PC makers move beyond the box as growth slides
By Nicole Volpe
NEW YORK, Feb 28 (Reuters) - Personal computer makers are
rapidly shifting out of the traditional business of making and selling
their traditional beige boxes as they explore new ways to tap wider
audiences, create fresh product categories and thereby shore up
flagging revenues.
Recent new product introductions centered on simple, sleek Web access devices and services are just
one of the many strategies PC makers are using to stave off tumbling PC prices and falling margins.
``The industry is moving to easier to use, portable access to the Internet,' said Jay Stevens, a financial
analyst with Buckingham Research Group.
Compaq Computer Corp. (NYSE:CPQ - news), Dell Computer Corp. (NasdaqNM:DELL - news) and
International Business Machines Corp. (NYSE:IBM - news), respectively the world's No. 1, 2 and
3-ranked PC makers, have each developed lines of PC devices that make Web access easier.
In response to declining revenues on the PCs themselves, computer makers are increasingly looking
``beyond the box' to sales of related Internet services, software applications and peripheral products
such as printers and networking equipment.
``The PC isn't disappearing, units shipped are actually expected to increase. But it's the revenue growth
rate that is slowing down.' Stevens said, referring to a trend underway for several years, in which
tumbling prices have spurred wider adoption of PCs.
``This benefits the consumer, the server players, everyone except the PC guys,' he said, in
distinguishing suppliers of consumer PCs and more powerful server machines used to manage networks
of other PCs from standard office PCs that still represent the bulk of the industry's revenues.
While the 44.9 million PCs shipped in the United States during 1999 generated $78.1 billion in sales,
technology market research firm International Data Corp. forecast PC shipments will accelerate to 60.2
million during 2001, even as revenues are seen only growing modestly to $86.75 billion by next year.
``There's been some debate about whether for PCs in the consumer space and in the corporate space
the average selling prices will continue to fall,' said Toni Sacconaghi, an analyst with brokerage Sanford
Bernstein.
``And there is increasing evidence of ASP declines going forward,' he said of average prices customers
pay for new machines.
Recently, some of the largest U.S. industrial companies have stepped up to take advantage of the
tumbling prices by offering special discounts to their employees.
Delta Airlines Inc. (NYSE:DAL - news) and Ford Motor Co. (NYSE:F - news) have said they are
subsidizing PCs and Web access for their employees through deals with PeoplePC. Hewlett-Packard
Co. (NYSE:HWP - news) is supplying the PCs for the Ford deal.
More such deals are expected, in moves that promise to open a new front in the mass marketing of PCs
beyond traditional consumer retail and corporate PC distribution. Only last week, IBM announced a deal
to offer Web access PCs to customers of Fidelity Investments, the No. 1 U.S. mutual fund company.
``The desktop as a revenue growth opportunity is looking minimal going forward,' Piper Jaffray analyst
Ashok Kumar said.
In the face of this challenge, Gateway Inc. (NYSE:GTW - news) said on Wednesday it had set a goal of
reaching $30 billion in sales by 2004 and that it aims for most of its profits at that time to come from
sales of items other than personal computers.
IBM has stopped selling consumer PCs through U.S. stores and begun to focus instead on direct sales
via the Internet, in a bid to return the business to profitability.
Facing up to the broader trend of a slowing revenue growth rate in the industry, market growth leader
Dell signaled earlier this year that investors should expect annual revenue growth in the low-30 percent
range. That is well below the historical 50 percent and above rates that had once made the Round Rock,
Texas company a ``must-own' technology holding.
Joe Marengi, general manager of large corporate customer accounts at Dell, said in an interview that
slowing growth rates were due to the ``law of large numbers,' which dictates that each turn of the crank
upwards in growth becomes harder to duplicate as the company reaches $25 billion in annual revenue.
However, analysts have pointed out that Internet equipment maker Cisco Systems Inc.
(NasdaqNM:CSCO - news), a company of comparable size to Dell, showed a 53 percent growth rate
year-to year, up from a traditional rate in the high 30 percent range. Dell's main problem is keeping pace
with tumbling PC prices, they said.
``The real law of large numbers here doesn't take a lot of skill,' Stevens said. ``You ship one PC for
$1000, and a year later you only can sell it for $500, now you have to sell two,' he said of Dell's
dilemma.
Still, Marengi said that the increasing commoditization of PCs could be a good turn for Dell.
``We would make out unbelievably well, because we have a very, very efficient model,' he said of
manufacturing and distribution efficiencies that Dell's major rivals have so far attempted to duplicate
without much success.
``There is more opportunity with the box still than most people are giving credit,' he said.
More Quotes
and News:
Cisco Systems Inc (NasdaqNM:CSCO - news)
Compaq Computer Corp (NYSE:CPQ - news)
Dell Computer Corp (NasdaqNM:DELL - news)
Delta Air Lines Inc (NYSE:DAL - news)
Ford Motor Co (NYSE:F - news)
Gateway Inc (NYSE:GTW - news)
Hewlett-Packard Co (NYSE:HWP - news)
International Business Machines (NYSE:IBM - |
