Financial Times (London,England) August 17, 1983, Wednesday Home computer industry pulls the plug on profits BYLINE: Louise Kehoe SECTION: SECTION IV; International Companies and Finance; June 1 -- August 8; This supplement covers the major international company and financial news during the period the Financial Times was not published; Pg. IV LENGTH: 986 words HIGHLIGHT: Louise Kehoe in San Francisco looks at how the price wars sparked by Texas Instruments and Atari have affected the leading U.S. manufacturers. LIKE A house of cards, the U.S. home computer industry seems to have collapsed. Texas Instruments and Atari pulled away the fragile foundation when they each separately announced expected losses on sales of low-cost home computers, video game players and the electronic game cartridges which plug into both. The entire industry's stock prices tumbled as investors figured that the boom in home computers would be as transitory as the 1970s booms in calculators, digital watches and other consumer electronics products. Such direct comparisons do not, however, take into account the relative strength of U.S. versus foreign suppliers of home computers, the breadth of the personal computer market and the significant profits from the "aftermarket" in add-on equipment and software which set home computers apart. Nevertheless, confidence in this high-growth, high-risk business has been severely shaken. With the end of the second quarter, both Texas Instruments and Atari confirmed the worst fears. Texas Instruments lost $183m (before tax credits) on its home computer operations. Analysts expect the losses to double before the end of the year. Atari, a unit of Warner Communications, had a second quarter operating loss of $310m. What went wrong? What happened to the booming sales of 1982? Industry sales totalled 2.4m units last year, and had been expected to triple this year. According to most industry analysts, the unit growth will live up to expectations, but dollar volume of sales will be much lower. Popular opinion blames an industry price war that began a year ago and came to a head in May. Following a strategy familiar in the consumer electronics field, the leading manufacturers announced repeated price cuts, rebates and special promotions. Texas Instruments set off the trend to lower prices with what has to have been a temporary $100 rebate programme on its 99/4A home computer in August 1982. This bought the effective retail price to $200. TI's move was quickly followed by price reductions on the Atari 400, the Tandy colour computer and the Commodore VIC 20. With successive price cuts, the VIC 20 and TI 99/4A are now selling for under $100, and the price cutting is not over yet. Atari has retired its low end 400 model. For TI and Atari, however, the price cuts did not produce the desired effect of accelerating market growth and increasing market share. Instead, the computer makers lost credibility among confused consumers and squandered profitability. While TI and Atari struggle to retain lost ground, Commodore, their chief protagonist in the price cutting spree, appears to have gained market share. Though Commodore's bottom of the line VIC 20 home computer sales have flattened, the company's Commodore 64 computer that sold a year ago for over $600 has been discounted to less than $200 and is selling well in competition with less powerful machines. For Atari, the home computer price war struck a double blow, hitting its video games products as well as the company's home computers. Video games machines which had sold for $150 and above were too expensive to compete with more powerful home computers. Video games sales have been reduced to a trickle. Like last year's dress fashions, the video games are no longer in style and are appearing on the bargain basement counters of department stores and supermarkets. Although the price wars were clearly a major factor in TI and Atari's problems, industry experts blame the management policies of the companies for their problems. At Atari a complex situation involving poor communications within the management and what seems to have been a total lack of communication with the parent company are at the root of the difficulty. Texas Instruments is criticised for having failed to update its product line, and for not providing incentives to third-party software developers. The latter has caused a dearth of programs for the TI home computer. The biggest fear among industry watchers is that the price war is beginning to spread into the higher performance sector of the market. There is a big price gap between the $50-$200 "home computers" and the $1,000-$2,000 "personal productivity" machines that are sold to a broad range of computer hobbyists, businessmen, schools and home users looking for more than entertainment from their computers. Such machines, sold mainly through computer stores, are the mainstay of the personal computer business. Sames of add-on equipment and software programs to run on these computers have become major businesses. Any softening in this sector of the personal computer market could be disastrous for hundreds of small companies in the U.S. Already one of the major suppliers in this sector of the market has hit trouble. Osborne Computer, which makes "portable" machines, has laid off almost 300 people, over one-third of its U.S. work force. Adam Osborne, the company founder, cited a sharp drop in demand for the company's Osborne 1 personal computer and increased production efficiencies in producing the newer executive model. Osborne cut the price of the original Osborne 1 by $200 in July, but that apparently did little to increase sales. Dramatic price cutting of $1,000-plus computers could be triggered if, as expected, IBM enters the home computer market with a $600-$700 machine later this year. It is rumoured that the new IBM computer, called Peanut, could be in U.S. stores as early as September 1. IBM's introduction of Peanut is expected to force Apple Computer to lower the price of its Apple 11E, the new version of the Apple 11. Anticipation of lower prices and profits at Apple caused the company's stock price to fall recently. However, experts suggest that the 11E, which was redesigned to reduce manufacturing costs, could be sold for under $1,000 and remain highly profitable.