Here’s a Strategy That Does Not Compute
How’s this for a business strategy: build a very sophisticated technology product that requires some expertise to operate properly, stuff it into mass-market retail channels at a price of $2,000 to $2,500, tap into the Zeitgeist of the times to persuade people that they really need this thing even though you can’t tell them specifically why, offer hardly any support when customers have problems--and, oh yes, render the product obsolete almost immediately so you can sell a new and improved version.
Incredibly enough, this approach has made the consumer PC business one of the fastest-growing industries in the world. But now, after a lucrative three-year run, the bloom may finally be coming off this most unlikely rose. Consumer PC sales for the 1995 holiday season turned out to be a disappointment, as evidenced by recent earnings reports from companies ranging from Intel to Apple Computer to Tandy.
Business was still solid, to be sure, with sales rising 20% to 30% over the year before. But slowing growth is starting to call attention to the bizarre and ultimately unsustainable way in which the PC industry addresses consumers. And unless the many bright stars of this business are able to get their minds around these problems, they won’t have much to celebrate in future holiday seasons.
First and foremost, there is the problem of price. It may be easy for well-paid engineers in well-heeled Silicon Valley to forget this fact, but $2,000 is a lot of money to most people, especially in an era when real wages are declining. About a third of all households now have PCs, and though it’s difficult to estimate how many of the remaining two-thirds could afford a mainstream PC even if they wanted one, my guess is that it’s a minority.
Some in the industry, led by Larry Ellison of Oracle, believe the solution to this problem is a new kind of home PC designed specifically for surfing the Internet and costing about $500. If it’s well-designed--Acorn of Britain is working with Oracle, and a number of other companies are developing similar products--this so-called Internet terminal could fill an important gap.
But this initiative alone isn’t enough. Personally, what I’d like to buy just now--and a I do happen to be in the market for a PC--is a fast 486 machine with a 28.8 modem, a quad-speed CD-ROM drive, plenty of RAM and a modest-size hard drive, for about, say, $1,200. Not being a game player or a number cruncher, I just can’t see any reason why I need something as powerful as a Pentium processor.
I’m obviously in the minority here: The biggest mistake most PC companies made this Christmas was not producing enough top-of-the-line equipment. Consumers have continually confounded analysts with their enthusiasm for the latest and greatest technology. Whatever one’s view of the logic behind that, it’s hard to argue with what economists like to call the “revealed preference” of the people who are spending the money.
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Still, the PC industry offers a remarkably narrow range of products. If you want to buy a stereo, you can spend $150 or $500 or $1,500 or $5,000, depending on your income and how much you value superior sound. In PCs, prices start at about $1,000 and end at about $3,000, and the great majority of machines fall into a much narrower range of $2,000 to $2,500.
Consumers’ preference for high-end machines is in part a rational reaction to another strange characteristic of the PC business: extremely rapid product obsolescence. Better to spend $2,500 for a machine that will be obsolete in two or three years than to spend $1,500 for one that will be obsolete next year, or so the reasoning seems to go. Older machines simply won’t run the new software. It’s as if you had to buy a new TV every couple of years just to watch the latest sitcoms.
“At some point, consumers have to say, ‘This doesn’t make any sense,’ ” says Richard Shaffer, principal of Technologic Partners in New York.
And then there is the question of ease of use, and the related issue of product support. Despite years of progress, PCs remain terribly complicated, and it requires a great deal of knowledge to diagnose and fix problems that occur all the time. The other day, the sound wouldn’t work on my new office PC. After mucking around a bit, I called our in-house technical support guy, who suggested I turn the power on my speakers off, which solved the problem. Now that’s intuitive!
At home, of course, most people don’t have technical support, so they’re stuck with calling the hardware or software company. That normally involves a long-distance call and a long time on hold, with no guarantee that the problem will actually be solved. Some people--indeed, on the evidence, a lot of people--will put up with this sort of thing, but most of those consumers who haven’t yet bought a PC are probably not among them.
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There are efforts underway to address some of these issues, including a Microsoft initiative--the Simply Interactive PC--to design a cheaper and easier-to-use machine. Yet few in the industry admit that any of these problems are likely to cause a significant fall-off in consumer PC sales growth.
I think they’re kidding themselves. Not only are PC makers patently unable to address large segments of the potential market, they are also risking a backlash among some of those who have already bought. Too many people have been stampeded into buying expensive equipment because they fear they or their children will be left behind, and they don’t much appreciate the fact that it requires an incredible amount of time and effort to get many software programs to run properly, or that their seemingly new machine suddenly isn’t new enough.
Hardware companies need to bring on new and different and cheaper consumer PCs, machines that do one or two or three things really well and are targeted to particular tastes. Software companies need to stop creating products with so many bells and whistles that they work only with the latest equipment. Consumers need to be more critical in analyzing vendor claims and their own needs. Otherwise, today’s home PC may come to be seen as overpowered, overpriced and overhyped.
Jonathan Weber is technology editor for The Times’ business section. He can be reached via e-mail at Jonathan.Weber@latimes.com.
