Interesting article about PC demand:
The Real Reason the PC Makers' Growth Is Slowing
By Barry Ritholtz
Special to TheStreet.com
12/11/00 1:17 PM ET
URL: thestreet.com
It's fast becoming a quarterly ritual: the boxmakers' confessions. This past week saw an unholy trinity of preannouncements
from Gateway (GTW:NYSE), Apple Computer (AAPL:Nasdaq) and Micron Electronics (MUEI:Nasdaq). Next,
Hewlett-Packard (HWP:NYSE) lowered its forecasts for home PC sales in the U.S. for 2001.
Credit Suisse First Boston piled on, lowering its projections for unit sales at IBM (IBM:NYSE) and Dell (DELL:Nasdaq).
Goldman Sachs chipped in, lowering revenue expectations for Microsoft (MSFT:Nasdaq). Last but not least, Intel
(INTC:Nasdaq) warned that revenue and earnings will come up short in the fourth quarter.
I don't believe the slowing U.S. economy, weakness in Europe, the reverse wealth effect or even Alan Greenspan is to
blame. The actual fault is something a bit more nefarious: it's the PCs themselves. If you can afford a computer, you already
own one.
To make matters worse, you don't need or even want a new one. PC owners -- who used to upgrade their machines every
two years -- no longer find compelling excuses to do so. Even Michael Dell observed in an article in The New York Times,
"There haven't been a lot of great reasons to buy a new computer."
To the frustration of the boxmakers, they were this close to having that great reason: P2P, or peer to peer computing. P2P
was going to be the next "killer app." Programs like Napster and Scour (as well as Aimster and Gnutella) held out hope
that boxmakers might halt the slide in their growth rates.
If only the recording industry hadn't litigated these peering start-ups to death, they may very well have provided that
desperately needed "great reason to buy a new computer."
Napster's main attraction -- its community has access to virtually the entire catalog of new music -- is ideally suited to high-end
PCs. Scour's unique ability -- to search for video media based on content, creator, subject matter, actors or any combination
of factors -- also demands a powerful machine.
For the PC industry, there's not much else on the horizon: High-end gaming is migrating to dedicated boxes like the Sony
Playstation II or Sega Dreamcast. Digital photography is a growing but relatively small niche, while streaming media is not
quite ready for prime time. The only bright spot was digital video editing: Even there, only Apple's iMovie and Sony's VAIO
Digital Studio are actually driving sales. Apple's preannouncement suggests that even that sales driver may be weaker than
expected.
From Upgrade Enthusiasm to Upgrade Fatigue
The PC makers face a very different demand curve then they did a few years ago. Intel and Microsoft used to take turns
driving a new upgrade cycle every other year. From the mid-'80s to the latter half of the 1990s, boxmakers could count on
either a hot new CPU (central processing unit) -- or a significant operating system (OS) upgrade -- just about every 18
months. That virtuous cycle kept PC demand high for more than a decade.
Those days are over: There hasn't been a compelling upgrade of an operating system or a CPU since 1995. Windows '98 was
a bug fix for Win95, while the latest operating system from Redmond -- Windows Millennium Edition -- certainly didn't have
crowds lining up at midnight to buy it. MacIntosh users are delaying Apple purchases until its new operating system comes out
in February 2001.
On the CPU side, buyers have wised up to the megahertz game: They've found out that a few hundred megahertz increase
does not really improve speed or power much. Add to the mix the new Pentium 4 -- it's actually hurting today's PC sales.
Savvy consumers have learned that each new CPU generation brings a sharp price drop on the prior processors. Today,
Pentium IIIs are more than adequate for all but the most demanding usage.
Where are the New Buyers?
With more than half of all U.S. households owning PCs, there aren't a whole lot of newbies left to sell PCs to. Home
computing does not demand more raw power. Typically, consumer PCs are used for Web surfing, email, word processing and
a game or two. Perhaps the occasional Excel spreadsheet, or Quicken, is used to manage the family budget.
Today's home systems -- even if they're two or three years old -- are fast enough and powerful enough to do everything these
users need, and then some. Even the least expensive computers sold since '98 (a $799 iMac or a $599 eMachine) have much
more capability than the median user requires.
Corporate owners are even less likely to upgrade. Last year, as part of their Y2K readiness plans (remember those?), they
completed a major hardware replacement cycle.
Intel and Microsoft no longer create the demand for new PCs the way they once did. The entire industry desperately needs a
"new, new thing" to drive sales.
P2P: The Killed Killer App
For a while, the PC industry had a glimmer of hope to combat all of these negative trends: Peer-to-peer computing. P2P was
going to be "da bomb" -- the killer software application that would make PC owners run out and buy new machines
immediately. Napster grew to more than 40 million registered users faster than any other program in history. Scour -- imagine
Napster plus video -- could even surpass that. It's exactly what the industry has been lusting for.
At least, that's how it looked 12 months ago. The peering trend was all set to move consumers toward high horsepower -- fast
-- RAM-laden and heavily accessorized machines. That may even happen one day yet. But Scour has been shuttered pending
the sale of the company's assets in bankruptcy, while Napster is embroiled in what seems to be never-ending litigation.
Peer-to-peer computing won't be driving PC sales any time soon -- certainly not if the recording industry's lawyers have
anything to say about it.
This relentless litigation by the Recording Industry Association of America, or the RIAA, and the Motion Picture
Association of America, or the MPAA, has crushed the file-sharing companies. Start-ups can ill-afford the distraction and
financial burden of legalized warfare. Unfortunately for the computer industry, the RIAA and MPAA are much better funded
than the P2P companies. They can afford litigation ad infinitum.
One can only wonder how PC sales might have held up if the computer industry came riding to the rescue of outfits like
Napster or Scour.
Peering, Downloading and Mulitmedia Configured PCs
The more than 40 million downloaders who have registered for Napster regularly push their systems to their limits. Ever since
they gained the opportunity to sample free music over the Internet, they have done so with a vengeance.
The recording industry calls it copyright theft, but for lots of people, Napster is really a form of interactive, peer-rated, digital
radio. A friend or Napster community member recommends some music, or maybe you see a song with lots of Napster traffic.
All it takes is a quick download to see if you like it or not. If you do, you can buy the CD; if not, you hit the delete key.
Before you start screaming piracy and property rights, consider the legitimate lure of Napster to nonpirates like myself: I've
purchased so many lousy CDs on the basis of a single song heard on the radio or MTV, it makes me hesitant to buy music on
that basis anymore. Napster gives me the ability to check out an entire disc from the comfort of my home before plunking
down my $15.
Despite the music industry's vehement -- and implausible -- denials, Napster is the only reason CD sales have spiked upward
for the first time in many, many years.
To the PC industry, the uncertainty over Napster (and other peering software) killed the killer app. Prior to the RIAA's
litigation, downloaders had but one thing on their Christmas lists: massively configured monster PCs. I know dozens of folks
(mostly guys) who were all set to buy the PC equivalent of Godzilla: 1.5 gigahertz machines with 80 gigabyte hard drives, 512
mb of RAM, Firewire, CD burners, optical drives -- the works. These power users were ready to lay out cold, hard cash for
the most expensive, highest-margin, most profitable machines the industry could assemble.
No longer. I know no one willing to spend $4,000 or more for a beast configured for multimedia downloading, ripping, editing
and burning -- not while there is so much uncertainty as to file-sharing's immediate future. These purchases are on hold until the
litigation ends ... perhaps a few years hence. Why spend four large bills for something whose primary purpose may disappear
tomorrow?
And that's really a shame, at least from the point of view of the boxmakers. Once these monstrous machines find their way into
homes, they create an awesome case of PC envy that generates more sales up and down entire product lines. Just as
broadband envy has been driving consumers to DSL and cable modems, trickle down computer envy helps the boxmakers.
It's a very real phenomena, and it helps sell PCs.
Until P2P finds some measure of legal standing - or another "killer app" comes along -- expect the growth rates of the PC
industry to continue to drift downward. |
