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Computer makers face a squeeze in the bottom line

Camelot is ending for some of the most famous computer companies in the industry. After a decade of rapid growth they are cutting prices and reducing employment, driven by increased competition and the need to offer more computer power for less money. Apple Computer Inc., once the luxury spa of computer firms, is issuing pink slips. Digital Equipment Corp. has laid off workers. International Business Machines Corp. also is paring the roster, with chairman John Akers recently issuing a scathing assessment of the company's work ethic. Hewlett-Packard Co., which never lays off anyone, is cutting pay and relocating employees.

Changes that began a few years ago have come to a head. The two main classes of desktop computers _ mainstream personal computers and engineering workstations _ have almost converged and are competing for sales in the technical and commercial computer markets.

Meanwhile, price wars in both arenas are squeezing profit margins and forcing companies to improve the bottom-line category of sales per employee.

Causes of the hard times are many. There's the recession, of course, creating a slump in demand at the corporate level for PCs.

Exacerbating the economic doldrums is a saturated market for PCs. The number of PCs sold in the United States, which grew 60 percent in 1985, is expected to rise only 3 percent in 1991, according to International Data Group, a market research firm in Framingham, Mass.

"The wide-open plains of the desktop are over," said John McCarthy, an analyst with Forrester Research in Cambridge, Mass.

In addition, PCs have become almost indistinguishable because they are based on a standard microprocessor family made by Intel Corp. Dozens of companies build compatible computers with nearly identical features, most of which are comparable in reliability.

"It's becoming like the cereal business," said McCarthy.

Buyers have become content with low-price systems from small companies, making it tough for firms like Compaq Computer Corp. and IBM, which have believed that their reputation for added value and quality justified higher prices. Both Compaq and IBM recently responded by lowering prices, a move that likely will force competitors to do the same, further cutting into profit margins.

"Even people who were loyal users were starting to evaluate other brands," acknowledged Compaq's chief executive officer, Joseph Canion. "We were perceived as over-priced, no question about it."

Compaq's profit margins, which have been 10 to 20 percent higher than some competitors, are expected to suffer, and the company needs a new strategy. "Compaq has a real difficult road. Their path to someplace else isn't obvious," said Russell Crabs, an analyst with Soundview Financial Group of Stamford, Conn.

Crabs added that price cuts by the larger computer companies may deliver a troubling fate to smaller competitors. "I think the list of clone vendors will be shorter before the year is over," he said.

The price war is affecting other companies, also. Apple has begun selling low-cost computers and, in a diversion from past practices, will soon offer some of its Macintoshes through large computer retailers called superstores. The move into low-cost computers has reduced Apple's profit margins, and the company has responded with layoffs and department-by-department efforts to trim expenses.

Some companies in the workstation field, which is growing far more rapidly than the PC market, also face challenges.

Unlike the PC market, which is competing largely based on price, workstation companies are competing on "price performance" _ offering more computing power for less money.

This financial squeeze has been brought about largely by two trends: distributed computing _ computers that can be connected together over a network that replaces large centralized computers _ and open systems _ in which similar operating systems, microprocessors and computer designs make it easier for computers to run similar software and communicate with each other.

The trends also offer users more economical solutions to their computing needs, creating a demand that companies are rushing to meet.

Consequently, more and more firms are selling workstations, including Digital and IBM, which have seen their minicomputer and mainframe businesses shrink as desktop computers become more popular. Both companies have undertaken far-reaching cost-cutting efforts, including severance plans to encourage retirements and reorganizations. Digital also had its first layoff in the company's 33-year history. IBM still hasn't had an official layoff.

Despite these moves, analysts say IBM and Digital are not ready to compete against the workstation leaders. IBM's prices remain higher than industry leader Sun Microsystems, and its system lacks software.

Because Digital and IBM workstations are incompatible with other machines on the market, the companies' commitment to open systems and distributed computing is often questioned.

Hewlett-Packard has made a smoother and more successful adjustment. It has developed a common architecture for both its minicomputer and workstation systems. This assures buyers that software will run on a range of computers, allowing a more splashy entry into the open systems arena than Digital or IBM. It is also Sun's toughest rival.

Hewlett-Packard has simultaneously kept a close watch on its bottom line, and last fall began reorganizing its computer systems group. In keeping with the open systems emphasis, it placed engineering workstations, minicomputers and networking products in one division.

Sales activities have been decentralized throughout the company, resulting in some financial savings and drawing applause from analysts.

"They have cut out a layer of organization and made accountability more direct," said Robert Herwick, an analyst with Hambrecht & Quist Inc., a San Francisco investment bank. "More than IBM and more than DEC (Digital), H-P is riding the waves of these trends" of open systems and distributed computing.