International Business Machines Corp., which dominates the multibillion-dollar personal computer industry, disclosed that it has frozen the number of stores authorized to carry its line of personal computers.
In a letter mailed to its dealers last Friday, Douglas R. Legrande, vice president of IBM's National Distribution Division, stated that, "Effective Nov. 18, no dealer applications for new or expansion locations will be approved in the U.S. and Puerto Rico by IBM . . . "
The move effectively fixes the number of authorized IBM Personal Computer dealers in the United States at roughly 2,500, and sets the stage for what many computer retailers believe could be a surge of computer store mergers and acquisitions in an industry troubled by oversupply and price wars.
"We feel we have adequate coverage at this time to be responsive to our customers' needs," an IBM spokesman said.
By prohibiting new dealers, IBM can help protect its existing retailers from further price competition on its machines while simultaneously getting a grip on the "gray market" in IBM PCs -- that is, personal computers sold at a deep discount. The overall effect should be that personal computer prices won't drop as quickly as they have in the recent past.
"It's definitely a significant move in our industry," said Avner Parnes, chairman of MBI Business Centers, a $100-million-a-year chain of East Coast computer stores based in Rockville. "It will spark a wave of mergers and acquisitions because it means that we can't just grow by launching new stores."
Parnes, who had planned to add at least 10 stores to his chain of 25, said he now will acquire, rather than build, them. He said the move really will affect the marginal stores that no longer can count on building a new store or franchise to fuel growth.
"In the short term, this is going to be beneficial because there are now too many dealers chasing too few customers," said Bert Helfinstein, vice president of Vienna-based Entre' Computer Centers Inc., the second-largest computer chain in the country with more than $450 million in revenue projected for this year. "I think this is IBM's attempt to help improve the business conditions of its dealers."
However, Helfinstein noted that Entre', which has based its growth on awarding IBM franchises, "regrets not being able to add new stores. . . . "We hoped to add about 40 to 50 new stores to our current base of 250. This forces us to reexamine ways to growth."
Entre' does plan to continue international expansion, which is not precluded by the IBM ruling, but has not yet decided what its domestic plans for growth will be except to promote higher sales per store.
"This is clearly confirmation of some of the problems that exist within that [distribution] channel," said Gibbs R. Moody, an analyst with the Gartner Group, an industry research firm. "If IBM thought they could expand without any dire consequences, I'm sure they would."
Moody estimates that about 65 percent of IBM's $4 billion in personal computer revenue comes from retail distributors. However, many of those retailers have seen profit margins erode or vanish as a result of intense price competition amidst lower-than-expected growth. Some of those dealers turned to high-volume, deep-discount sales -- a practice IBM has vowed to stamp out. Industry sources assert that up to 15 percent of the estimated 1.2 million IBM PCs sold were through gray-market channels.
A spokeswoman for Computerland, the nation's largest computer-store chain, with projected revenue of $1.5 billion, said the company felt the U.S. market was saturated with IBM dealers and that, with 614 stores, Computerland "is in the best shape of anyone in the industry" to deal with IBM's decision. Spokeswoman Dianne Douglas said that, because Computerland has been aggressively developing new stores overseas, the IBM freeze in the United States will have little effect on the company's expansion plans.