06/17/96 SERIOUS FUN FROM IBM

SERIOUS FUN FROM IBM
It's hitting home users with an avalanche of goodies
Last summer, IBM Chairman Louis V. Gerstner Jr. stood before Wall Streeters and outlined his strategic plans for the world's largest computer company. On the short list: luring consumers, a segment IBM hasn't been able to crack after a dozen years of trying. Gerstner, though, gave few specifics. ``Stay tuned on this one,'' he told analysts. ``This is all futures.''
The wait is over. On June 10, IBM will begin a full-scale siege of the consumer market, with new PCs, software, and electronic gadgets. Backed by a hefty $70 million ad budget, the effort will launch with new Aptiva PCs, featuring arcade-style 3-D graphics for intense game play. Later in the year, the Aptivas will get a sleek new look. During the course of the summer, IBM will follow up with new software, Internet goodies exclusively for IBM customers, and a variety of new peripherals, including monitors with built-in speakers. IBM may even buy a few companies to add heft to the attack. ``We can dazzle the world, and we will,'' crows James A. Firestone, the 41-year old general manager of IBM's new consumer division.
REPEAT SALES. Dazzle the consumer world? IBM? There's a long way to go. Sales of computer gear into U.S. homes--PCs, game machines, software, and online services--is expected to skyrocket to $71.5 billion by 1999, up from $39 billion last year, according to market researcher Access Media International. IBM's take? A relatively slim $1.8 billion. What's more, Big Blue's share of retail home-PC sales sank during the first quarter of this year, to 5.3%, from 9.5% in the first quarter of 1995, says researcher Computer Intelligence. Rival Compaq Computer Corp., meanwhile, surged to 20% from 15.7% during the same period.
The consumer market is an opportunity the $72 billion giant can't afford to ignore. Insiders say Gerstner is pushing for annual sales growth of 10% for IBM as a whole, much higher than the 6% analysts expect this year. To hit the goal, IBM must expand its markets, and executives figure consumers are a good bet. Gerstner doesn't have much time to win over those buyers: New competitors--particularly Japanese companies Sony, NEC, and Toshiba--are gearing up for their own big push.
To build a consumer empire, Gerstner is counting on Firestone. A marketing executive, Firestone worked for Gerstner at American Express Co. Last August, Gerstner hired him away from Ameritech, where he headed the consumer division. Firestone's strategy: to target the computer-savvy population--repeat buyers of PCs with household incomes of $50,000-plus. ``We're not going to be all things to all people,'' he says. ``These people have PCs, and they're buying more.''
To snare them, IBM figures it can forge a relationship based on new services--many to be included in the base price of its PCs. Consumer loyalty is an underappreciated concept in the PC business, says Link/International Data Corp. analyst Richard Zwetchkenbaum. According to his research, only 28% of consumers say they are likely to buy the same brand of PC again. ``If you can get customers to buy your product and then stay with you to buy again, you can lower your cost of sales,'' he says.
One idea in the works: using IBM's deep pockets to offer consumers--already wary about the rapid pace of change in the PC industry--new financing options. For example, a two-year rent-to-own option might include one free software or hardware upgrade. At the end of the term, the customer could keep the machine or turn it in for a downpayment on a new IBM model.
Then, there's the Internet hook. Starting in June, all IBM PCs will come with the latest browser from Netscape Communications Corp. and access to a new IBM World Wide Web site. Initially, Big Blue will provide online help as well as quick links to a variety of family-oriented Web pages--everything from sports and travel to stock quotes. IBM may also do away with preloading of software titles, only a fraction of which are actually used. Instead, the Web site will offer software--mostly free, but some could have a fee--that can be zapped to the PC at the click of a button.
Later in the year, IBM will offer another service, called Update Connector. When Aptiva customers hit the IBM Web site, special software will detect whether their machine is due for an upgrade on any software, say, the new release of Lotus 1-2-3. Other services under consideration: a program in Canada to wire new homes and an IBM outlet in Japan to fix any computer gear.
JUNGLE BUNGLE. The Web isn't going to replace IBM's own software. Firestone's biggest challenge may be building IBM into a serious provider of PC programs. So far, the effort has been poorly focused and late. For example, IBM released a CD-ROM game based on the new Jungle Book movie. But it came out in April, at least six months after the flick did. Firestone is already fixing that problem. He's got a new game tied to the upcoming Pinocchio movie. When the picture hits theaters in July, the game will be on store shelves--and there will even be Aptiva PCs in some theaters that kids can use to play the program.
If that's not enough, insiders say Gerstner is willing to buy software companies to fill in the gaps. Top of the list: educational or edutainment software companies. Says Firestone: ``Acquisitions aren't out of the question.''
IBM's strongest weapon could be products deep within its research division. IBM scientists, for instance, are working on a prototype of a cyberphone--a combo Web browser and cellular telephone. The twist: a tiny mirror at the base flips out to view a projection from the unit that looks like a 12-inch monitor. That will allow users to troll the Net or check E-mail.
To attract sophisticated home-PC buyers, Firestone is bringing IBM's industrial design into the 1990s. The new Aptiva, code-named Stealth, has a unique feature that saves space on the desktop--the CD-ROM and floppy disk pop up from a hidden panel on the top of the machine. The rest of the computer is in a box that slides under the desk. ``We're bringing a sense of what the consumers want in their home into the way IBM is designing its products,'' says Firestone.
Big Blue is already winning over some of the toughest reviewers: retailers. ``These are exciting products,'' says Lawrence N. Mondry, executive vice-president of CompUSA Inc. and, previously, a vocal critic of IBM. ``This is a radical change.'' The real test, however, will come from consumers.
By Ira Sager in New York