idc says revs "shrank" - their term - last year!
NOTICED THE PRINT IN BOLD...
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Business Week Online
PC Makers Think Beyond the Box
To replace falling hardware profits, they're heading off in surprising directions
Hardly a week goes by that some wild-eyed startup doesn't announce a scheme to
give away personal computers--as if the PC were some throwaway rather than
the machine that ushered in the Information Age. On Mar. 31, following in the
footsteps of Free-PC, NuAuction, and DirectWeb, New York-based Gobi said it
would hand out free PCs to consumers who sign up for three years of Internet
service. Meanwhile, emachines Inc. keeps cranking out PCs priced as low as
$399, and startup Microworkz Computer Corp. says it will soon sell them for
$299. ''Where is this all going?'' asks Brett B. Faulk, director of retail product
marketing at Compaq Computer Corp. ''It's anybody's guess. It's hard to draw
rational conclusions from irrational pricing.''
Problem is, selling PCs the old-fashioned way is starting to look nearly as
irrational. Why? Two years of free-falling prices are
squeezing the life out of margins, threatening to leave PC makers gasping for
profits. A 17.3% drop in the price of the average
desktop computer last year shrank industrywide revenues by 3.6%, according to
market researcher International Data Corp. And
those doldrums look to be the state of things to come. Analysts expect prices to
plummet nearly 15% this year, capping
industrywide sales growth at less than 5%. ''I would not be surprised to see a
number that's pretty close to flat PC revenue,'' says
Jerre L. Stead, CEO of Ingram Micro Inc., the biggest distributor of
computer-related gear.
Worse, prices also are tumbling on notebooks and industrial-strength PC servers
that have delivered the bulk of profits for top PC
makers in recent years. The average price of a PC server has fallen 13.4% over
the past two years, says idc. ''It's getting harder to
find places to hide,'' says Merrill Lynch & Co. analyst Steven M. Milunovich. ''PCs
are a tough business--and it's likely to get
tougher.''
That's why PC makers are scouring their balance sheets and searching their souls
as they grapple with an unavoidable reality: The PC alone can no longer deliver
the financials of old. ''Clearly, we can't be a one-trick pony any longer,'' says
Michael D. Lambert, head of Dell Computer Corp.'s server unit.
GIZMOS. Suddenly, PC makers are heading off in surprising new directions. Dell
and Compaq are developing E-commerce
businesses--whether it's collecting monthly Internet service fees or becoming
online sellers of everything from printers to carrying
cases. Hewlett-Packard Co. has its own E-business spin: In addition to selling
servers the traditional way, HP and its partners will
host others' Web-site operations on HP servers, collecting a monthly service
charge or fee on transactions. ''This way, we're no
longer chasing the bouncing ball of hardware margins down the stairs,'' says Nick
J. Earle, chief marketing officer for HP's
enterprise-computing unit.
Other PC makers think new gizmos are the answer. Compaq and Packard Bell
NEC Inc. are preparing non-PC products such as
cell phones and newfangled devices that act as Web-access machines. And some
PC makers are simply backing out of parts of the
market. In February, Acer America Corp. announced that it will close its U.S.
retail PC effort, while Hitachi has shuttered its U.S.
subsidiary.
Experts say bigger players may yet make an exit, possibly even IBM. Analysts
have been calling for Big Blue to abandon the
cutthroat home-PC market and focus on more profitable PC sales to
corporations. IBM says it has no such plans, but it is clearly
struggling in the PC market. In the 1998 annual report, Chairman Louis V.
Gerstner Jr. declared that ''the PC era is over''--some 80
pages before IBM disclosed that it lost $992 million pretax in PCs that year, after
losses of $161 million and $39 million in 1997
and 1996.
Even Dell, the one computer maker that has defied gravity, with revenues soaring
50% over the past several years, is not nearly so
cozy with the PC these days. ''We are very focused on changing from a model of
65% desktop PCs to about 45%,'' says Dell's
Lambert. Indeed, Dell is following the lead of Compaq, IBM, and HP, investing
heavily to develop heavy-duty storage systems,
which carry 50%-plus gross margins.
For those that successfully branch out into new, higher-margin areas, PCs could
become, well, just another business. If Compaq's
services and storage businesses continue to grow at current rates, by 2002 they
will reap profits of $3.5 billion and $3 billion
respectively, vs. $3 billion for PCs, says CBIC Oppenheimer Corp. analyst James
D. Poyner Jr. Other PC makers could similarly
offset flagging computer profits. At Gateway Inc., CEO Theodore W. Waitt
figures non-PC sales could be 20% of his revenues
over the next few years--and a larger percentage of earnings.
It's possibilities like this that have Compaq taking one of the more ambitious
approaches. Besides storage and services, the No. 1
PC maker is launching an aggressive Web strategy. On Jan. 26, it created a
stand-alone company around its AltaVista search
engine. The goal: to make it a top-notch portal and, ultimately, cash in by taking
it public. Meanwhile, Compaq hopes to boost
sales of Shopping.com, an online store it purchased in January, by promoting it on
Compaq PCs and on AltaVista.
WALLFLOWER. Other PC makers want in on the Internet action as well. And
who can blame them? They own the screen on which Amazon.com Inc. and Yahoo!
Inc. have built their vast fortunes, yet they have little to show for it. ''They just
watched the market caps of all these profitless Internet startups zoom out of
sight--and they didn't get any of it,'' says senior analyst Matt Halperin of Boston
Consulting Group.
Best-positioned are those with established Web-selling operations--notably, Dell.
On Mar. 3, Dell unveiled its Gigabuys.com site, where consumers can choose from
30,000 products, ranging from digital cameras to computer bags. In the future,
Dell will fold
this service into its 12,000 Premier Pages--specially designed Web pages for
corporate customers--so they, too, can buy this broad
array of products from Dell.
In May, IBM will follow suit when it unveils a Web site, code-named Project
Odyssey, to sell its entire line of PC products
directly to small businesses and consumers. Since IBM currently sells only its
Aptiva home PCs and one Thinkpad laptop online,
this could boost its cybersales to $10 billion to $15 billion, with PC products
accounting for more than half, says Richard
Anderson, general manager for IBM's enterprise Web-management unit. And since
giving customers control over ordering and
configuration cuts handling and service costs, IBM's expenses would be 5% lower
for products sold online, say insiders.
Ultimately, these launches into cyberspace could morph into sweeping new
business models in which PC companies make money
not on their hardware but on the services they can bundle with their boxes.
Already, Gateway and Compaq get a share of monthly
revenues from Internet service providers featured on their machines. And the
more subscribers they sign up, the more advertisers
will pay to get their ads displayed to these potential shoppers.
That's the vision of many ''free PC'' upstarts: Break even on the machine and
make a killing on E-commerce. So far, most of these
schemes just don't add up. Take Free-PC, which plans to give 10,000 PCs to
consumers who are willing to give up 20% of the
screen to ads. One big snag: Some 49% of home-PC users don't even look at ads,
says Dataquest Inc.
BIG SHIFT. However wobbly today's free-PC pioneers may seem, don't rule out
their success in the longer term. Analysts say
that as broadband connections such as cable modems become popular, monthly
Internet service bills will rise to $50 or more. That
could provide a deep enough revenue stream to subsidize PCs. ''I haven't seen a
way for the economics to make sense yet, but they
ultimately will,'' says Sky Dayton, CEO of Earthlink Networks Inc., an Internet
service provider based in Pasadena, Calif.
Some new plans already look better than others. Gobi, for example, will give
away PCs to customers who pay $26 per month for
three years, as well as a $30 startup fee and a $45 shipping fee. Since Gobi buys
the PCs directly from contract manufacturer
Solectron Corp. and charges a slight premium for ISP service, CEO Ganesh
Ramakrishnan says Gobi can break even. Profits
would come from a cut of the E-commerce his customers will conduct. ''We're not
a gimmick,'' says Ramakrishnan. ''We have a
sustainable business model.'' That may be more than even the biggest PC makers
can say if they don't move quickly past PCs.
By Peter Burrows in San Mateo, Calif., with Ira Sager in New York
Business Week Online (also)
Test-Driving Those Bare-Bones PCs
''Honey, can you pick up O.J., bananas, peanut butter, and a PC?'' No, you won't
find personal computers at your neighborhood
7-Eleven just yet. But given how rapidly hardware prices are crashing, the
possibility doesn't seem that remote. On Mar. 15,
Seattle-based Microworkz Computer unveiled WEBzter Jr., priced at $299,
including a year of Internet access via EarthLink.
Microworkz claims half a million systems have been ordered, although it doesn't
even start shipping until Apr. 19. Microworkz is
hot on the heels of emachines, an Irvine (Calif.) PC marketer that has sold about
500,000 sub-$600 systems since November
(BW--Apr. 5). Analysts expect Compaq and Hewlett-Packard to field sub-$500
models around the fall. ''The most explosive area of
the market is in the $300-to-$600 range,'' says David Stremba, principal PC
analyst for Dataquest in San Jose, Calif.
What exactly do you get for a few hundred bucks? That's the burning question for
first-time PC buyers as well as for those who
dropped three grand for a state-of-the-art desktop only a few years ago. The
answer: While there are trade-offs, most buyers can do
quite nicely with an el cheapo machine.
Back in the old days--the early to mid-1990s--people were best advised to stretch
their budgets as far as they could and buy PCs with more technology than they
probably required. That way consumers could fully exploit a newly minted
operating system such as Windows 95 and stave off the obsolescence that
seemingly kicked in the instant you lugged the thing home.
Today, no new operating system is taxing the capabilities of most PCs. When
some nifty and demanding new technology does come along, it'll be a lot easier to
write off $300 than $3,000. Anyway, you probably don't need the last word in PC
hardware. Take Intel's latest chip, the Pentium III microprocessor, which typically
resides in PCs that cost $1,500 or higher. It's overkill for most consumers. Sure,
Intel says Pentium IIIs offer ''70 new instructions enabling advanced imaging,
3-D,...and streaming audio and video and speech-recognition applications.'' Say
what? That's mumbo-jumbo for stuff you can't take advantage of--or don't need.
Indeed, most buyers can live quite happily for at least a couple of years longer
with machines built around Intel's less expensive
Celeron chips, or low-cost rivals from Cyrix or AMD. Moreover, as Intel phases
out the II, you might find bargain PCs based on
that chip, a powerhouse nearly equal to its successor. ''There is almost nothing
that can't be done on these low-priced systems, and
there should be no regrets about buying them,'' says analyst Tom Rhinelander at
Forrester Research.
POWER USER. Before you go shopping, plan on how you'll use your computer. If
you're a power user, bargain-basement computers will probably fall far short of
what you need. Travis Richardson of Minneapolis, for example, spent $3,200 for a
fully loaded 500-MHz Pentium III from Dell because his wife designs Web pages,
he records music and burns CDs, and the kids play 3-D games. But if you only
need a computer to prowl the Web, send E-mail, or write book reports, there's no
way you'll have to spend more than $1,000--including monitor.
One unit that looks attractive in that price range is the entry-level Gateway Select
366, for $899. Based on AMD's K6-2 366-MHz processor, the system comes with a
15-inch monitor, 4.3-GB hard drive, 32 MB of RAM, and software such as
Quicken Basic 99 and Corel WordPerfect Suite 8. If you have a little more money
to spare, spend it upping the capacity of your hard drive. An 8.4-GB upgrade
costs $65, a 13-GB version, $110. You'll also want to add RAM--64 MB costs $64.
Investigate a new color printer, for about $200. If it's available in your area, a
cable modem for connecting to the Net at robust speeds runs about $40 a month,
plus installation.
Whatifeven $900 is too much? The entry-level model from emachines costs $399,
after a $50 rebate. For that, you get a Cyrix chip
running at a fast 333 MHz, and USB ports on the front and back of the minitower
case for connecting other devices. In addition, it
includes a 32x CD-ROM. For $599, you can get an upgraded model with a
DVD-ROM instead.
TINNY SPEAKERS. However, the 2.1-GB hard drive of the emachines model is
cramped, especially since Windows 98 hogs a big chunk of its space. The tinny
speakers that come with the system won't let you enjoy Mozart in full splendor.
And overall, the system feels cheap; the keyboard, mouse, and CD-ROM all are
flimsy to the touch. So if you end up buying an emachine to replace another
computer, hang on to your old mouse and keyboard.
Moreover, with any machine in the $300 to $600 range, don't expect all the
software you'll find in a more expensive computer. Your upgrade capabilities are
also more limited, and basic components may be missing. You must fork over $99
to add a package containing a floppy drive, CD-ROM, and speakers to the
WEBzter Jr. Adding a monitor boosts the tab $140 to $400.
You shouldn't expect much service at the lower end, either. WEBzster comes with
a one-year warranty and two weeks of technical support, though for $50 you can
increase your coverage to three years, with 24-hour phone support. PCs from
emachines also come with a one-year warranty; free tech support lasts 15 days
from your first call, but you can get a three-year warranty with 24-hour tech
support for $60. Or, for $20 per incident, you can pay for support as you need it.
By contrast, Dell offers free lifetime tech support.
You say $300 is too expensive? How about a free PC? Bill Gross, who runs
idealab! in Pasadena, Calif., which operates a variety of Internet businesses, is
offering a Compaq Presario PC to a limited number of Web applicants who fit an
undisclosed demographic profile. About 1.2 million folks have requested a
machine so far, although idealab! intends to select only 10,000 initially. To apply,
go to www.free-pc.com. You'll have to fill out a detailed questionnaire, including
your name, income, and information about your hobbies, publications you
subscribe to, and gadgets you own. If you actually receive a computer, you'll have
to agree to have it on at least 10 hours a month, and be online for at least one of
them. Whether you're online or not, ads from companies sponsoring the deal will
be displayed.
GOOD-BYE, PRIVACY. Besides surrendering your privacy and subjecting yourself
to an advertising barrage, you get a computer that is no great shakes. It includes
a 333- MHz processor, 15-inch monitor, and 4-GB hard drive, half of which is
filled with ads. Its modem speed is a lackluster 33.6 kbps. You cannot upgrade the
computer, beyond adding a larger display or a DVD drive. Compaq, however,
does provide technical support.
In another variation on the free theme, DirectWeb (www.directweb.com) intends
to give away computers to people who subscribe to the company's Internet
service. For $19.95 a month, you'll get a 333-MHz Celeron-based Ingram Micro
machine. No contract is required--when you drop the service, you return the PC.
You'll get a faster Celeron if you pay $29.95 a month; at $49.95, you'll get a
Pentium III, plus a color HP printer. DirectWeb is starting out in the Philadelphia
area, and is scheduled to come to other cities later in the year.
Even Microsoft is getting into the free-PC business. As part of a current
promotion, its MSN HomeAdvisor Web service (www.homeadvisor.-com) is giving
away computers to homebuyers who find and close on a mortgage loan via the
service. If you borrow $125,000, you'll receive a 300-MHz desktop PC with 32 MB
of RAM and monitor. Those who close on smaller loans get a Casio PV-200
personal organizer. Mortgage rates vary and are set by such lenders as
Countrywide and Chase.
Even if you don't go for the free-PC deals, thanks to falling computer prices, there
has never been a better time to pick up a new unit or replace the slowpoke on
your desk. You can take home a terrific computer--and still have plenty of money
left for groceries.
By Edward C. Baig
EDITED BY AMY DUNKIN |
