Dog-Eat-Dog Shake-Out

The U.S. computer industry has been a source of profound national pride in recent years. While other parts of the economy have sagged, computer makers have maintained the tradition of American ingenuity and skill. But last week even they seemed badly shaken. Buffeted by plummeting profits, slow sales and excess capacity, the industry resembled a sophisticated data processor suddenly gone awry.

The manufacturers' problems are deep and astonishingly widespread. At midweek, IBM, the world's largest computer maker and the prototype of a successful company, shocked Wall Street by announcing that its earnings for the first nine months of this year will be below those for the same period in 1984. The news helped send the Dow Jones industrial average down more than 23 points in two days. Shares of IBM stock tumbled 7 3/8.

Then, at week's end, Apple Computer, a pioneer in personal computers, revealed the extent of its woes. Apple said it will lay off 1,200 of its 5,800 employees and shutter plants in Texas, California and Ireland. The company said it would report a loss for the third quarter of this year.

Sandwiched between those developments was word that Burroughs and Sperry, two older computer makers that have long lived in IBM's shadow, were engaging in merger talks in hopes of competing more effectively together than apart. Such a combination would create the second largest manufacturer of data processing machines in the U.S.

Analysts viewed all these events as proof that the once glamorous computer industry is in a serious skid. "This is not a slowdown," said Esther Dyson, editor of the trade journal Computer Industry Daily. "This is an old- fashioned, dog-eat-dog shake-out. Before it's over, there's going to be a lot of red ink and some casualties. It's not going to be a pretty sight." The industry is still growing, to be sure, but at a dramatically reduced rate. It will show an estimated 23% gain this year, in contrast to a 56% increase in 1984.

Still, new firms continue to flock to the field. "There are 375 to 400 companies manufacturing or marketing personal computers," says Ken Lim, an analyst at Dataquest, a consulting firm. "That's 300 to 350 more than anyone needs." Though sales of personal computers are slumping, they remain much healthier than those of mainframe machines.

In today's computer world, nothing sells as well as it used to. Recent dips in economic growth have taken the edge off companies' appetites for new large machines. Consumers, meanwhile, seem baffled about just what to do with the personal computers that were being snapped up just two years ago. "Customers are confused," says John Boyd, sales vice president of AT&T computer systems. "There are too many companies with too many products and too many claims."

While the slump has left few firms untouched, none seemed more battered last week than Apple, the company whose founders began by tinkering with a circuit board in a California garage and went on to live a new version of the American dream. Among the problems that now plague the manufacturer are the gradual aging of its mainstay Apple II home computer and the recent failure of its Macintosh model to make much headway in the office market.