                        IBM AND THE STATE OF THE MARKET

IBM's 1986 second quarter left a lot to be desired by the dominant company in 
the computer industry.  This quarter's profits were down 7.7% to $1.3 billion 
from the same period last year, even though revenues increased by nearly a 
billion dollars.  IBM's position has worsened over the past several quarters as 
the computer giant has failed to improve its productivity.  While IBM president 
and CEO John Akers blames "Sluggish capital spending in North America and 
uncertainties about U.S. tax reform legislation," he made no mention of the 
increased competition in all product lines.  Another of IBM's unmentioned 
problems is the ever-increasing number of articles covering shortcomings in 
several of their products.  Headlines such as "Early 3480 Cartridges Prove to 
be Defective," August 4 Information Week; and "IBM 3090 Reliability Figures are 
less than Impressive," July 28th Information Week were unheard of just a couple 
years ago.  Whether this type of press will have any effect on IBM is debatable 
at this point, but if like articles start appearing in places like "Business 
Week" and the "Wall Street Journal" they would certainly affect IBM's sales and 
stock prices.  

In response to the added pressure, IBM is lowering prices, especially on their 
PC Lines.  They took one round of price reductions this summer, and are 
expected to take another in October. So far the majority of the cuts have been 
on the original PCs -- 256K with a single floppy drive like the Apple /// -- 
rather than the more advanced ATs and XTs.  Another area of interest to IBM is 
that of gaining patent protection for its micro products. They have patents 
pending on their AT keyboard and computer case.  Since there is little original 
technology in the PC line, IBM is trying to keep clone makers from looking like 
IBMs even if they cannot keep them from functioning like IBMs.  

Other computer makers reported mixed results for the past three-month period.  
Digital did well with a 17% increase as did Zenith and Texas Instruments.  Best 
of all was the king of the clone makers, Compaq, with a 70% gain in earnings.  
Because of poor earnings, IBM led this summer's correction in the Dow Jones 
Industrial averages by declining nearly 30 points.  For comparison, Digital 
increased nearly that amount during the same period.  The day before this was 
written, the Dow had a 28 point rally with IBM trailing the market with a 1% 
increase. (28 points translates to a Dow increase of 1.5% of value).  On the 
other hand, Apple led the Over-the-Counter market in volume with a 4% increase 
compared to a 1% general market gain.  

It is evident that IBM has a number of problems.  They will be forced to 
respond to their growing inefficiency in the marketplace and in their 
production facilities.  The introduction of the 80386 workstation next year may 
not be enough to revitalize their slumping sales.  Even if it becomes the new 
"standard" for business, it will take time to establish itself.  In addition it 
will mean the obsoleting of IBM's current line of PCs and forcing businesses to 
invest in new machines and much new software, a tall order in times of slow 
economic growth.  If the 80386 workstation fails, IBM will have to regroup 
quickly to avoid the possibility of becoming the Chrysler of the 1990's (where 
internal inefficiencies and products poorly suited for their market become a 
cancer eating away at the strength of the company).
