Wall Street is putting all its unhatched chickens in one basket: IBM. While the Dow Jones average plunged 57.39 points to close at 2,278.40 on Monday, the Blue Chip’s stock actually gained $1.625 to close at 152.375. The strategy of the brave Blue bulls is likely to backfire, perhaps by the end of this week. Overreacting to a tsunami of Japan-related economic panic, the world’s largest pool of investment capital has smashed stocks, bashed bonds… but bet more chips on Big Blue. This peculiar behaviour stems in part from IBM’s PC flack attack, a campaign that has scared the daylights out of investors in clone-makers, computer dealers and aftermarket vendors. To its credit, Wall Street has observed with uncharacteristic logic that the Reagan Administration’s anti- Japanese stance on high-technology tariffs will benefit IBM while hurting its competitors at home and abroad. But if Washington backs off, making the investors wrong, the reaction could be severe. Wrong news is even worse than bad news for the stock market.
IBM’s track record in PCs is worse than Wall Street seems to think
There is no question that IBM’s coming announcements will change the Personal Computer business; new items will force competitors to mimic. However, IBM’s workstation peddlers have tried scare tactics in the past, with mixed results. The company’s track record in personal computers is far worse that Wall Street seems to think. The PCJr is more typical of IBM’s offerings than its successful parent. That machine, aimed at the Apple II, was a loser that IBM eventually had to give away just to clear out its warehouses. Subsequently, IBM got clobbered with its first portable, stumbled when it brought out the kneetop Convertible, and embarrassed itself with the RT. Speciality versions of the PC – the 3270 and 370 models – similarly failed to win many hearts and minds, as did the XT 286. The AT is another story, but not a particularly happy one. While the machine would have sold well initially if IBM had been able to meet early demand, IBM then shipped quite a few with bad disk drives in them, later fell behind the clones, and then failed to bully the market into submission with such trite tactics as a different keyboard and a marginal performance kicker. Cloners ate IBM’s lunch, its profits, its prestige. Clearly, the clones haven’t beat Big Blue on price alone. Users sensed they were being gypped when they bought IBM Personals, and this has been Big Blue’s big problem. The clones offered prices more in line with decreasing manufacturing costs, and performance more in line with improving technology. Adding insult to injury, they provided users with more careful adherence to IBM’s initial standards (in contrast, for example, to the Convertible’s BIOS, and the XT-286’s off-size cabinet). What it came down to was that users began to see the Personal as a Lotus engine or a word processor, not some trinket bearing the IBM logo. So IBM lost control of the market the way Sony lost its hegemony in the Video Cassette Recorder trade. Sony was a wise guy company, unwilling to license its Beta technology. To the extent that IBM closes its architecture, rivals could destroy it by pushing their Personal equivalent of VHS to IBM’s Beta concept. Complex VLSI, cheap memory and built-in features may garner IBM some initial orders, but competitors – already using more VLSI than IBM, long since underpricing IBM on memory, and always providing some features IBM left out – will strike back. It will come down to a long race based on hard work and tolerance of slim profit margins. The former virtue is shared by all the serious players; the second is not. To the extent that IBM lowballs the market with its new machines, its profits will be depressed, not enhanced. Wall Street has not yet considered what low-profit Personals mean to IBM’s bottom line and to the overall efficiency with which it deploys its capital – its return on invested equity. Personals are only the most visible computers, not the most important. They represent only about 10% of IBM’s business. On o
ther fronts, there remains a big gap between users’ expectations and IBM’s offerings. Nothing in the IBM announcement will change its mixed prospects in markets for larger (and considerably more profitable) machines. It is in the middle of the market that IBM stands to gain from a tariff war with Japan, at least in the short run. All the minicomputer companies, and DEC in particular, have taken advantage of semiconductor price wars to reduce the prices of their offerings. Similarly, these same manufacturers provide peripheral devices at low cost because there are so many ambitious manufacturers. While tariffs are unlikely to drive DEC and its ilk to losses, any pressure IBM can put on rivals’ profits will help it win business. Of the several key minimakers, DEC is most vulnerable to memory chip price increases. With its sealed VAXBI bus, DEC has locked competitors out of the add-in memory business; this will prevent DEC from riding out short-term increases in memory prices by sacrificing low-profit business to independents. If DEC’s bus were open, DEC could yield the least profitable 20% of the memory market to low-margin producers. By doing so, it would at least maintain headway in the systems business. When memory prices drop again – as they surely will – DEC could pass through some of its savings and regain whatever share of the add-in market it pleased.
Tariffs could affect the price of large mainframes and their peripherals
In any event, IBM has yet to price memory for its midrange systems anywhere near levels that would cripple competitors; it’s doubtful that IBM could sacrifice profits in this critical market sector without hurting itself more than its enemies. But you never know. Similarly, tariffs could affect the price of large mainframes and their peripherals, which are imported from Japan by NatSemi’s NAS and by Amdahl. But the mainframe vendors could re-jigger their prices, raising memory costs while lowering processor costs. A mechanism to compensate these companies for any profit pressure could easily be developed in the form of profitable purchases of their American-made goods by their Japanese suppliers. With numerous tactics available to them, the mainframe plug-compatible manufacturers should be able to survive any tariff wars, if if they get shaken up in the short term. When investors realise that they’ve over-reacted to IBM’s belated effort to rescue its Personal Computer business, and to the limited ability of the government to revive the moribund American merchant semiconductor business, stock prices will adjust. And IBM, which has taken a bold posture it is unlikely to back with real results, will have an even tougher time winning over investors and users when it finally does get its house in order.