TIME: Almanac 1995

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<text id=89TT2832> <link 89TT1731> <link 89TT1064> <title> Oct. 30, 1989: Just Squeaking Along </title> <history> TIME--The Weekly Newsmagazine--1989 Oct. 30, 1989 San Francisco Earthquake </history> <article> <source>Time Magazine</source> <hdr> BUSINESS, Page 72 Just Squeaking Along </hdr><body> 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. </body></article> </text>