By Andrew Pollack

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June 19, 1983, Page 003001 The New York Times Archives

BASKING in the newfound success of its home computer business last January, Texas Instruments Inc. hosted a lavish party at the ConsumerElectronics Show in Las Vegas. Comedian Bill Cosby, who does the company's commercials, posed for pictures with other guests and made a few remarks. Referring to the $100 rebate that had helped make the T.I. home computer popular, Mr. Cosby joked about how easy it was to get people to buy computers if you paid them $100 to do it.

That joke is no longer funny. Overly aggressive price cuts and rebates, combined with excess production, have turned Texas Instruments' home computer business into a sudden financial failure, jolting the stock market and raising questions about whether the home computer market is headed for a crash.

After announcing that it would lose as much as $100 million in the second quarter because of problems in its home computer business, T.I.'s stock went into a tailspin, dragging other computer stocks with it. T.I. shares fell more than $50 in two days, to $107, before inching back up to close Friday at $116.25.

T.I.'s problems were partly the result of its own mistakes. But they also pointed to the fierceness of competition in the home computer industry, which, despite being one of the fastest growing businesses in the nation, is beset by a ruinous price war and, according to some estimates, by a glut of products that is making profitability difficult for many players.

''I've been in retailing 30 years and I have never seen any category of goods get on a self-destruct pattern like this,'' said Everett Purdy, senior vice president of merchandising for Service Merchandise, which sells home computers through its catalogs and showrooms. Since fall 1982, T.I.'s list price has tumbled from $400 to less than $100.

T.I.'s crisis called to mind the sudden drop in video game sales announced by Atari last December. The video game business, which is now overlapping the home computer business, has been beset by oversupply - and in some cases big losses - ever since. And, it's possible a similar situation could develop in home computers, especially if T.I. decides to unload its excess inventory at prices that would make today's $99 bargains seem high.

What is most surprising about the home computer business, said Mr. Purdy and others, is that such price cutting should occur so quickly after the market was born. Before 1982, there really were no ''home'' computers for sale in general retail channels under $1,000. Personal computers, such as the Apple and I.B.M., were generally sold through computer specialty stores and were often used in business.

It was only last year that the home market started to develop as the price of computers dropped to little more than video games, as department stores and discount houses started carrying the machines and as the average homeowner developed a fear of his family being left behind in the computer age.

The home computer business is still healthy in the sense that sales are continuing to increase, although there is disagreement over just how strong demand will be. While there were perhaps two million home computers sold last year, some analysts estimate that about five million will be sold this year. Thus, other companies are quickly moving to try to divorce themselves from T.I.'s problems.

''Basically, I don't think we have a disaster in progress in the home computer business,'' said John V. Roach, chairman and chief executive of the Tandy Corporation, which sells its home computer through its Radio Shack chain. Sales are continuing healthy growth, he and other industry executives said. But T.I. produced even more than the growing market could handle.

THE T.I. fiasco, however, might mark a shift in the way computers a remarketed and used. Fewer suppliers might survive at the low end, where computers sell for $100 or less and can be used for little more than playing video games or learning to program. Timex Corporation's sales of the first $100 computer have slowed despite a price reduction to below $50, and Mattel, a new entrant, is being stalled at the starting gate. Atari, one of the leaders of the market, has never made a profit in home computers.

More attention might be paid to more expensive machines, selling for a few hundred dollars, which can be used for more than the $100 machines that are mainly designed to play games. Coleco Industries' new $600 machine, Adam, is seen as the start of that trend. I.B.M. is also likely to enter the field later this year with a machine geared toward business-oriented uses in the home.

A factor propelling that trend, in addition to the price war at the lower end, is a concern that home computer growth will slow unless the machine is made more useful. ''You'll never get to sell 10 million units a year on the basis of current products,'' said Clive Smith, an analyst with the Yankee Group, management consultants who say that improvements are needed in the amount of software and its ease of use. ''The whole home computer market is a market racing to live up to its own promise.''

FOR Texas Instruments, the loss was a serious blow and raised questions about whether the company will abandon the business as it did digital watches. Even the fear that T.I. might pull out could deter retailers from placing orders, further damaging T.I.'s chances.

''You can't play a defensive game in consumer electronics,'' said Adam F. Cuhney of Salomon Brothers, who thinks T.I. will not recover in the business. ''They are not in control of their own destiny.''

The company said the loss was caused by an unexpected slowdown in orders, particulary for software, that was brought about by a glut of home computers and video games on the market. T.I. said it was scaling down production and writing off excess inventory.

But the magnitude and the suddenness of the loss surprised and puzzled analysts. An after-tax loss of $100 million in the second quarter for the company as a whole translates into a pretax loss on home computers alone of $200 million to $250 million.

Texas Instruments officials last week declined to be interviewed. ''Not a chance. Absolutely not a chance,'' said company spokesman Norman Neureiter. Indeed, even the home computer division's public relations manager, whose job it is to talk to the press about that specific T.I. activity, has not been allowed to talk to some publications in the last few weeks.

Nevertheless, it is evident that the loss was the result of a combination of factors, all of which are evidence of a consistent problem that T.I. has had in the consumer electronics business. In digital watches and calculators, T.I. helped drive prices so low that it ruined the business, even for itself.

One of the other companies severely hurt in the calculator wars was Commodore International, which was dependent on other companies for the chips it used and was therefore limited in how much it could cut costs. Since then, Commodore has vertically integrated. When Commodore and T.I. faced off again in home computers, Commodore was the winner. Mistake number one for T.I., analysts and competitors say, was getting into a price war with a more agile, lower-cost producer.

T.I.'s home computer was first introduced in 1979 for $1,150 and was an embarrassing failure. T.I. discovered in 1982 that it could sell large volumes by cutting the price and offering rebates. But the T.I. 99/4A, which was little different from the machine that was originally designed to sell for $1,150, was no match cost-wise for Commodore's VIC-20. As Commodore and T.I. started their downhill race, it was inevitable that prices would get so low that T.I. would start losing money while Commodore stayed profitable. T.I. ''got suckered by Jack,'' said Harry Fox, president of Spectravideo, a new home computer company, referring to Commodore president Jack Tramiel.

Even that would not have been too bad had T.I. been able to make up for low-priced computers by making large profits on software and peripheral equipment as it had hoped. But there is a flaw in such a razor-and-blade approach to profits in the home computer market.

The history of the personal computer business, brief as it is, has shown that the successful machines are the ones that have the most and best software available for them. It has also shown that no single company can write all the software itself. It must take advantage of the cottage industry of programmers.

Yet if T.I. was to make its profits in software, the software that sold had to be its own, not that of others. That became clear in December, when Atari's profits took a plunge because other companies began making games for its video game machine that were better than the games Atari itself was selling. T.I., trying to balance those contradictory influences, decided to try to get other companies to write software for its machine, but insisted on marketing the software itself. But many software companies would have none of that.

The result was that T.I. discouraged software companies, putting its computer at a further disadvantage relative to the VIC-20 and other machines. And without other companies competing with it, T.I. did not put enough effort into developing its own software, particularly games, according to competitors and former employees. It also did not license popular arcade games like Zaxxon and Frogger, which are still the best selling programs for home computers. Its peripheral equipment, such as disk drives, were also overly expensive.

Two other mistakes helped administer the final blow. One was that T.I. became over-optimistic and produced too many machines. While most industry analysts expect about five million home computers to be sold this year, Texas Instruments, at its annual meeting in April, predicted industry sales would total 6.7 million. T.I. geared up to produce three million computers this year, and now might be able to sell only two million, according to Michael Krasko of L.F. Rothschild, Unterberg, Towbin. Inventory piled up.

T.I. also had to withdraw its computer from the market for about a month earlier this year to correct a potential electric shock hazard, for which T.I. took an unusually large $50 million charge against earnings in the first quarter. Inventories swelled because production continued while sales halted, and the product never regained its momentum when it reappeared.

With all that excess inventory, T.I. was stung when it reduced prices and had to make up the difference to retailers and distributors who were holding inventory purchased at the previous prices.

Future options are slim. The company said in its announcement that it plans to stay in the business. But it needs new products. One, a $100 computer introduced in January that was designed to be used to learn programming never got to market because prices for the more versatile 99/4A had already dropped almost that low by last spring.

The company was expected to introduce a more expensive machine, the 99/8 at the Consumer Electronics Show in Chicago two weeks ago. But the machine, code-named the Armadillo, was not displayed publicly, partly because it would have been upstaged by Coleco's Adam, as well as by new products from Commodore and Atari. Its status is somewhat unclear. Mr. Purdy of Service Merchandise said that when he expressed interest in putting the 99/8 into the company's next catalog, T.I. officials were ''very vague about it.''

It is also believed T.I. is working on a bundled system, with software, printer and data storage device combined in a package. Indeed, bundling appears to be a new trend. Rather than competing on price for the basic unit, and hoping to earn a profit on purchases of software and peripherals later, manufacturers are starting to package everything together in an effort to recover their profit up front. Coleco's Adam, which will sell for $600, includes 80,000 characters of internal memory, a daisy-wheel printer, a tape storage device, game joysticks, a word-processing program and a game. The package will allow people at home to use the computer in place of a typewriter as well as for playing games.

Not everyone is convinced, however, that bundling is the way to go. Mr. Tramiel of Commodore said that bundling makes the entry price for many consumers too high. Bundling also limits the consumers choice. ''They've made up your mind for you on what kind of printer you should have with your machine,'' said William G. Kelley, president of the American Home Video Corporation, a Denver-based electronics store chain.

One thing that seems certain is that movement will be away from game playing toward more powerful computers with greater capabilities. Those more versatile machines will drop in price to the point where they slow the sales of computers like the T.I. 99/4A and the VIC-20, just as those two computers dropped in price to the point where they slowed the sales of even less versatile video game machines and of computers like the Timex Sinclair 1000, which is used mostly to learn programming. Already Commodore has reduced the price of the Commodore 64 to about $200 wholesale and has started to deemphasize the less powerful VIC-20.

I.B.M.'S entry into the home computer market, expected this fall with the introduction of Peanut, will accelerate that trend. The Peanut is expected to sell for aout $600 and will be compatible with I.B.M.'s more expensive personal computer. It would have a powerful 16-bit microprocessor, compared to the 8-bit chips in most home computers now. Mr. Smith of the Yankee Group predicts that, within a year, major home computer manufacturers will come out with new computers that can run their existing programs as well as programs written for the new I.B.M. machine. Japanese companies, who last week agreed on standard specifications for home computers, might also make an entrance into the American market.

Ironically, the move toward more powerful systems might actually restore in consumers' minds the computer's perceived value that had been damaged in the fierce price cutting. Said Mr. Kelley of American Home Video, ''When they went to $99, people started asking 'What's wrong with it?'' '