To say that the PC market is going through tough times is an understatement. Now we know why Sullivan was wanting to spin off Intellesale two years ago. The question still remains... how is ADSX to sell Intellesale in this environment and to whom?
biz.yahoo.com
Thursday July 19, 12:15 am Eastern Time
TheStandard.com
Boxed Out
By Mark Boslet
It can't get much tougher for personal-computer makers. A savage price war is slashing profit margins as demand in the business and consumer markets is stalling. Manufacturers are responding by desperately cutting costs, including laying off thousands of employees.
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The result has been big losses for major PC makers, with only Dell Computer eking out a profit in the first quarter. Just last week, Compaq Computer CEO Michael Capellas increased his layoff target to 8,500 from the 7,000 he announced in April.
The industry's bottom line may be even more startling: The market may no longer be big enough for all of Dell's four largest competitors - Compaq, Gateway, Hewlett-Packard and IBM. Speculation is rising that one or more of them may follow second-tier PC maker Micron Electronics' exit from the market in June.
Rarely are price wars as intense as this year's struggle. By some estimates, prices for business PCs have fallen by a third, to about $1,200 from nearly $2,000 in the fourth quarter of last year. The average cost of a consumer machine - $868 - isn't much different from last December's price of $897, but the product now comes crammed with expensive features, such as recordable CD drives and extra memory. The bells and whistles have severely cut into margins and forced PC makers to work overtime to devise ways to squeeze more costs from assembly lines.
Ever since Dell began cutting prices during last year's weak Christmas selling season, the company's strategy has been a classic economic gambit: Use price to gain market share and drive weaker competitors from the business. Dell is using the efficiency of its direct-sales model against the more cumbersome businesses of Compaq, Hewlett-Packard and IBM, all of which sell machines through distributors or retailers even as they promote direct sales.
Dell's build-on-the-fly strategy has been aided by an equally withering price battle over PC parts. Chip suppliers Advanced Micro Devices and Intel have been undercutting each other in the microprocessor market. In April, Intel introduced a high-speed, top-of-the-line 1.7 GHz Pentium 4 at $352. Two years ago, a similar flagship chip might have come out at three times the cost. "The pricing environment is brutal," admits AMD spokesman John Greenagel, whose company recently copped to missing Wall Street's second-quarter growth and earnings targets, blaming sharply lower selling prices.
Costs for disk drives and memory chips, made by companies such as Micron Technology, are also down. The price of 64-bit DRAM - or dynamic random access memory - collapsed from near $9 in the middle of last year to about $1.50. Dell is able to react to these price drops more quickly than its rivals and cut what it charges for machines, sometimes more than once a day.
RUSSIAN ROULETTE - PC STYLE Manufacturers are sweating out their pinched profit margins. Top PC Makers World Market Share U.S. Market Share Survival Strategy Dell Computer 12.8% 23.0% Started price war to gain share Compaq Computer 12.1% 13.9% Reducing costs, clearing out inventory Hewlett-Packard 7.3% 9.8% Stressing profitable growth IBM 6.2% 5.2% Left retail market, promoting direct sales NEC 4.5% N/A Consolidating PC units to boost profits Gateway N/A 8.5% Launching cost-cutting campaign Sources: Companies, Gartner Dataquest
The impact of the PC price war has been devastating to the industry. Analysts estimate that even Dell's gross margin is now below 10 percent, less than half of what it was a year ago. For a computer selling for $1,000, Dell makes less than $100 - not exactly a formula for big profits. Indeed, the company's $462 million in first-quarter net income was down slightly from last year. Dell since has said that revenue for the second quarter will be down 3 percent to 5 percent and that 5,700 employees will be let go.
Still, Dell is faring better than Compaq, Gateway, HP and IBM, which all reported losses or breakeven results from PC operations for the first quarter of 2001. Compaq's loss on PCs was $82 million; Gateway had an operating loss of $86 million. HP said results were near breakeven. The losses limit the companies' ability to keep pace with Dell. "We are being very competitive on pricing," says Dave Zabrowski, an HP vice president. But, he adds, "the PC business is always a tough business, and we don't have an open checkbook to gain market share" by selling PCs below cost.
Accordingly, to cut costs, HP is going from five North American factories to two. And it's revving up its capability to ship products - such as notebooks from its facilities in Taiwan - directly to customers. The company also has passed along component price savings to consumers. "HP is committed to the PC business," Zabrowski says.
Spurred by the challenging market, Compaq's Capellas has vowed to streamline his supply chain and reduce second-quarter PC inventories at distributors so deeply that sales would suffer from slower reorders. "In today's environment, it is imperative to rapidly cut costs," he says.
The industry's aggressive cost-cutting is coming at a difficult time. Market researcher IDC projects worldwide shipments will climb only 5.8 percent this year, compared with 15.6 percent last year. Unit sales in the saturated U.S. market could decrease for the first time, by more than 6 percent. This spring, Intel buoyed spirits by forecasting a consumer sales rebound during the back-to-school and Christmas seasons. But AMD's weak second-quarter results - the company said earnings would be between 3 cents and 5 cents a share when Wall Street was looking for 20 cents to 32 cents - make that promise look less likely. Meanwhile, cash-strapped business buyers show a continuing reluctance to replace desktop machines.
This year's slow market should come as no surprise. The PC has become commoditized, much like consumer electronics staples such as the television and telephone. Consumers look less at features and more at price when buying.
"In the early 1980s, PCs were just like the Palm is now," says Charles Ferguson, who coauthored Computer Wars and whose startup Juice Software makes PC programs. "They were obviously the coming thing." Now, however, "they're not new, not hip, not young. They are old fuddy-duddies you just assume are always there."
But there are signs the PC is more resilient than the soft market suggests. Household penetration in the U.S. rose a surprisingly strong 3 percent in the final six months of 2000 to 60 percent, an all-time high. And as of January, consumer buying intentions had not fallen off. Ten percent of households remain "extremely likely" to purchase PCs in the next six months, the same as in July 2000, according to consumer research firm Odyssey.
With expectations that another 139 million PCs will be sold this year, the box business is still worth fighting over. "The market is certainly slower this year than last, but we are seeing plenty of demand out there from a consumer standpoint," says Dell sales director Tom Vogl. "We don't think the PC market is dead by any stretch."
Dead, no. By most accounts, the PC will be around for years to come. Some PC makers, on the other hand, may not. |
