What 'Beyond the PC' Means for PC Makers
Business Week Online
After years of being the shining star of high-tech products, the personal computer has suddenly become quite the whipping boy. At
the TED9 high-tech gabfest in Monterey, Calif., from Feb. 17 to 20, for example, pundits such as Wall Street Journal technology
columnist Walt Mossberg and MIT assistant professor Michael Hawley took turns pointing out the PC's many ills, all but
relegating it to the trash-heap of digital history. "It's a product meant for office drudge work that fell off the back of a truck and
landed in consumers' homes," said Hawley. "It's not fit for my mother to use. It's basically industrial waste."
That's harsh stuff, but consider this: Even some PC makers are getting a bit frustrated with their product's inherent problems. In
fact, by the end of 1999, some pure PC players will have moved "beyond the PC" themselves. Startup eMachines, for example,
plans to unveil a DVD player/PC hybrid called the eMedia, that's designed to be used in the living room for E-mail, Web
browsing, and game playing on the Internet. Packard Bell NEC Inc. expects to have an entertainment-based product by yearend as
well. And Compaq Computer Corp. plans to be selling wireless communications devices and set-top boxes in a year's time.
Why break out of the "Wintel" fold now? Because when it comes to generating profits, the tried and true Microsoft Windows-Intel
processor model seems to be running out of gas -- at least for companies relying heavily on the sub-$1,000 market that now
represents half of U.S. consumer PC sales, according to ZD Market Intelligence. It's not just that margins are negligible on today's
low-end models, where a $500 machine might return only $40 or so in profit. Given Intel's and Microsoft's near-total control of the
technical standards, there's little PC makers can do to make their products stand out -- or to make easier-to-use machines that
would appeal to a broader audience. "We're on the eve of a revolution in pervasive computing -- and the ease of use of the current
PC will never get to where it needs to be," says Packard Bell NEC Chief Executive Alain Couder. Indeed, he recently asked his
engineers to find a way to remove Windows from the PC and replace it with a simpler operating system. The response: Not
economically feasible.
DRASTIC CUTS. The result of this profit squeeze has become dangerously apparent in recent days. On Feb. 19, Packard Bell
NEC announced a 15,000-person layoff, along with news that its Packard Bell home-PC unit had lost more than $1 billion over the
past two years. On. Feb 23, Acer America Inc., after years of losses, said it would get out of unprofitable retail-store channel and
sell only via the Interent. These moves followed Hitachi's Feb. 4 announcement that it would shut down its U.S. notebook
subsidiary, Hitachi PC Corp.
Rather than downsize or surrender, some PC makers are taking a different tack. To break the cycle of falling prices and shrinking
profits, they're adding services, which may draw new buyers -- and also produce revenue annuities for the PC companies. On Feb.
24, for instance, Gateway 2000 announced it would provide free Internet service to customers who buy a PC costing more than
$1,000. Other companies are expected to make similar moves. Compaq, for one, is trying all kinds of schemes to find a profit
formula that adds up. On the one hand, it's experimenting with the so-called free PC model: It will sell 10,000 Presario home PCs
to startup Free-PC Inc., which will "give" them to customers who agree to have online ads appear on the units 24-hours a day. But
Compaq is also buying up software and E-commerce companies such as Shopping.com, with the goal of creating services and
content that set it apart from the PC crowd.
One PC maker that appears unlikely to stray from the pure Wintel model is Dell Computer Corp. The Texas company has
mastered the direct-order business and continues to squeeze great profits from conventional PCs. But even Dell may be feeling the
heat from plunging PC prices: Revenue growth in its most recent quarter fell from historic 50%-plus levels to just 38%, prompting
a shellacking on Wall Street on concerns over a slowdown.
In the end, high-volume PC producers, including even Dell, will have to follow the market-segmentation strategy of their patron
saint (and master) Intel, which is trying to compensate for cheaper chips by selling more high-powered models used in corporate
servers and engineering workstations. So far, that balancing act has helped keep Intel growing, even as PC prices plunge. For PC
makers contemplating a plunge into ultracheap, low-margin information appliances, having a high-end server and workstation
business could prove to be a crucial determinant of their continued success.
By Peter Burrows, in San Mateo, Calif. |
