The home computer industry and Wall Street. Ken Uston.
I used to be Senior Vice President of the Pacific Stock Exchange. In that capacity, I ran into many brokerage types, both "customer men" (a fancy name for stock salesmen) and research analysts. Those encounters eventually convinced me that Wall Street (Montgomery Street in San Francisco) often foists all kinds of spurious "advice" (snake oil?) or an unsuspecting public.
I recall a conversation with the chairman of the exchange, who was a floor specialist, in which he confided to me, "I'd never invest in the market for my own account. Sure, I sit on the floor every day, watch the tapes go by, and I'm far more up-to-date than any individual investor could possibly be. Yet there is no way I would buy and sell stock on my own. On stocks that I specialize in, I make a ding (commission) on every trade. If it weren't for the dings, I'd probably lose money."
This remark brings to mind Andy Tobias's best-selling, iconoclastic books (The Only Investment Guide You'll Ever Need and Getting By On $100,000 A Year). Tobias states that a monkey tossing darts at a listing of stocks on a wall will do as well as most Wall Street investment counselors.
I have nothing against Wall Street, but when it comes right down to it, the stock market is not even what the statisticians call a "zero sum game" in which the total won by some people is lost by others. This is because we must substract brokerage commission, which, even with the discount brokers, are substantial. My point? Since I began studying the home computer industry, I have seen more and more evidence that Tobias's monkey theory is probably accurate. The December 8 Debacle
Let's take Atari as an example. On December 8, 1982, Wall Streeters were stunned when Atari announced a huge loss--so stunned that, to this day, we hear about the "December 8 Debacle." The investment community was taken totally by surprise, and Warner stock plummeted. (The Securities and Exchange Commission, incidentally, is investigating several top Warner officials who allegedly unloaded gobs of Warner stock just before the announcement.)
For many months prior to this, the video game magazines were writing about the horrible VCS Pac-Man cartridge. Arnie Katz, the editor of Electronic Games Magazine, told me at the June 1982 CES that he had been told there were millions of dollars of Pac-Man cancellations.
The fact that Atari's ET game was unacceptable was no secret to thousands of gamers; yet Atari had hoped this cartridge would become a mega-hit because of the popularity of the movie. And, of course, it was quite obvious to anyone attending June 1982 CES that everybody and his brother was jumping into the VCS software business; there were over 30 producers at that point. Sure, you might say, "That's hindsight." But let's continue the story.
At the Billboard Video Game Conference in San Francisco in April, oft-quoted Lee Isgur of Paine Webber gave a speech. He predicted that Atari could well be "the Coleco of 1983" and that the company could rise "from its own ashes." Another Wall Streeter, Michele Preston from L.F. Rothschild et al., spoke at the conference. She thought that the worst wasa over for Atari.
Mow, the supreme irony. On that very day, guess what has happening 3000 miles to the east? You guessed it! Atari released first quarter results: a $45 million loss for the consumer electronics division.
A few months went by and Wall Street again settled down. But another bomb went off on July 22 when Warner reported losses for the second quarter of $283 million. The Atari subsidiary lost $310 million--coincidentally the exact same amount (to the nearest million) that Chrysler posted as its earnings for the second quarter--and on the very same day! (Remember the olden days when auto companies were in trouble and Silicon Valley companies were considered the panacea for the U.S. economy?)
Had Wall Street learned its lesson and expected the worst? You be the judge, from the following reactions:
* Crowell, Weedon & Co.: "It's mind boggling, I never expected anything on that order of magnitude."
* Wertheim & Co.: "It's frightening."
* Goldman, Sachs & Co.: The large loss was "totally unpredictable."
Even Atari management was baffled. Steven Ross, Chairman of Warner, stated, "A loss of this magnitude clearly was not anticipated." Trouble In Texas
Let's take another example. People who play video games and use computers have felt that the TI 99/4A has been overpriced since its inception. Even free evaluation models gathered dust in some magazine offices; some TI 99/4As were never taken out of their boxes. The programming language (TI Basic) is one of the poorest in the industry. The games are even drabber.
Yet the Bill Cosby ads have been selling the 99/4A at rates that stun knowledgeable computerists. At the June CES, TI placed ads touting the 99/4A with, not one, but four faces of Bill Cosby. I guess this proves the old marketing adage, "It's the sizzle, not the steak."
The industry was once again taken by surprise when, after an announcement that TI expected to lose about $100 million in its second quarter, TI stock dropped almost 50 points in two days. Reeling from the shock, industry analysts swung their pendulums the other way. One Wall Streeter called for TI to get out of the home computer business. A major newspaper ran a front page article predicting doom and gloom for the entire industry. Not The Age Off Aquarius
Mattel is an interesting case, too. They displayed Intellivision 3 (in a secret back room) at the January, 1983 CES. While the systems is fabulous, Mattel was shown to be out of phase with the industry. Intellivision 3 was made obsolete just one month later by the Coleco wafer tape cartridge.
Mattel's Aquarius also appeared in January. Most reviewers have panned this system. A Mattel marketing executive showed us the in-house slides of the economic and marketing rationale behind the Aquarius system (at the Billboard conference). Someone asked him pointedly, "Does the public really want to balance their checkbook, keep a budget, or try to write with a rubberized keyboard, or is the Aquarius essentially a solution in search of problem?"
What happened a few months later? Mattel reported electronics division losses of $34 million. The heads of several key Mattel executives rolled just a few weeks later. Losses continued to mount, and in August, 400 employees of Mattel's electronic division were laid off. Advice And Predictions
My advice to Wall Streeters: It is well and good that you read industry reports, visit companies, and talk to management. But you should also try to get your information straight from the horse's mouth. When you get home from work, take off your three-piece suits, put on a pair of jeans, grab a joystick, and play some games. Then and only then will you really find out what is going on in the industry.
Enough criticism. Now I shall go out on a limb with some long range predictions.
The home computer hardware industry is similar to the auto industry 60 years ago when there were dozens of car manufacturers trying to cash in on the enormous potential (does that phrase sound familiar?) of the horseless carriage industry. Today, of course, there are only a handful of U.S. car producers. Eventually, there will be only a few dominant hardware manufacturers. The most likely to succeed are:
* IBM. They will make it on quality and name. Watch for a mid-range ($500-$700) home computer of excellent quality before long.
* Apple. Support (software and peripherals) is hard to beat. I don't know about Lisa, but I have a feeling other new products (perhaps the MacIntosh) will make a real dent in the market.
* Coleco. The Adam may be a smash. Lots depends on where Coleco sells it (better in computer stores to compete with more expensive systems, than in toy stores, competing with far cheaper game machine/home computer).
* Commodore. It is hard to argue with success. Commodore passed out their third quarter figures at CES, showing income and earnings per share more than double 1982 levels. But I am still skeptical. The Vic 20 sold tons, and lots of companies are making software for it. The 64 is doing well, too. But neither of these computers in my view can currently be said to excel in the three major areas in which home computeres are used: games, education and word processing.
With the enormous volume of software coming out from Commodore and others, this could change. But, as I said, I am skeptical.
* Atari. They are losing multi-millions now, but they have taken some good corrective steps: merging the computer and video system divisions, laying off thousands of workers, moving manufacturing to the Orient, writing off apparently all of their dead game inventory, and introducing their excellent XL and DXL computer line (and making it compatible with previous Atari computers).
Atari does make the best game computers on the market, and the game software available for Atari computers is, in my opinion, the best in the industry. Atari will continue to be a dominant factor in the market. I don't know what this means to their bottom line, however.
If you think the hardware industry is confusing and dynamic, consider the software industry, which is a real can of worms. I can't begin to predict specifically what will happen there, but I will caution, while this isn't any great revelation, to watch for a shake-out. The shake-out, however, will be so enormous that Wall Street will again be stunned, and you will see first page headlines about it in virtually every newspaper in the country.