PC Business' Big Five May Turn Into Big Three
By Jim Seymour
Special to TheStreet.com
5/31/01 4:10 PM ET
I mentioned here the other day and again on a Yahoo! chat a few days later that I think Dell ( is going to keep the pricing pressure on its competitors until someone -- and maybe more than one "someone" -- cracks and exits the business.
My speculation then (and now) is that a retreat from PCs will come from Hewlett-Packard (HWP:NYSE - news - boards), but I've also commented several times that I think IBM (IBM:NYSE - news - boards) is a candidate for bailing on the PC business, too.
I've had a lot of letters from readers asking about that. Why would an H-P or an IBM quit the PC business? And why would those two, of the PC business' Big Five, be the ones to bail first? All this is clearly worth a longer discussion, so here goes.
Right now the Big Five PC sellers are Dell, Compaq (CPQ:NYSE - news - boards), Hewlett-Packard, IBM and Gateway (GTW:NYSE - news - boards). Dell holds the units lead by most ways of counting, but Compaq is generally ahead in revenues. No surprise: Dell has pushed its prices down hard, both increasing its unit sales and decreasing its profits, while Compaq has only recently begun to compete more aggressively, but still not with prices as low as Dell's.
Michael Dell has made it perfectly clear that he intends to use the present difficulties in the PC business to build market share, even at the cost of some erosion in Dell's profits, and anyone who believes he doesn't want to drive out some competitors must not be listening when he talks. In its most recent report two weeks ago, Dell posted first-quarter revenue of $462 million, slightly down from the year-ago quarter's $466 million -- though it kept quarterly earnings per share at 17 cents, level with the first quarter of 2000. Dell's gross profit margin for the quarter was 18%, down noticeably from the year-earlier quarter's 20.5%.
And Then There Were...
Industries like the PC business tend to devolve toward a Big Three, maybe a Big Two. Big Fives have generally proved unstable and, over time, unsustainable. I think we'll see those forces at work in PCs soon, with Dell and Compaq unquestionably staying on top and Gateway coming in third.
Hewlett-Packard has become a staple of the discounters and office-supply people. Along with Compaq, H-P does well at stores such as Best Buy, Circuit City and Staples.
But in this case, doing well means selling a lot of units ... with little or no profits.
The desktop PC business has become a bed of quicksand for computer makers. The rush to under-$1,000 computers, which began four years ago, has shifted almost all of many PC makers' sales into that low-to-no-profit zone. Especially for companies such as H-P and Compaq, which rely so heavily on retail sales -- with all the attendant distribution costs of getting to retail and the give-up of additional margin points to the retailers themselves -- making a buck on sub-$1,000 PCs is extremely difficult.
H-P has been struggling lately, of course, across the board. The reorganization that CEO Carly Fiorina launched a year and a half ago has still not paid off. Fiorina has acknowledged that the double-digit growth figures she was able to deliver last year are in trouble. H-P is already the slowest-growth player in Unix servers and only a marginal presence in storage systems.
And expenses, which soared under her reorganization (all the more painful at a company once legendary for controlling expenses), have been a particular embarrassment.
H-P needs to shed unprofitable, dead-end businesses, and desktop PCs and probably notebooks as well are exactly that for Hewlett-Packard. I think Fiorina knows that, but she and her management team have been in denial. H-P doesn't need to stay in PCs for any strategic reasons -- it's no longer in effect buying shelf space for its very profitable laser printers and printer-supplies lines with its PC line -- and soon enough, I believe, Fiorina will beat a retreat from PC losses.
One down.
And IBM? CEO Lou Gerstner has been famously quoted lately about the madness of chasing a no-profit business. Sending a signal, Lou?
In the past, IBM has argued that it's strategically important for Big Blue to stay in the PC business for account-control reasons.
But those reasons are fading -- make that "have faded" -- and IBM doesn't belong in PCs anymore. For every corporate manager it charms with its excellent ThinkPad notebooks, it burns 10 shareholders who keep asking themselves why the heck their company is still in this dead-end business.
So I think sometime between now and his retirement next spring, Gerstner will announce that IBM is getting out of the PC business. Sam Palmisano, current president and COO at IBM and Gerstner's designated heir, likely would support that decision -- he's a sensational, tough-minded manager -- but Gerstner could take some of the heat off Palmisano by announcing the withdrawal from PCs as his last, grand gesture.
Think that isn't the kind of big gesture Gerstner would like to make as he goes gently (and rich, deservedly, from engineering IBM's extraordinary comeback) into retirement and a career of consulting and board seats? Have you read Dresdner Kleiner Wasserstein analyst Stephen Dube's mock "General Gerstner's Farewell Address," comparing George Washington's eight years as the first U.S. president with Gerstner's term at IBM? It's just what Uncle Lou would like to do.
Two down.
So what about Gateway? Will this be a three-horse race or an exciting battle between two giants? Gateway's unlikely to depart the biz (as, say, Micron did a few weeks ago). It doesn't have any other business to retreat to, as Micron did into Web hosting. (Talk about going from the frying pan into the fire...)
Likelier, I think, we'll see Gateway in third place, continuing to struggle but holding on. The Dell-Compaq duopoly will be on top, and the niche players, most notably Apple (AAPL:Nasdaq - news - boards), will bring up the rear.
My confidence factors in these guesses? I'd assign about 2-to-1 odds in favor of H-P's departure over the next 12 months, and probably go 3 to 2, maybe a little better, on an IBM retreat.
Either way, and especially if both leave for greener pastures, this is an extraordinary opportunity for both Dell and Compaq. Dell's superior model and greater aggressiveness -- and the increased market share it's rolling up right now -- would give it the stronger hand. But both Dell and Compaq could begin to look to stronger profits.
And finally, the Dell crunch in pricing would ease. Dell doesn't need to crush Compaq. Heck, in a two-horse race, Dell would need a healthy Compaq to keep the feds off its back. |
