HOW PCs WILL TAKE OVER YOUR HOME Great software, low prices, and simpler machines have consumers flocking to buy computers. Will the PC eventually conquer the TV?
By David Kirkpatrick REPORTER ASSOCIATE Jane Furth

(FORTUNE Magazine) – SINCE CHRISTMAS morning, the Olasz children -- John Erik, 8, and his twin sisters, Becky and Erin, 6 -- have spent most of their free time clustered around a desk in their Pittsburgh kitchen. There sits a new personal computer, a Leading Edge 486DX, the family's first. ''They walk in from school, take off their coats, and run to the computer,'' says their mother, Nancy. Those little fingers aren't calculating spreadsheets on the keyboard, propped on a pulled- out desk drawer. Instead, they're maneuvering through a maze in a program called Mixed-Up Mother Goose and making posters with Disney's Aladdin Print Kit. Nancy wants to learn to use the computer so she can work part-time at home (she's now a receptionist). Her husband, John, hopes to communicate electronically with the lab he manages, which tests metal for industrial plants. After more than a decade as the office computer market's anemic sibling, home computing is suddenly the fastest-growing segment in PCs. Last year American consumers bought a record 5.85 million personal computers. Sales rose 24% to $7 billion, vs. 5% and $25 billion for the industry as a whole, reports Link Resources, a Manhattan research and consulting firm. One out of three American households has a PC -- some 32 million in all. Among families with annual incomes over $100,000, some 70% own PCs, vs. 55% in 1992. The Olaszes ) are typical: middle-class parents who want to do work at home. Makers of hardware and software say demand is just heating up. Bill Gates, CEO of Microsoft, predicts that by the decade's end, 50% of his company's revenues will come from home sales, vs. less than 5% today. Keith Fox, head of Apple Computer's U.S. consumer market group, thinks 20 million to 25 million families are likely prospects -- computerless households that can both afford a PC and put it to good use. Home computing creates big opportunities for companies in publishing, telecommunications, broadcasting, and toys to come up with related services and products. John Maxwell, an analyst for Soundview Financial, a Stamford, Connecticut, institutional brokerage firm, predicts that home computing will prove ''the biggest growth area we'll see in our lifetime, in any industry.'' At least five factors are spurring sales:

-- More Americans are working at home. BIS Strategic Decisions of Norwell, Massachusetts, calculates that more than 60% of PC-equipped households have an office in which family members use the machine for work they've brought home or for other income-generating projects.

-- Prices are falling. Today, after several years of price warfare in PCs, $1,500 buys an IBM-compatible with a huge amount of data storage and a fast processor chip that can efficiently run Microsoft's Windows operating system. The equivalent machine would have cost at least $3,500 in 1991. Prices for Apple's Macintosh PCs have fallen nearly as much.

-- PCs are easier to set up. Manufacturers have finally figured out that no consumer wants to wrestle with complicated components and mystifying software to hook up a new computer. Their solution: PCs that are factory equipped with everything necessary so that anyone can take them out of the box, make a few connections, and be up and running in less than half an hour. A typical bundle from IBM, for example, is a PS/1 Consultant minitower system for the home office. It incorporates a top-of-the-line 486 processor, a high-capacity (420 megabyte) hard disk, a telephone modem that sends and receives data and faxes, and preinstalled Microsoft Works software that includes modules for word processing, spreadsheet, database, and communications. Price with a color monitor: about $2,800.

-- Shopping for a PC is more convenient and less intimidating. Discount outlets like Wal-Mart now sell computers; even grocery stores have started carrying software. More than 5,000 U.S. stores sell Macintoshes, double the number in 1992. Major manufacturers back up their products with toll-free help lines and reassuring guarantees. Compaq's 800 number, for instance, is open round the clock, and the company provides a warranty that covers house calls by a repair person the first year and service at a dealership for two years more.

-- Exciting software and CD-ROMs are luring customers. Publishers have created thousands of programs on health, finance, humor, home repair, and even sex, as well as myriad games and educational packages for children. No wonder software sales to consumers grew 20% last year, to $3 billion, according to Link. Now the new technology of multimedia is expanding the power of home PCs with programs that incorporate sound, animation, and video, as well as ordinary graphics and text. Multimedia software sells on CD-ROMs (techspeak for compact disk -- read only memory), which are identical physically to music CDs and store as much data as about 400 ordinary floppy disks. About 15% of home computers shipped in 1993 were equipped with CD-ROM players; retailers say they often have a hard time keeping these so-called multimedia PCs in stock. ''CD-ROM is pulling people who had hesitated to purchase over the brink,'' says Kevin McDonald, a marketing manager at Apple, which sells CD-ROM players in about half its consumer machines. (For a sampling of popular programs, see box.)

-- Top PC producers are pushing home computing aggressively. Compaq has made the biggest splash in the shortest time. Its Presario 425, introduced last August, quickly became the top-selling PC in many mass-market outlets (see ''How Compaq Keeps the Magic Going'').

Sales of IBM's three-year-old consumer line, called PS/1, grew more than 30% last year and accounted for over 20% of the company's PC revenues. But CEO Lou Gerstner seems to want more. He recently hired an ex-colleague from RJR Nabisco, Richard Thoman, to oversee the IBM PC Co. Thoman has no computer- industry or technical background. His mandate clearly is to do what he's spent his life doing -- boost consumer marketing -- though neither Thoman nor IBM will say so (he's too new to talk, IBM claims). Apple has always been strong in the home market, the source last year of roughly 35% of the company's sales. The Performa line, introduced in 1992, has broadened Apple's appeal. While for the past decade only 20% of Apple customers have been women, they represent 49% of Performa purchasers. One reason more women are buying: They're no longer leaving it to their husbands to get a computer for the kids. Never has consumer motivation been the subject of more intense interest in the computer industry. The reason first-time PC buyers most often cite to explain their purchases, according to Link Resources, is to do job-related work at home. Typical is Jeff Stoiber, an architect in Washington, D.C., who says he plunked down $1,265 for a Macintosh Centris 610 in December because he wanted to bring work home and inspire colleagues to start using computers. Once they get a computer, however, families often find themselves using it for fun. Says Robert Amezcua, general manager of the IBM PC Co.'s consumer systems operation: ''People tell us they buy computers for home-office use. But they actually use them for games. They just won't admit that's the primary reason.'' The Olasz family spent $1,600 for their PC largely because Nancy and John thought it would help them work, but the kids will hardly let them near it. John Erik, Becky, and Erin prefer the PC to the videogame system that Santa also brought. And no wonder. Today's entertainment and education software is good and getting better. Stoiber's 6-year-old son, Marcus, zips through a program called Treasure MathStorm! by the Learning Co. ($40). On-screen, he climbs a mountain, fights a villain, and digs for treasure, solving arithmetic problems in order to proceed. Even his brother, Luke, 3, has begun to fiddle with the game. This fast-growing genre is known by the unfortunate label ''edutainment.''

The capacious CD-ROM makes possible clever animated books for kids, like The Tortoise and the Hare, a rollicking rendition of the Aesop fable on a disk from Broderbund Software. The 7th Guest, a whodunit by Virgin Games aimed at older kids and adults, is so popular that it's hard to find in stores. IBM includes King's Quest VI ($50), a CD-ROM fantasy adventure from Sierra On- Line, with many PS/1 machines. The program lets the player direct the movements of a somewhat dippy animated prince as he searches the world over for his missing sweetheart. Solving the convoluted mystery requires him to interrogate shady characters, confront monsters, and gather artifacts such as a key needed to unlock a door later in the game. Devotees spend days unraveling the clues. MANY COMPANIES bundle CD-ROM encyclopedias with their multimedia PCs. Reference works are a selling point: Since a high-quality conventional encyclopedia costs about $700, the Compton's Interactive Encyclopedia that comes free with IBM's PS/1 makes the $2,000 machine seem almost a steal. CD- ROM encyclopedias include about as much textual information as the printed kind, plus audio, animation, and video material that is more than decoration. You might not have known, for example, that Wilbur and Orville Wright used a weight to help catapult their early planes into the air unless you'd seen the video in the New Grolier Multimedia Encyclopedia ($100). IBM also bundles with its multimedia machines a CD-ROM version of the Mayo Clinic Family Health Book. Computing has even begun to nibble at the multibillion-dollar business of sex entertainment. Scores of adults-only CD-ROMs are available in software stores. Example: The Interactive Adventures of Seymore Butts ($60), in which the user controls the video seduction of a woman encountered on the street. (Click on an icon and select which part of a porn sequence you want to view.) Lawrence Miller, a co-founder of Interotica of Santa Monica, California, which makes the program, estimates that the racy CD-ROM market totaled at least $5 million in 1993. He thinks it will double this year. For better or worse, software will likely come to resemble other entertainment industries like books and records. Says Patty Stonesifer, who runs Microsoft's $200-million-a-year consumer division and who started her career in book publishing: ''The range of software titles will be as broad as the interests of people. Titles will be hot for a season, and waves of topics will be popular, just like with books.'' Andy Bose of Link Resources predicts that software best-seller lists will influence consumer purchases. Already video stores and other media retailers have begun to carry software. Blockbuster Video rents CD-ROMs in all 57 of its stores in the San Francisco area and intends to take the program national starting later this year. ''Games are much, much more popular than anything else,'' says Mike van der Kieft, Blockbuster's director of business development. ''We heard all about computers in the home ten years ago, but it didn't happen. It is happening this time, and multimedia is making the difference.'' Baker & Taylor Software, a large distributor that specializes in consumer titles, is test-marketing a range of products, mostly children's software, at 35 bookstores nationwide. It also has inexpensive (under $30) home computer software in tests at 20 grocery stores across the U.S. As software makers rush to capture the home market, look for prices of almost all software to drop. Consumer-oriented programs often sell for well under $100; some of the best business software is priced low enough for any home office. Borland's highly rated Quattro Pro spreadsheet, for example, sells for just $45. Within three years, predicts Soundview's Maxwell, most programs will cost as little as a hardcover book -- $20 to $25. Home-software producers are paying as much attention to old-fashioned market research as to hot new technology. Take Intuit, the Silicon Valley company whose Quicken program virtually defined the market for personal-finance software and today is in more than five million homes. ''We built our company around a consumer products model, not a technology model,'' says CEO Scott Cook, who started his career as a product manager at Procter & Gamble. Before Intuit begins work on a new product, such as a recent CD-ROM extension of Quicken that features explanations of home finance and the stock market, it conducts focus groups and analyzes consumer behavior and buying habits. Once the product is launched, Intuit advertises widely in magazines and on TV. It strongly emphasizes customer service, which it provides mainly through toll- free numbers. MICROSOFT STAFFERS have been trading insights with veteran marketers at companies like Sears Roebuck, Nike, and Estee Lauder. To develop Creative Writer, a writing and publishing program for children 8 to 14 that has been getting rave reviews, designers spent months in classrooms, asking fourth- and fifth-graders what they liked and disliked about prototypes. Microsoft's way of promoting the program is unconventional too: It has been advertising Creative Writer on the QVC shopping channel. Research on home computing has turned up what may be the most potent selling point of all: Kids who use computers tend to watch less TV. That was a conclusion of Opinion Research Corp., which surveyed computer-owning parents last summer for Fuji Photo Film U.S.A. More than a third of the parents said their kids spent less time in front of the tube because of the PC. Fully 91% expressed confidence that the computer helped develop fundamental skills like reading, writing, and arithmetic. One pro-computer mother is Andrea Marcaurelle of Ipswich, Massachusetts. Her household got a Compaq Prolinea 425S last March, and Erica, 11, and Alicia, 9, spend about two hours a day on it playing games. They especially like Broderbund's Where in the World Is Carmen Sandiego?, a best-seller that teaches geography and reasoning. Says their mother: ''That is time they aren't watching TV, and their grades seem to be improving.'' More and more consumers have begun to take advantage of the PC's unique power as a communication device, by signing up with one of the growing number of on-line services. The biggest include Prodigy (two million subscribers), CompuServe (1.7 million), and America Online, a fast-growing upstart (550,000). These businesses allow those with a modem-equipped PC to dial up a wealth of information, including news and financial data. Users can also join electronic discussion groups on a vast variety of topics, or post messages on electronic bulletin boards and find people with shared concerns. Having a problem breast-feeding your newborn? A recent query posted via Prodigy netted eight replies with helpful suggestions. Some retirees use electronic mail on Prodigy to stay in touch with their children and grandchildren. Most major brands of home computer come bundled with free trial memberships to both Prodigy and America Online. Will the PC be your on-ramp to the information highway? Bet on it, say many technology analysts. Marc Schulman of Technology Strategies Group in Stamford, Connecticut, for instance, argues that no other digital device of comparable power is likely to make its way into tens of millions of homes in this decade -- even if America's cable-TV and telephone giants spend billions trying to popularize their own versions of digital interactive TV. Says Schulman: ''The PC will be the view port. The rate of technology change in PCs is much faster than in TVs, and everything connected with TV involves government regulations, while PCs don't.'' Maxwell of Soundview Financial goes further: ''The PC will become, among other things, the primary entertainment vehicle, and you'll be able to throw your TV away.'' Already Apple and Packard Bell sell computers that double as TVs. The PC will soon merge with another consumer product, the telephone, says Richard Bodman, chief strategist at AT&T. ''By the end of the decade it will be inconceivable to have a PC that isn't also a telephone,'' he says. Callers will be able to share on-screen data at will, he believes, and conduct video conversations. Compaq has already taken a step in this direction. A feature ^ that has helped make the Presario 425 such a hit is its built-in telephone answering machine. You connect the PC to a phone line, and when a call comes the machine automatically jumps to life. It plays your outgoing message and can maintain voice mailboxes for as many as 999 family members, if you have lots of relatives -- or aliases. ONE PROBLEM may slow the PC's seemingly inexorable march toward ubiquity: It is still way too hard to use. Nancy Olasz was stunned to find no fewer than six manuals packed with the new machine: ''I didn't know there was so much to learn. That just floors me. I feel a little overwhelmed.'' The Olaszes soon discovered that they can make do without consulting the books, but now Nancy is annoyed because she cannot coax colors out of the new color printer. A survey last fall by Roper Starch Worldwide for IBM determined that more than half of all Americans have no interest in buying a computer because they think them too complicated. Says Andrew Kessler, a security analyst at Unterberg Harris in San Francisco: ''Consumers don't want to compute at home. They want to entertain themselves and get work done. But the industry hasn't figured out how to hide the computer technology from the consumer.'' Intuit's Scott Cook says he's continually amazed at how much complexity consumers will tolerate. But he is confident that the industry will find ways to apply the ever-growing power of PC technology to give people what they want without asking them to master much more than an on-off button. He poses a riddle: ''What do you call someone who doesn't know anything about operating systems and doesn't want to know? Normal.'' A motorist doesn't need to understand how a car works to drive it, and computer makers are moving toward the day when the same can be said of using a PC.

CHART: NOT AVAILABLE CREDIT: FORTUNE CHARTS/SOURCE: LINK RESOURCES CAPTION: POWER SURGE Sales of personal computers for the home have boomed in the past two years. Industry analysts predict at least two-thirds of American households will eventually own PCs. WHY CONSUMERS BUY HOME PCs