applications. As a result, there's a momentous battle shaping up between U.S. computer makers and Japanese consumer electronics companies. The most prominent application currently being pursued is to use the technology employed on the PC to create a converter box to support interactive TV. With the box, viewers can watch programs, do shopping, play games, and "rent" video movie all in front of the movie set. Telephone companies, computer makers, video game makers and big media companies such as Time Warner, News Corp., and Walt Disney already join force to develop the technology to make home multimedia possible. As John Sculley estimated, by the year of 2000 the consumer-electronics, television, telecommunication, entertainment and news industries will have merged into a single market, with sales of $3.5 trillion a year.