As PC Revolution Fades, Computer Firms Alter Roles

SLOW sales. Layoffs. Restructuring. These are the fresh signs that the personal-computer industry is heading into a new, unstable era."The business itself is not in a crossroads, I think they're in an alleyway," says Barry Bosak, a computer analyst with Smith Barney, Harris Upham & Co. "There may not be an exit." While the industry has been hit by a spate of bad news, including layoffs at Apple Computer, NeXT, and component suppliers, the biggest surprise of the past month was Compaq Computer.

'Big shock' at Compaq On Oct. 24, the company announced a first-ever quarterly loss of $70.3 million and layoffs of some 1,400 people - another first. The next day, Compaq's board raised eyebrows by firing the company's founder and chief executive, Rod Canion. "It was a big shock," says Phil Lemmons, editor in chief of PC World magazine. "The company had thrived under his leadership." Analysts say Compaq's new chief executive, Eckhard Pfeiffer, has announced all the right moves to compete against lower-cost rivals such as Dell, AST, Northgate, and Zeos. Mr. Pfeiffer promises to slash costs, bring new products to market faster, and sell computers through new channels. The problem is that in moving to win the battle, Compaq - and by extension the United States - could lose the war. Mr. Lemmons and others worry that Compaq will be unable to support its extensive research-and-development efforts. That will open the door to foreign competitors willing to invest for the long term. "If they significantly reduce their research and development ... that's a very bad sign," Lemmons says. "Our computer industry is going to have a very big problem." "I'm concerned that we will be moving into a new generation of technology at a time when American companies won't be able to fund new R&D," says Melinda Reach, a computer analyst with Merrill Lynch & Co. The underlying problem is that the personal-computer revolution is over. After the introduction of the IBM PC - and certainly by the time of the IBM AT in the mid-1980s - the industry began making only evolutionary changes. Today's models are certainly much faster and cheaper than the original PC. New machines, such as laptop computers, have created niche markets. But none of these changes compares with the introduction of the PC. Thus, the high-tech industry that the US pioneered is becoming ever more competitive around features such as price and reliability rather than innovation. Can US companies compete against Japan and other countries in this new environment? "Computers are an interesting case where US companies have to draw a line in the sand and defend their turf," says Daniel Burton, vice president of the private-sector Council on Competitiveness. "I think they can. US computer companies are by and large capable, well-managed companies. [But] that doesn't mean it's not going to be hard." Mr. Bosak is more pessimistic. "I think the trend is that things get worse," he says. Unless some new revolution comes along, computers will no longer be made in the US. They'll be "assembled in occupied America," Bosak says, only half jokingly. "Support and service is becoming the most important factor," adds Rick Martin, a computer analyst with Prudential Securities Inc. Thus, US computer companies in the future may market and support computers made in Taiwan. Mr. Martin says it makes sense for Compaq to shift its investment dollars away from core research to fund better distribution and support.

New role for chipmakers? Innovation, meanwhile, will have to come from somewhere else - perhaps from companies who make the microprocessor chips that run the computer. "The computermakers of 15 years from now are what we call today semiconductor companies," says Dick Caro, senior electronic systems consultant for Arthur D. Little. Already, Intel Corporation, the world's leading maker of microprocessors, is packing more and more computer functions onto these chips. It has just announced a 10-year agreement with IBM Corporation, a huge producer of chips as well as computers, to add even more functions to the chip.