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Tech Plunge Begs Question: How Low Is Low? : Computers: Price war pummels software stocks. Egghead reports first-quarter loss of $2 million, says its CEO has resigned.

August 27, 1993|MARTHA GROVES | TIMES STAFF WRITER

SAN FRANCISCO — This week's escalation of the never-ending computer-software price wars sent software shares plummeting Thursday, raising new questions about just how low software prices will go.

In a sign of the times, Egghead Inc. reported a first-quarter loss of $2 million and blamed it on industrywide pricing pressure that squeezed profit margins. The Issaquah, Wash.-based retailer, which earned $1.7 million in the year-ago quarter, also said its chairman and chief executive, Timothy E. Turnpaugh, has quit. He joined the company in February.

Software prices have been falling for a while, but Borland International Inc. sparked the latest turmoil in software stocks with its announcement late Tuesday that, until Jan. 15, it will sell the new version of its popular Quattro Pro spreadsheet for a relatively rock-bottom $49.95, down from a list price of $99. Such programs used to list for 10 times as much.

Although Lotus Development Corp. and Microsoft Corp., Borland's much-larger rivals, said they would not immediately match the pricing, the action nonetheless "raises the question of how low and how far will the pricing deteriorate," said Jeff Silverstein, editor and publisher of the Software Industry Bulletin in Stamford, Conn.

Comparable programs--Lotus' 1-2-3 and Microsoft's Excel--cost $300 to $400. Borland's move is seen as an aggressive retaliation against its nemesis, Lotus, with which it is locked in a three-year legal battle over copyright issues.

Borland, which lost $2 a share Wednesday in NASDAQ trading, suffered a further drop Thursday of 62.5 cents, closing at $17.50. Among others pummeled on Wall Street were Microsoft, down $2.125 to $72.125, and Lotus, off $1.125 to $31.50. Egghead slipped 12.5 cents to $7.75.

The price wars have intensified in the last couple of years as big companies such as Microsoft have made deals with corporate customers who buy large quantities of software. In addition, software makers have begun to scramble for business as computer hardware manufacturers have taken to bundling most of the software a home user could want with their machines. The hardware makers get a volume discount.

Compaq Computer Corp., for example, announced this week two new easy-to-use Presario models that come equipped with personal finance programs, games, word-processing programs and on-line services.

An official at Borland headquarters in Scotts Valley, Calif., said investors were overreacting out of a failure to understand the company's strategy.

"We're creating a segmented strategy which targets the way people are buying software today," said David Watkins, Borland's vice president of product management and marketing. The introductory offer is intended to allow Borland to increase the amount of space it has on retailers' shelves and therefore sell more product.

He added that Borland's profit margins will not be significantly affected, because the company has been slashing production costs.

Maybe so, but Silverstein said the price cutting has caused margins throughout much of the industry to drop "fairly significantly." He added that the business "is not going to get back on an even keel anytime soon."

Consumers, he noted, are the key beneficiaries.

"What we're seeing is the end of the Windows upgrade cycle," said Chris LeTocq, director of software research at Infocorp, in Santa Clara, Calif., with users shifting from older operating systems to the popular, easier Windows format. "Software vendors are seeing this happening and know they have to grab market share before the conversion is completed."

Software Stocks Take a Hit

Shares of computer software companies plunged Thursday, reflecting this week's escalation of an industry price war that is cutting profit margins.

52-week Thurs. close Decline from Stock high/low and change 52-week high Borland Intl. 49-15 1/4 17 1/2, - 5/8 -64% Adobe Systems 37-12 5/8 20 1/4, + 1/8 -45% BMC Software 84 1/8-38 3/4 57 1/2, -2 1/4 -32% Microsoft 98-68 1/2 72 1/8, -2 1/8 -26% Sybase 77 1/2-26 3/4 60, -6 -23% Autodesk 56 3/4-38 3/4 44 1/4, -1 3/4 -22% Lotus Develop. 40 1/8-14 3/4 31 1/2, -1 1/8 -21% Powersoft 40-22 33 3/4, -2 1/4 -16% Oracle Systems 56 3/8-15 3/4 50 3/8, -4 3/8 -11%

All stocks trade on NASDAQ.

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