A REPORT from a leading investment advisory service, entitled simply TYPAR, Take Your Profits and Run, was a relatively simple assessment of a brand new growth industry, computer leasing. The report advised investors in January to sell shares of various computer leasing stocks. As a result, the stocks of many of these glamor companies took severe losses in the period immediately following the report. What is this phenomenon called computer leasing? And why has it had such tremendously profitable growth and drawn such tremendous interest from the investment community? Computer leasing is a relatively recent development, whose basis lies in the unique pricing structure currently prevalent in the computer industry. Essentially it operates under a umbrella established by IBM, the principal manufacturer in the computer industry. As a result of this umbrella the computer leasing companies are capable of providing users with a price reduction. The service they render to buyers is a price cut. Originally, IBM offered equipment only on a rental basis. This policy was upset in January 1956, by a consent decree which forced IBM to make equipment available on a purchase basis as well. All manufacturers in the computer industry now offer equipment on a purchase or rental basis. The general ratio between the monthly rental cost and the purchase price ranges from 1:45 to 1:50. Purchase of a machine therefore reaches breakeven with rental in approximately 45 to 50 months. However, the cost of money and the cost of equipment maintenance is normally included in rentals (but not in purchase contracts) thereby increasing the breakeven period to approximately 60 months. Users tend to consider rental as more advantageous and less risky than direct purchase for several reasons-because the industry has a rapid product turnover, because IBM encourages rental, and because of the large amounts of cash involved. Today, therefore, over 70% of the approximately $16 billion in installed computer equipment is rented from the original manufacturer. Approximately 3% is rented from a third party, a computer leasing company, and the remainder is purchased outright. The possibility of the leasing companies increasing their 3% market share is one factor in making them an interesting situation. The leasing company derives its operating base by purchasing the equipment and using a depreciating base longer than the five-year breakeven established by the manufacturer's ratio. Most leasing companies use a ten-year life, and some even assume a 10% residual value after the expiration of the ten-year period. Leasing companies thereby provide themselves with considerable economic margin when the equipment is released to the ultimate consumer. By providing the consumer with an incentive discount of 10 to 15%, the leasing company, using a tenyear depreciation base, will earn a net profit of 20 to 30%, or better. The tax investment credit on purchase, and the ability to use a more rapidly declining depreciation scale eliminates the possibilities of income tax for at least the first five or six years. Figure 1 shows the economic structure of equipment when placed on lease or rental. Using a one million dollar computer, the direct breakeven over rental occurs at 60 months. The leasing company breakeven, assuming a discount ranging from 10 to 25% off the manufacturer's rental, occurs in six and onehalf years, assuming no residual value and no tax investment credit. By applying the tax credit the breakeven is reduced by almost an entire year. The primary gamble in the business is the actual economic and technical life of the equipment. In general, the physical life of the equipment may be assumed to be in excess of the ten-year economic life and need not therefore be considered on new equipment. If the equipment can be maintained in productive use for more than ten years, the profits will increase DICK H. BRANDON is President of Brandon Applied Systems, Inc.