Strong PC Sales Seen, Despite Slowing
By John W. Schoen
Senior Producer, MSNBC
Jul 24 2000 5:21PM ET
With demand for Internet hardware and wireless devices booming, sales growth for desktop personal computers continued to slow down in the second quarter. But industry profits are expected to be strong. And with slowing growth hitting PC makers very differently, they are responding with very different strategies
The latest figures from two widely followed research firms -- Gartner Group’s Dataquest unit and International Data Corp. -- show continued sluggishness in PC sales in the United States after a boom in sales last year. Part of the reason for the slowdown, analysts say, is that 1999 was a hard act to follow, as booming demand for sub-$1,000 PCs was fanned by $400 rebates offered by Internet service providers
"Last year was just a banner year in PC volume, especially in the consumer segment," says Anne Bui, a PC industry analyst at IDC. "Because we don’t have those bargain basement prices, the volume just isn’t there."
But rebates aren’t the only factor. Some PC makers this year are suffering from shortages of key parts like DRAM memory chips, DVD-ROM players and circuit boards. For the most part, the top-tier PC makers have ample supplies, but spot shortages will likely get worse before they get better, according to Daniel Kunstler, who follows the industry for J.P. Morgan.
"You’ll definitely see some scrambling," Kunstler says. "I would not want to be a second tier PC maker fighting for allocation."
News of the slowdown helped drag down stocks of PC makers Monday, as investors took the news of the slowdown as a sign that PC profits would be weak. But a closer look at the numbers shows that those worries may be overblown.
One big reason industry profits are expected to hold up -- even as sales have been slowing -- is that PC prices have been rising. The average retail price jumped from $838 in last November to $934 in April, though they have eased a bit since then according to PC Data Inc. That pricing power is helping to shore up the industry’s profit margins as the pace of sales slows.
Why are PC prices rising -- after years of relentless price cuts? Analysts say a big reason is less competition, as fewer players are left standing after last year's intense price cutting shaved profits margins. Packard Bell NEC, for example, pulled out of the consumers PC market entirely. Acer and International Business Machines Corp. {IBM} have decided to sell PCs only on the Web. And the shortages of parts hitting second-tier PC makers has helped sideline additional PC supplies.
While the growth in PC sales remains slow in the United States, demand is much stronger overseas, especially in the Asia/Pacific region, where
second-quarter sales were up more than 20 percent. In Japan, PC sales were up by some 40 percent. Overseas sales were especially strong for Dell Computer Corp. {DELL} and Hewlett Packard Co. {HWP}.
That has some analysts looking for healthy growth later this year. Chase H&Q PC analyst Walter Winnitzki says the numbers have been skewed by unusual factors in the past few years. An unusually weak 1998 -- when overseas economies were ailing and PC makers reorganizing to cut inventories -- was followed by an unusually strong 1999 -- when ISP rebates and "free PC" deals stoked demand. Now, he says, the second-quarter slowdown reflects a return to more normal, seasonal patterns.
"Historically, the second quarter tends to be one where there’s not a lot of interest in buying computers." Winnitzki says. "It’s past the holidays and before the back-to-school."
Winnitski is looking for PC sales growth to pick up to the high teens later this year.
Meanwhile, PC makers are adopting very different strategies to keep their earnings growth strong. IBM -- the inventor of the PC -- is losing money on its PC operations and seeing its market share shrink. Although demand is booming for its e-commerce services, IBM lost $69 million in the latest quarter on PCs but has managed to cut those losses and expects to break even by year end. Meanwhile, the company is pushing desktop sales to its Web site, pulling back from retail stores and emphasizing laptops, which have higher profit margins.
As IBM leaves the retail channel, Hewlett-Packard is moving to take over that abandoned shelf space. H-P is hoping its strong printer brand will help expand sales of PCs to consumers through retail channels, such as Best Buy Co. {BBY} and CompUSA. The strategy seems to be paying off. H-P rang up U.S. sales gains of 44 percent in the latest quarter -- the biggest gain posted by the top PC makers.
Compaq Computer Corp’s {CPQ} leading position in the worldwide PC market hasn’t helped the bottom line. The company’s commercial PC segment has lost money for the past four quarters and seen year-over-year sales declines for the past three quarters. But after a painful reorganization that involved a shift to direct selling, some analysts think the company has turned the corner. Although PC sales make up less than a third of Compaq’s sales. PC analyst Kurtis King at Banc of America Securities says a move back to profitability in the segment could ignite a big rebound in Compaq’s shares.
Dell Computer, which continues to see strong PC growth, is aggressively pushing its server and notebook lines to make up for the industrywide slowdown. So far, Dell Computer is holding on to its market share lead in the U.S., though it lags Compaq in worldwide PC sales. News of the industry sales slowdown brought lower revenue forecasts for Dell Computer from Merrill Lunch analysts Steven Fortuna, though he left his earnings numbers unchanged.
Gateway has pushed aggressively to develop other sources of revenue, including Internet access, e-commerce and other services. That plan seems to be paying off. In the latest quarter, non-PC business represented some 40 percent of Gateway's earnings, up from just 5 percent a year ago. By the end of the year, the company says those non-PC services are expected to makeup 45 percent of Gateway's profits.
Apple Computer Inc. {AAPL} continues to upgrade its product line to spur sales. The company, which recently posted strong operating profits, blamed its sluggish sales in the latest quarter on customers waiting for a new round of products, including a new eight-inch-square Power Mac G4 introduced earlier this month at the company’s annual Mac World show in New York. The silvery box with a clear enclosure takes up one-fourth the space of most PCs, using a processor that the company says reaches speeds of more than 3 billion calculations per second. Apple Computer also unveiled a new palette of its trademark pastel colors to help refresh sales.
Are slowing PC sales here to stay? Some PC makers are hoping that this year’s rollout of Microsoft Corp.’s {MSFT} new Windows 2000 operating system will spur another round of desktop upgrades -- as Windows 95 and Windows 98 did when they were released. This time around, though, the upgrade cycle is happening more slowly; Windows 2000 hasn’t brought the kind of strong consumer demand that had early adopters lining up at midnight to by the first releases of those earlier upgrades. But analysts still expect that corporate customers will begin upgrading later this year. |
