IBM's remarkable tap dance is on hold. Profit comeback forecast in '87, but former dominance in doubt

International Business Machines has sometimes been likened to ``the elephant who could tap-dance.'' But with a second straight year of lower profits looming, and smaller competitors making big money exploiting holes in IBM's product lines, analysts wonder: Will the elephant that could dance relearn the steps it seems to have forgotten?

``A lot of people say the company is like a lumbering giant now,'' says William J. Caffery, an analyst with the Gartner Group in New York, ``but we think IBM is going to learn to dance again. We may not be seeing the Charleston anytime soon, but next year it may be doing a pretty fast fox trot.''

Last week, IBM reported third-quarter profits 27 percent below the same period last year. IBM's chief financial officer, Allen Krowe, was reassigned last week -- and analysts are saying this is because he failed to anticipate the softening market.

IBM is officially blaming slack European demand as a chief cause for its third-quarter woes. But one industry analyst says, ``We are very skeptical about that softening as an industrywide trend.''

The drop in Big Blue's profits contrasted sharply with a rise of 26 percent at Digital Equipment Corporation; 64 percent at Burroughs; 46 percent at Apple; and 2.3 percent at NCR.

Even though competitors are having a field day at Big Blue's expense, it's pretty hard not to be optimistic about the company. Though profits were down, the giant company just last year achieved $50 billion in sales, even though IBM itself admits its target of more than $100 billion by 1990 was overly optimistic.

Mr. Caffery is fairly positive that IBM will get its act together by mid- to late-1987. Outside analysts also expect the big computermaker to rise to the challenge, adjust its product line, trim costs, and reassert its dominance over the spectrum of computer products.

That may happen. But changes within the industry also point to changes, some subtle, some radical, in favor of less dominance by one manufacturer and toward increased competition industrywide.

``We're undergoing a restructuring of the overall information processing marketplace, so that the characteristics of [computermakers] themselves simply has to change,'' says Robert Simko, executive director of the International Technology Group, a Los Altos, Calif., research firm.

``There is a recognition now that companies are going to have to sell computers in a multi-vendor environment instead of a pure blue environment.''

Factors opening the door to IBM competitors include:

Advancing technology, which has squeezed more power into tinier packages, has encouraged a shift away from mainframe computers to much smaller, midrange computers that are nearly as powerful.

IBM is strongest in huge mainframes and small PCs but lacks a strong-selling midrange line to link them. One analyst says this gap in its product line leaves the company flailing like a ``paralyzed lobster unable to get its claws to work together.''

Decentralization of computing in the office has had the effect of undercutting IBM mainframe sales and spreading purchasing authority away from traditional IBM buyers.

IBM PC clones have undercut its profits in the personal computer market, and competitors are winning the midrange battle.

High internal costs (research and development, factory automation, and too many salaried workers) have given smaller, leaner companies an edge.

Business customers are refusing to buy until manufacturers get PCs, mainframes, minicomputers, and microcomputers all functioning harmoniously together -- sharing data and computing power. IBM's multiplicity of computer architectures has made it tough for its products to compete -- because many of them don't communicate easily or at all.

Much to its dismay now, IBM decided long ago to allow each of its machines to be designed differently, depending on its functions. Various machines are often difficult to link, because their architectures won't allow them to ``talk'' with one another. Also, software purchased for one won't necessarily work in another.

``This budding trend toward rationalizing computing resources has left IBM out of the equation,'' Caffery says.

IBM controls 70 percent of the world's mainframe market, 45 percent of mid-size systems, and 30 percent of personal computers, according to Dataquest, a market research firm.

Still, selling computers has changed radically, says Mr. Simko. No longer can IBM simply offer a sophisticated electronic box that processes information. Companies demand that ``functionality'' be had from their expensive equipment. ``Dark tube audits'' at some companies have shown that many personal computers had become large, overpriced paperweights.

``Money is moving away from IBM's monopoly market,'' says John McCarthy, an analyst with Forrester Research in Cambridge, Mass. ``All of a sudden they're in a competitive, price-sensitive environment where there is plenty of competition.

IBM's many competitors are eager and able to cut in on the slow waltz IBM has had with key corporate customers -- especially in the area of mid-size minicomputers, where IBM is arguably the weakest.

No company has done this more effectively than Digital Equipment, the nation's third-largest computer manufacturer. Though just a fraction of IBM's size, Digital, for example, is surging into the financial services industry, long an IBM stronghold.

Years ago Digital chairman Kenneth Olsen decided his scientific computers would all be designed with the same internal architecture. Now that ``interconnectivity'' has become essential, the decision is seen as a golden one that has enabed Digital to expand at the expense of IBM. Some analysts speak of Digital as nearing the ``critical mass'' it needs to challenge IBM's grip on the computer market.

Perhaps the most important change in office computing is the trend toward decentralization. IBM does have a new midrange line of computers aimed at providing an easy link between a large mainframe and its PCs. But although it's been announced, it won't be available until late '87.

Decentralization has occurred as prices for microcomputers and minicomputers have dropped below $100,000; at most companies, that is usually the benchmark at which a committee must authorize a purchase. This has created a crucial difference in the way computers are sold.

In other words, power to buy computers has left the hands of computer specialists, who were familiar with and made the recommendations to buy IBM mainframes, and gone into the hands of middle-level managers.

Midrange units that sell in the $20,000-to-$40,000 price range have as much computer horsepower as a mainframe, or more. Department managers and field sales offices are buying these midrange computers to keep track of inventory and computer sales and to do word processing on the side.

Although there are predictions of an IBM rebound in 1987, there is some concern that capital spending will continue to lag. One analyst says that 22 percent of capital spending last year -- or about $115 billion -- was spent on computers.

Such predictions of stagnant demand mean that if IBM is to come back, it will have to expand its market share at the expense of competitors that have been showing no respect for the industry leader.

``The bottom line is that IBM's own product mix just isn't playing in Peoria,'' says Caffery. ``IBM was extra aggressive until six to eight months ago, gearing up plant capacity -- but the demand just hasn't materialized.''