Price War in Small Computers

Staking out market positions for what may be the hottest Christmas item

James Belmares watched intently as his six-year-old son James III eagerly pushed the keys of a Texas Instruments home computer in a Target discount store in Dallas. Belmares, the father of five children, had previously been scared off by the price tag on the machines, but last week the computer was only $299, and the company was offering buyers an additional $100 rebate. The tempting price and the unrestrained enthusiasm of his children made a purchase virtually inevitable. Said he: “The kids are wild about it. They are addicted to it. It’s like a cult.”

Belmares is one of the ever growing number of consumers being drawn into the market for home computers by an all-out price war that erupted last month. Spurred by the prospects of Christmas shopping, computer makers have slashed prices on their least expensive models. As a result, says Clive Smith of the Boston-based Yankee Group, a leading electronics analyst, sales are expected to explode from a mere 35,000 in 1980 to 1.5 million this year. Smith sees shipments rising to a dazzling 3.5 million in 1983. Says Barbara Isgur, an industry watcher for the Wall Street firm of Paine, Webber: “This year is the turning point. We have entered the age of personal computers.”

While firms like IBM, Apple and Xerox are strong in the field of personal computers for the office, they have stood clear of the Shootout for the home market. The key players:

TEXAS INSTRUMENTS. The Dallas-based giant triggered the battle on Aug. 2 by announcing that beginning Sept. 1, it would offer the $100 rebate on its TI-99/4A personal computer, which has a list price of $299. Just two years ago, virtually the same model sold for about $1,000. Yankee Group estimates that Texas Instruments now has about 23% of the market for inexpensive home computers.

TIMEX. The watchmaker jumped into the computer fray last month with the lowest-priced system, the Timex Sinclair 1000, which sells for just $99. It has less computing power than its rivals, although its capacity can be upgraded. Timex Sinclair has an estimated 26% market share.

COMMODORE. Two weeks after the Texas Instruments announcement, Commodore cut the wholesale price on its VIC 20 by up to $40. The machine is now selling in stores for about $199. Commodore accounts for 23% of the low-price market.

ATARI. The king of video games, Atari is now offering home-computer buyers $60 worth of discounts on its extensive library of entertainment and educational programs. The Atari 400 model sells for less than $300. Atari officials like to point out that their computers also play many of the most popular video games, including Pac-Man, Asteroids and Space Invaders. Atari has about 17% of the inexpensive-computer market.

RADIO SHACK. The strong-selling TRS-80 Color Computer costs $399, down $98 from last year. Tandy Corp., which has previously sold through its Radio Shack stores, this month will begin offering a companion version of the Color Computer at independent television dealers. Tandy’s market share for low-priced computers is 10%.

Until the past few months, computers were sold almost exclusively in specialty stores that catered mainly to computer buffs. But now the inexpensive machines are popping up in an amazingly wide range of shops. Customers can find them for sale in supermarkets, drugstores, catalogue showrooms, boutiques and department stores. Toys R Us, the largest U.S. toy chain, did not carry a single computer last year, but it now has floor-to-ceiling displays of Atari, Commodore and Texas Instruments machines at all of its 144 stores. Safeway Stores are offering the Commodore at twelve supermarkets from Seattle to Anchorage. Michael McLaughlin, a vice president and computer analyst with the management-consulting firm of Booz, Allen & Hamilton Inc., estimates that nearly 30,000 stores sell computers, compared with a mere 2,000 just one year ago.

The electronic items quickly become bestsellers. Macy’s sold 1,000 Timex machines in four days last month, after setting up a computer corner in its flagship Manhattan store. Says R.C. McAllister, marketing director of the southern region for K mart: “Home computers are the hottest category in our stores. There has been a lot of activity, and demand exceeds supply.”

Many retailers joyfully look for computers to be a ubiquitous item under the Christmas tree this year. A Child World toy outlet in Chicago has added an entire new section to handle the anticipated rush. Says Store Manager Joseph Murphy: “We expect the home computers to be our biggest sellers this Christmas.” At fashionable Bloomingdale’s in New York, Warren Zorek, manager of the consumer-electronics department, predicts: “This Christmas will be the breakthrough in personal computers.”

Manufacturers have been able to chop prices drastically primarily because the computer keyboard console is only the first of a series of items that buyers need. At a minimum, they must also have television sets or special video screens to display whatever the keyboard unit is doing, and software programs for the machines. Many customers also buy printers, memory boosters, telephone links, power cords and numerous other devices. The real cost of a computer often comes from these additional components. Industry experts compare buying a home computer with buying a razor. The initial cost is small, but total outlay is much higher because of later spending on blades. Notes Computer Analyst David Wu of Montgomery Securities in San Francisco: “They give people a cheap machine, and then they get them with the add-ons. It’s like opium.”

The cost of the extras can mount rapidly. The Texas Instruments TI-99/4A sells for just $199 after the rebate, for example, but buyers need to spend about $530 more on software and equipment to use a language program called LOGO, which the company is heavily advertising Those later sales are exactly what computer makers are looking for. Says William J. Turner, manager of the Texas Instruments consumer-products group: “For every $1 of console sales there is another $1 of peripherals and software. Next year that could rise to $2 to $3.”

A boom for personal computers this Christmas season may mean doom for last year’s Christmas hit: the video-game machine. Those generally sell for between $125 and $300, but only play games. A small computer has a vast array of other uses. Says Benjamin Rosen, publisher of a widely read industry newsletter: “This is probably the end of the line for straight video games.” Arnold Brown, president of the New York consulting firm of Weiner, Edrich, Brown Inc., thinks the game machines could become a consolation prize this Christmas season. Says he: “Some consumers are going to have to settle for them simply because there won’t be enough personal computers available.”

Atari Chairman Raymond Kassar believes that such claims are wildly exaggerated. His company is introducing a new game machine with improved graphics at a suggested retail price of $269. That is only $30 less than the price of the Atari 400 home computer, but Kassar predicts good sales. Says he: “There will always be a very strong mass market for the ultimate game machine.”

Although many computer owners use their systems for little more than game playing, others are branching into fields that include language learning, music writing, investment analysis and other activities. But some analysts believe that the potential for home computers has hardly been tapped. Many expect consumers to begin banking and shopping through them soon (see box). Others stress the value of electronic data banks that offer huge storehouses of information.

The computer price wars and brisk sales are one bright spot in an otherwise bleak economy. Retail sales have not picked up substantially after the July tax cut. With so much going wrong in business, Americans apparently like to go home after a hard day’s work and play a rip-roaring game of Pac-Man or chart their biorhythms on a home computer.

— By John Greenwald.

Reported by Dick Thompson/San Francisco and Bruce van Voorst/New York