IBM empire strikes back at clonemakers with bold machines

Once IBM seemed invincible. But over the past several years, the Armonk, N.Y., computer giant has watched its dominance of the personal computer industry slip. So even IBM needed the lift of a gala announcement of new products and a new strategy for regaining control of the computer market in the 1990s.

For months, industry watchers, systems analysts at Fortune 500 companies, personal computer nuts, and the trade press have speculated about - and jockeyed for a glimpse of - the new products from International Business Machines Corporation.

Big Blue didn't disappoint. Six years after it introduced its first personal computer, the world's biggest computermaker made the most of its moment in the spotlight last week. When the veil was lifted, there four major products, as well as a slew of new printers, advanced features, and other options. The new line was dubbed Personal System/2.

(Computer terminology, Page 24.)

Initial reaction has been mostly positive to the new lineup of machines from Big Blue, which had fumbled badly with several new personal computer products in the past few years.

``I think it's a good move for them. I think it's a good move for the industry,'' says John McCarthy, analyst with Forrester Research, a Cambridge, Mass., market research firm.

Mr. McCarthy, who has been fairly critical of IBM until now, believes the new computers may set a new standard for personal computers and power the company into the 1990s.

The profusion of new equipment is aimed at halting IBM's declining share of the $22 billion personal computer market. In 1985, IBM held about 42.7 percent of the market. That slipped to 35 percent last year, but because of the new offerings it may rebound to near 40 percent this year.

When IBM introduced its personal computer in 1981, it was already late getting into the game. It used off-the-shelf technology to enter the burgeoning market quickly. Rise of IBM `clones'

Because the parts were widely available, however, a number of companies, including many in Far East, produced ``cloned'' products that frequently underpriced and outperformed IBM's products. IBM's market share dropped.

Now IBM has taken a bead on the clones with the new products, each of which is 80 percent made by IBM, instead of the 20 percent in the first machine. Also, by using a proprietary operating system (PS/2, IBM's version of Microsoft's OS/2), and by using new manufacturing techniques, it will be much tougher for clonemakers to imitate IBM.

Will IBM's new PS line kill the clones?

No. But it may slow them down a lot. The clonemakers have put up a brave front, saying the installed base of computers using the old open hardware and operating system is too big for even IBM to convert to its new way of doing things.

``I think possibly the buildup was greater than the actual results today,'' says John Sullivan, vice-president of Leading Edge Hardware Products Inc. of Canton, Mass., which sells PCs made by South Korea's Daewoo Group. ``We will be able to compete very favorably with them on price and performance.''

Market analysts say that while IBM's products are likely to capture Fortune 500 companies, this might not do much damage to the cheaper clones, including Leading Edge's products. IBM has said it does not want a low-end price battle, but its production costs have dropped so far that it can afford to offer discounts and be competitive with its new machines.

IBM's bold move (a boldness nobody disputes because of its far-reaching effects) will likely split the personal computer market, analysts say. Three choices for buyers

Instead of simply buying a machine that runs Microsoft MS-DOS, a user will have to choose from IBM's new PS/2 line, or from current machines based on MS-DOS, or from Apple, which has its own operating system.

``I think what we're going to see is the compatible market dividing into two primary markets - the IBM market and the rest following the MS-DOS standard that's already been set,'' says Clare Fleig, director of systems research at International Technology Corporation, a Los Altos, Calif., computer consulting firm.

Such a split would clearly leave Apple Computer of Cupertino, Calif., in a much tougher position. The enhanced graphic and desktop publishing capabilities of the IBM offerings compete directly with Apple's new Macintosh II. The Mac II has been gaining a foothold in the important business market.

``I don't think Apple is going to go away, but I think they're going to have a tougher time extending their inroads into business,'' says McCarthy of Forrester Research. ``Apple loses a lot of their differentiation.''

``I think it is for our customers to say if our ideas for personal computing are better or better executed,'' says Jean-Louis Gass'ee, vice-president of product development for Apple.

``I don't want to worry about the competition, I want to worry about the customer. I don't want Apple to be No. 1 - I want it to be good.''

Despite the generally well-received offerings, there were a few smudges on IBM's otherwise sterling new entry.

IBM's stock dropped following the announcement, while shares of Apple, Compaq (a maker of IBM compatibles), and others rose. And the same community of IBM-watchers that waited hungrily for this announcement is still waiting. It will be early 1988, analysts say, before the OS/2 advanced operating system and fancy new spreadsheets and other software packages to make the new machines work up to their capacity.

``The big caveat to all of this is the delivery of the new operating system,'' McCarthy says. ``From a hardware point of view, they've done some good things.''

The new operating system is a crucial element in making the new hardware more valuable than what is already on the market. An operating systems works like a traffic cop to orchestrate the performance of the hardware and software that is plugged into it.

Until OS/2 is finished, it will be hard to know how readily accepted the IBM machines will be, since users will not be able to evaluate them fully until early 1988.

``I'm still a little disappointed that the operating system isn't here,'' says Larry Stouder, information center manager of Continental Grain Company of New York. Mr. Stouder's company has about 250 personal computers in its central office, only a fraction of them IBM-made. The rest are clones.

Other customers, too, will be tallying the cost of upgrading computers.

Another problem customers may have with the new machines has to do with the new diskettes. IBM's new models use smaller slots that accept 3.5-inch hard plastic diskettes, instead of the traditional 5.25-inch floppy disk.

Although IBM offers help (for a price) in switching to the smaller diskettes, the larger version will not disappear overnight. That means a lot of fuss and bother for systems people trying to juggle information from one size disk to the other.

Already some experts have declared 1987 a ``year of confusion'' for the marketplace as it tries to decide what it should buy. And IBM's new products, as good as they look, still must wait for the new operating system to prove they work as smoothly as the multimedia show that brought them to the public last week.

``We're not anti-IBM,'' says Stouder. ``We only got forced into the clones, I think, because IBM didn't come around quickly enough on price responsiveness and things like that.

``We couldn't deal. We got chased away. We didn't go away voluntarily. We'll come back if things are structured properly and if the machines are going to do what we want them to do.''

Computer parlance Microprocessor: the internal chip at the heart of the computer. The standard for more powerful computers such as the top-of-the-line IBM Personal System 2 and the Compaq 386 is the Intel 80386 chip. It will process all current PC software. But so far there is no special software that takes advantage of all the power of the new 80386. Unlike the IBM standard computers, Apple Macintosh products utilize the Motorola 68000 chip family. Fixed disk: the storage area for information on the computer. The new IBM family ranges from 20 million (20 megabyte) to 115 million characters of storage. Most personal computers have a 10 megabyte fixed disk. Diskette: a 3.5-inch plug-in unit which will hold at least twice as much data as the old 5.25-inch floppy disk. The floppy was the standard for the PC. Data storage potential of the new diskette makes cloning difficult. Memory: the electronic working area inside the computer. The top machine in the new IBM family can expand to 16 million characters of memory (16 megabytes) without add-on hardware. Prior to this, the limit was 640,000 characters (640K). Operating system: the language a computer uses internally. MS-DOS is the industry standard. The related PC-DOS had been the IBM language. Apple Computer uses a proprietary operating system, which differentiates it from the PC and clone families but also limits the software choices available to owners. Operating System/2 (or Personal System/2) is what IBM's new Personal System computer uses. This new system will make it more difficult for competitors to clone the new IBM model right away. Installed base: the number of computers currently being used in companies and homes. The bigger the installed base, the more lucrative the market for software manufacturers. Computer networks: tying together a number of personal computers to share information with each other and with mainframe computers. Networking is considered essential to the growth of the computer industry. IBM says its new system will allow machines to share data easily with one another.

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