PCS: CALM BEFORE THE STORM;RECORD AD SPENDING CONTINUES BUT TIGHTENING, SHAKEOUT LOOM FOR '97

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U.S. PC sales will reach double-digit growth again this year. But magazine ad pages in the category may be flat, and the explosion in computer TV advertising may be coming to an end.

What gives? The maturing PC industry is coming to grips with shrinking margins by starting to tighten the screws on advertising.

To be sure, this year should break records. Dataquest says sales growth will be 13.6%, slowed from last year's torrid 21%-but still a number most industries would kill for. Because of rate increases, the media's PC ad revenues will be up even if pages are flat.

The $2 billion-plus in ad spending for PCs and related products will get a boost of more than $80 million from brands stepping up spending (Hewlett-Packard, Acer) or entering the market (Sony, Fujitsu and Hitachi). But there are warning signs.

The big question is 1997, when many expect some of the wannabe consumer PC brands to quit.

Of the 11 major PC brands in or entering the U.S. retail market, just five or six will remain at the end of '97, said Brian Burch, manager of marketing services for Hewlett-Packard Co.'s home PCs.

In this final fight for retail shelf space, "the [ad] volumes are going to go up significantly," he said.

Add it up, and 1996 could be a year of record PC sales and record ad spending-and record losses for those PC sellers that drop the ball.

"That is a very concise definition of the market," said Peter Horan, president of marketing services at International Data Group, publisher of PC World and other titles. "There's going to be a lot of really ugly pushing and shoving in '96. It's the first step in the consolidation."

HOT '97 SEEN

Ken Cron, president-publishing at CMP Publications, bullishly contended 1997 will be "one hell of a year" for tech advertising because of a boom in business PCs, the Internet and cheap new consumer devices.

But some giants are looking to save, not spend. IBM Corp., after ratcheting up global spending to an estimated $600 million a year, wants to hold the line as it begins '97 planning.

Some key marketers are reassessing advertising. No. 1 seller Compaq Computer Corp. last year managed a 36% increase in sales, yet Compaq said it boosted global ad spending just 4% to $201 million. The marketer cut its U.S. TV spending last year even as others were jumping in. For 1996, Compaq is cutting consumer media spending to cope with shrinking margins, say executives familiar with the plans.

It's tough to get a fix on a field in such flux. While successful Compaq is cutting, struggling AST Research is more than doubling ad spending. Hewlett-Packard and Acer America, the category's two hottest entries, this spring begin their first TV campaigns for home computers. Hewlett-Packard is expected to spend about $20 million, with Acer spending somewhat less.

Adding to the complexity: Three Japanese companies-Sony Electronics, Fujitsu PC Corp. and Hitachi PC Corp.-have chosen this difficult year to enter the U.S. PC fray, fueling industry ad spending by some $50 million.

CUTTING THEIR LOSSES

Some companies already have decided to cut their losses. AT&T Corp. and Digital Equipment Corp. have xited retail PCs. High-flying Micron Electronics bought and shuttered one-time power Zeos International.

Epson America is drastically scaling back U.S. PC sales. "It's a very difficult market to succeed in," and Epson spokeswoman said.

For those still in the game, market watchers bet one or more ad accounts will go into review during the tumult.

"Once one of them tumbles, there is a domino effect," said one industry veteran.

On teh surface, it seems a strange time to enter the U.S. market.

Dataquest spooked the industry in March with a report thet U.S. home PC sales this year will grow only 8%, about one-third the rate of '95, and then shrink later this decade as the market reaches saturation.

Surveys of the overall U.S. PC market, including business sales, are more promising. Dataquest last week projected the overall market will grow 13.6% this year, in line with other broad surveys.

Less mature global markets are growing faster; Dataquest says the world PC market will increase 19.1%, off from last year's 25.6%.

MARGINS SHRINKING

While U.S. sales are growing, profit margins are shrinking. Compaq's margins today are just half the 43% of 1990. Compaq raised-or perhaps lowered-the stakes in the first quarter by again cutting margins and prices to gain market share. As a result, it managed a colossal 56% sales increase in North America last quarter.

To compete profitably with Compaq, rivals have to cut prices; that puts pressure on expenses such as advertising.

Yet with so many brands jostling for share, this year ad spending still will be up.

Total computer industry print spending last year increased 19% to $2.2 billion, says tracking service Adscope. The biggest component of that-desktop and notebook PCs-was up 11% to $320 million.

The '96 ad market is off to a soft start, however. First-quarter ad pages in 55 computer publications tracked by Computer Publishing & Advertising Report were up less than 1%, though revenues rose 9% because of higher prices.

Computer advertising pages in publications fell 4.7%, slightly worse than the 3.9% overall drop in consumer ad pages, according to Publishers Information Bureau.

BULLISH ON '96

Computer marketing and media executives are more bullish about full-year prospects. And spending from the new players will help.

Computer and business media should get a boost later this year as PC marketers play off the arrival of Microsoft Corp.'s Windows NT software.

CMP's Mr. Cron projected U.S. PC ad pages will be "relatively flat," with broader computer industry ad pages up slightly. He estimates computer ad pages globally will be up 6% to 7%.

But factor in higher rates, he said, and computer print ad revenues will be up 10% to 15% in the U.S. vs. a nearly 20% gain last year, and 17% to 18% globally vs. 22% to 25% in '95.

"The market certainly is not growing as fast as '95," Mr. Cron said. "On the other hand, I think that '96 is setting the stage for what I think is going to be a real surge in growth in '97."

Mr. Horan, meanwhile, projected a computer industry spending hike of 5% to 7% in the U.S. and 15% to 20% outside the U.S.

Eric Hippeau, chairman of rival Ziff-Davis Publishing Co., more optimistically sees "low double-digits" in the U.S. and stronger results in Asia and Europe.

"I hope Eric's right; we'll both have a better year," Mr. Horan said.

The three computer media giants all expect to do better than the market, contending they will pick up share from other computer, consumer and business media.

TV faces a bigger problem. Computer spending last year nearly doubled

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