Stiffer competition ahead for word-processing firms

Business people are often wordy, and that's just the characteristic that word processing thrives on. This industry is racing along at an average 34 percent annual growth rate. It does this by selling computers that let people edit their writing electronically instead of using little bottles of Wite-Out.

Word processing is handy for secretaries, clerks, lawyers - anyone doing a lot of writing. The user types words on a keyboard, then sees them displayed on a computer screen. By hitting certain keys, the text can be moved around, underlined, and corrected. Then, when it is letter-perfect, the final copy is printed on paper.

Christine Hughes, who researches the industry for Quantum Science Corporation in New York, says 359,000 word-processing units were installed in 1981. By 1986, Quantum expects the number to reach 1.5 million.

At the moment, the marketplace has room for companies with as large a market share as IBM (25 percent in 1981) and as small a one as Dictaphone (which didn't even make the ''others'' slot in the chart to the right).

''For now, the window is wide open for word processing,'' says John Murphy, vice-president of Advanced Office Concepts, a consulting firm in Bala-Cynwyd, Pa. ''But it is closing quickly.''

Mr. Murphy gives the industry two years before intense competition sets in and the weaker firms are weeded out. Price discounting, an early sign of stiffer competition, has already begun.

NBI Inc., a word-processor manufacturer in Boulder, Colo., had a two-for-one sale on some of its models in November and December. In January, it began reducing some software 50 percent on a conditional basis, and it's offering 7 to 20 percent discounts on some hardware, too, says Paul Harris, a spokesman for the company. Still, net income for the second quarter, ended Dec. 31, was up 47 percent from the year before, to $3.8 million on sales of $36.1 million.

Atlanta-based Lanier Business Products Inc. recently issued this statement about its second quarter: ''Competitive pressures required us to reduce prices in some product lines, lowering (profit) margins.'' Earnings per share were half what they were a year ago. However, Lanier's dramatic earnings decline is an exception in the industry, says John Levinson, a securities analyst at Goldman, Sachs.

Ever since the Justice Department settled its antitrust case against IBM in 1981, the company's aggressive pricing has been a major factor in competition, other manufacturers say. But industry costs are also lowering, they say, and that should ease the clamp on profit margins.

To survive in a more competitive market, most analysts and manufacturers say word processors need to take on many more features. ''Users want these machines to do more,'' says Alan Macher, a spokesman for IBM. ''The general trend is toward multifunctions,'' agrees Melody Johnson, a securities analyst for Kidder, Peabody & Co.

The most significant feature added to word processors has been data processing - the ability to do calculations with large amounts of numbers. And Dictaphone, a division of Pitney-Bowes, has a circuit board for its newest word processor that allows it to run most personal-computer software on the machine. The new system, the 6000, also has natural language commands. Instead of using a predetermined command to see payroll, for instance, the user could type: ''Show me the payroll'' or some variation of that.

Mr. Murphy, the Advanced Office Concepts vice-president, says the word processor has to evolve into a ''complete office-automation system.'' That means it should offer word processing, data processing, records processing, electronic mailing, and electronic filing, as well as electronic calendars.

The industry should also make word processors compatible with other computer brands, analysts say. For instance, a person using a Wang word processor might want to draw on some data stored in the company's IBM main computer. What happens then?

No problem in this case, because Wang makes its word processors compatible with IBM machines. ''Most of the Fortune 1000s have a basis in IBM systems,'' explains Frederick Wang, executive vice-president at Wang Laboratories Inc. ''We assume they are going to be there, and if we can get more of our systems on the periphery, but IBM has the mainframe, we get the visibility,'' he says.

''Wang wants to try to exploit IBM,'' says A.G. Becker analyst George Elling, and it's paying off. Net income for the second quarter stood at $34.7 million, compared with $24.2 million the year before.

Wang is on the right track in another way, analysts say: It is concentrating on a ''systems'' rather than a ''stand alone'' approach. A systems approach has many word-processing stations connected to a main memory unit, while a stand-alone word processor is a separate unit with its own memory. The system user has the advantage, says Ms. Hughes, the Quantum researcher, ''because the cost per work station is less'' and users get more memory. She also says the stand-alone market is getting ''squeezed'' by personal computers and electronic-memory typewriters.

Still, stand-alones have their place. ''Customers are not always at the same level,'' Mr. Wang says. ''A lot of companies just beginning to get into word processing (buy stand-alones). Others, who have been doing word processing for five years, are looking for third-generation (systems).'' Wang Laboratories also sells a stand-alone model. It takes both kinds of word processors to compete, he added.

With the smaller word processors beginning to resemble personal computers and the larger ones picking up more and more features, the defining lines for computer products are getting fuzzy. ''Computer markets are converging rather than separating,'' as Mr. Murphy puts it.

As the market turns mishmash, what should manufacturers do?

''Everyone offers basic word processing and data processing. It's like a commodity,'' says Mr. Levinson, the Goldman, Sachs analyst. To differentiate their products, manufacturers ''will have to tailor software to solve particular problems of a particular market,'' he says.

He adds that one other area will make the difference - service. Vernon Jobson, vice-president of marketing at Dictaphone, says one factor in the firm's strong word-processing revenue growth is ''personalized service.'' Working one on one with individuals as well as with large accounts is important, he says.