Word processing suffers harsh growing pains
Some industry giants have taken a beating as competition heats up
November 21, 1977
In recent weeks there has been a flurry of new products in the word-processing, or office automation, business. Those products and the questions they raise about the future of word processing have focused fresh attention on one of today's hottest growth industries.
The word-processing business continues to grow at the rate of 20% a year -- as fast as, or faster than, most experts had predicted. Small companies are still entering what is generally regarded as a market for giants. Partly as a result, the marketplace is a madhouse: More than 70 makers of text-editing equipment now compete in what often seem to be as many different ways, confusing not only their customers but the industry itself.
Amid the confusion, though, two things are clear:
* The transition from first-generation "stand-alone" text editors to integrated systems -- the "office of the future" -- has begun.
* Most makers of word processors have had, or are now having, major problems -- some of them fatal.
In truth, office automation has turned out to be a lot tougher business than many manufacturers, large and small, had expected. Litton Industries Inc., the giant conglomerate, has quietly shut down its effort. Two major players, Burroughs Corp. and 3M Co., have lost vital ground in the last year or two. Even Xerox Corp., expected to be the toughest competitor for International Business Machines Corp., the industry leader, has not done as well as many industry analysts had expected, though a new family of integrated products announced two weeks ago could get the copier giant back on a fast track.
A simple generation
Despite the onrush of technology in the past two years, the vast majority of the up-to-400,000 word processors now in U.S. offices are basically automatic typewriters, combining an electric typewriter with a memory so that a letter need be typed only once. IBM, which had the whole market to itself until five years ago, accounts for as many as 300,000 of these machines because of its early lead and its outstanding sales and service network.
Until recently, no company was able to penetrate that IBM product base to any great degree. But now the competition is led by major computer and office-product makers that also have nationwide sales forces backed by good service networks. IBM's market share has slipped in recent years as a result. According to Quantum Science Corp., a New York market research firm, IBM's share of annual shipments will skid from 65% in 1975 to 50% in 1981, primarily because of the market penetration of such companies as Xerox and Burroughs.
The new system products coming out now are important because "the big growth is going to be in the next five years," says Evelyn Berezin, president of Redactron Corp., Burroughs' word-processing subsidiary. "And it will be very important to build your customer base," she notes. The reason: As in the computer industry, once a customer goes with a supplier, it tends to remain with that supplier as the system grows.
So far, the new marketing thrusts tend to fall into three classes:
* The companies that are attacking IBM head-on by selling systems, a collection of word-processing terminals linked to each other and to printers and other peripheral hardware. Backed by strong marketing and servicing forces, such suppliers include Xerox and Burroughs.
* Producers that are trying to sell compatible products into the giant IBM product base, such as Lanier Business Products (box, page 102H), CPT, and A. B. Dick.
* Finally, those companies, such as Addressograph-Multigraph and Lexitron, that are trying to find a specialized market niche or to sell stand-alone products to first-time users.
IBM laid out its strategies earlier this year (BW -- Feb. 14) when it announced its Office System 6. This was designed to be compatible with, and complementary to, its existing Mag Card automatic typewriters so it would not outmode IBM's huge rental base of those obsolescent but immensely profitable units. Some analysts believe that IBM's conservative philosophy of protecting its installed base will continue to handicap the industry leader. In fact, while sales of Office System 6 apparently are meeting IBM's targets, some observers do not regard its planned shipment rate as overly ambitious.
"It hasn't impacted us as much as we thought it would," says Edward I. Rosen, marketing vice-president at Vydec Corp., one of the smaller companies that has succeeded in competing with IBM (box below). The reason, he adds, is that Office System 6 "is double the cost on a cost-effective basis." Vydec President Patrick P. DeCavaignac observes: "IBM found itself unprepared to react appropriately to the market because of the large rental base and a reorganization [of its operation]. That was all the small companies needed to get off the ground."
But if IBM has had problems, then several of its largest competitors have had disasters by comparison. That was literally true for Litton. It tried to succeed in the market more as a follower than a leader, and it then had to disband its word-processing operations because its product was not competitive. "They had a machine that should never have been put on the market," says one market analyst.
Giant 3M is also having its problems. It moved into word processing with great fanfare in 1975 by acquiring Linolex Systems Inc., a pioneer in word-processing systems. But now, says Melody Johnson, industry analyst for Quantum Science, "3M is no longer giving Linolex the support they need. They've just given them the name -- there's no real commitment to marketing and product development."
3M says otherwise, of course. "We had to get our house in order," says Donald C. Vadnais, general manager of the company's Information Management Dept. When 3M took over Linolex, he says, it had to set up a national service, sales, and support organization that the smaller company lacked.
Being acquired by Burroughs has not helped Redactron all that much either. "You can hear the fizzle," says the president of one competitor. Despite the Detroit computer maker's financial resources and years of related experience, Redactron delivered its first Redactor II, a display-screen text editor, a full year after the product was announced. It took longer than originally expected, explains President Berezin, to develop the new system.
The new Redactron text editor also uses the older, magnetic-tape storage instead of the "floppy disk" memory found in most new word processors because the company lacked the money to come up with two storage media and it had to choose between them. Berezin admits that "this has hurt in terms of competition with other people."
Redactron also has suffered from a high turnover in marketing personnel who left for higher-paying jobs with smaller companies. "People have said we trained the whole country," says Berezin, only partly in jest. But she concedes that because of her marketing staff turnover, the Burroughs subsidiary has not been able to grow as fast as it had planned.
Xerox also did not grow as fast as it planned after it introduced its first automatic typewriter two years ago. "They didn't come close to making their original plan," says a major competitor. "They thought that hardware was the total answer, and it wasn't." Xerox also lost sales because its model was not compatible with IBM equipment.
The new Xerox bid
But Xerox learned from its mistakes and, when it announced its new Model 850 display typing system last month, it made a major change in marketing strategy. "We want to be able to coexist" with IBM, says Robert J. Potter, president of Xerox Office Systems. So the new line was made compatible with IBM's Mag Card typewriters and the ink-jet printer in the Office System 6 family.
"Compatibility is a way of getting your nose in an account you might otherwise be shut out of," says Jeb Eddy, who analyzes the word-processing industry at Dataquest Inc., a Menlo Park (Calif.) market research firm. "The idea of the No. 2 firm's saying it does not make sense to operate with an either-us-or-them philosophy has healthy implications for the industry."
Following IBM's systems lead with Office System 6, Xerox introduced a family of 10 plug-in modules, including two second-generation, visual-display terminals -- one with a full-page screen and the other with a 24-character display. The system is a major step toward the "office of the future", since additional new products will simply plug into the 850 system -- a market approach that is consistent with Xerox's original strategies (BW -- June 30, 1975). "This is not a back-of-an-envelope design," Potter adds. "Weve really worked the human factors."
The first of the Xerox 850 systems already are installed, and industry analysts are unanimous in their praise. One analyst calls the 850 "the supermarket approach -- allowing users to mix and match" modules to fit their needs. "It's really the way to go", he adds.
If so, then a large number of Xerox's 70-or-more competitors are not going to have the carefare. Bringing such a product line to market and establishing a national sales and service force will cost far too much. "There's going to be a shake-out," predicts Berezin of Redactron. Agreeing is Edward E. Hale, vice-president at Addressograph-Multigraph Corp., which has just entered the market (BW -- July 4). "The companies that survive in the long run," says Hale, "will be those with excellent marketing and service strength or those with the money to develop it."
But it is sure bet that most companies will hang in as long as they can. The potential market is a big one. From total revenues of around $600 million last year, word processing is expected to increase to $1.5 billion by 1981. And as far as most experts are concerned, that growth is just the beginning.
By 1990, predicts Booz, Allen & Hamilton, the consulting firm, as many as 4 million establishments will be using an incredible 10 million to 20 million interactive work stations. The only obstacle to that growth could be an overall shortage of capital. "Don't underestimate the investment this will require," comments Harvey L. Poppel, a senior vice-president at Booz, Allen. "It probably will dwarf our past investments in computers."
GRAPHIC: Graphs 1 and 2, The fast-growing market in word processing, Robert McAuley-BW; Picture, no caption, Robert McAuley-BW
Copyright 1977 McGraw-Hill, Inc.