Computers: Wearing Out the Insulation

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When their industry was in its youth, computer men lived in a world of their own, immune to most of the gyrations of the rest of the economy. Now the industry is well established, and to its dismay is no longer insulated from such problems as the general business slowdown, reductions in federal contracts, stiffening competition and tight money.

Last week, for example, Control Data Corp. of Minneapolis announced that it had suffered "substantial" losses in computer operations in the first quarter, and would lay off an unspecified number of workers throughout the nation. The company specializes in making very large computers, sold chiefly to the Pentagon and universities, both of which are suffering from budget squeezes. Some corporate customers have also told Control Data to stretch out deliveries—to send computers later than the ordered dates. To conserve cash, other customers have switched from buying computers to leasing them at fees ranging up to $300,000 a month.

Several suppliers of computer services were also in trouble. Los Angeles-based Computer Sciences Corp. discontinued Computicket, a system that sold theater and sports tickets at terminals linked to a central computer. Computicket had been losing clients to a rival service, Ticketron. At the same time, Manhattan's Computer Applications, Inc. scrapped Speedata, a computerized system for reporting grocery sales and prices. The company simply could net raise the $2,000,000 more needed to make the system profitable.

Overdone Jitters. Computer stocks have been sinking ever since IBM announced in January that its fourth-quarter earnings were off slightly from the year before—a rare event. Last week IBM reported a turnaround in the first quarter; profits rose to $2.02 a share, from $1.82 a year earlier. Its own stock jumped 5¾ points on the news, to close at 331½—still far down from the January peak of 387. The IBM report pulled up prices of some other computer stocks too, but they also remained far below earlier highs. Control Data dropped to 49⅛, less than half its January peak of 122½. "Wall Street, not Seventh Avenue, is the fashion center of New York," said Computer Expert John Diebold, "and the fashion is to be nervous about computers."

Investors' jitters may be overdone. Like IBM, computer makers who are less dependent than Control Data on Government orders are still doing well. RCA's first-quarter computer sales were up 20% from a year earlier. Those sales, to be sure, reflect orders placed a year ago, and Wall Street expects a slowdown in orders soon. But that has not occurred yet on any broad scale. Some businesses, in fact, are increasing rather than reducing their orders because of the developing profit squeeze; they hope that new, faster and more sophisticated computers will cut costs.

Even the Government, the largest user, is only slowing the rate of increase in its computer orders. Federal departments will buy or lease 4,750 computers in the current fiscal year, up 2% from fiscal 1969, which had shown a 10% rise over the previous year. What last week's traumas really proved was that the computer industry has reached a stage of maturity which includes troubled as well as growing companies.