March 05, 2002 17:27
PC Firms Look beyond Low Profits for Chance to Push More Lucrative Products
By Sam Diaz, San Jose Mercury News, Calif.
Mar. 5--Walter Hewlett claims that personal computers are a dead-end business, and that's one reason why the Hewlett-Packard director opposes HP's planned purchase of Compaq Computer.
And it's clear that with many households already owning one, two, even three computers, PCs are a mature business. Last year, the number of PCs sold in the United States dropped 12 percent, the first decline since personal computers went mainstream in the mid-1990s. Worldwide, sales fell 5 percent. And profits are razor-thin.
So why would any company stay in the PC business?
The answer: to sell more profitable products and services that complement the PC, from HP's inkjet printers to Sony's camcorders.
"We've known from the beginning that this is not just about participating in the commoditization of the PC business," said Mark Viken, senior vice president for Sony's Information Technology Products division. "We try to make it more of an entertainment-centric device than a utilitarian PC device. It's not about the individual PC itself but the total solution." Some manufacturers, such as Gateway and eMachines, are pushing low prices and customer support in hopes of gaining market share.
Others, such as Sony and Apple Computer, continue to offer innovative technology and a trusted brand name, despite showing little growth in overall market share.
Even Texas-based Dell Computer, the ultra-efficient manufacturer that leads the PC market, is putting more emphasis on sales to corporations, hoping to challenge enterprise leader IBM in sales of servers and PCs for the workplace.
"There are 164 million computers out there that are 3 or more years old. There is a pent-up demand," said Dell spokeswoman Colleen Ryan.
HP and Compaq have a common strategy -- a merger -- to handle the sluggish PC market while preparing for expected growth through the next generation of buying.
With the merger -- scheduled for a vote by HP's shareholders March 19 -- HP hopes to boost its line of PC-related products, especially printers, and sell other products such as digital cameras and scanners. But it also obtains from Compaq a business that continues to be dominated by Dell and appears to have little growth left.
Dissident director Hewlett, who is leading an effort to block the deal, says HP should concentrate on the printer-and-ink business. He argues that expanding the PC business would dilute HP's profits, and the benefits of selling a cluster of related products aren't enough to offset the PC profit drain.
HP executives argue that the combined resources of the two companies would actually strengthen HP's lucrative printer and ink business by pushing a variety of products that encourage consumers to make more printouts, whether of digital photos or a favorite Web page.
Tim Bajarin, president of high-tech consulting firm Creative Strategies in Santa Clara, said that the changes in the consumer PC business would not be good for a new player just entering the game.
But, he said, there's plenty of opportunity for existing PC powerhouses.
"Is the PC business viable? If a company is already in the PC business and has a strong customer base, the answer is yes, the existing players can still make money," he said. "But what's important -- whether you're Dell or HP or one of the others -- to making money over the next five years is surrounding computers with services, consulting and the next generation of Web-based applications." Sony, as much a brand name as HP, is keeping its PC side of the business alive by marketing the PC as a digital hub for other Sony products -- its cameras, camcorders and audio devices, for example.
Likewise, Apple, which also carries single-digit market share, continues to attract computer users who have specific uses in mind, notably multimedia products such as digital video and music.
"When the rest of the industry was retrenching and figuring out how to trim costs and the employee workforce, we were investing and getting the new Mac OS X operating system out there," said Greg Joswiak, senior director of hardware product marketing for Apple.
"We were investing in key applications -- iTunes, iDVD, iPhoto -- and introducing the iPod. Now, we've got the new iMac." Apple can maintain higher profit margins because its machines cost more.
But are consumers willing to drop $1,500 or more on a high-end Sony or Mac when they can pick-up an eMachine or Gateway for about half that price?
"In the end, we're willing to give up market share rather than lose money," said Bob Davidson, senior vice-president of product marketing for eMachines.
"EMachines has been playing the very low end of the consumer business at the retail level and they did pretty well this last quarter," said Roger Kay, director of client computing at high-tech research group IDC. "But the average selling price is so low that they'll have to do some real magic tricks to make money at it." Gateway, too, will need some magic to make money or gain market share in the immediate future, especially now that last year's cutbacks forced it to abandon the international market, which is one of the bright spots in the PC world.
Last year, as PC sales fell in the United States, they grew in Latin America, Eastern Europe and the Pacific Rim.
"Working for an international company like HP, you see China and places like that where the PC penetration in the home is very, very low," said Duane Zitzner, president of HP's Computing Systems division.
An estimated 65 percent of U.S. homes have at least one PC. And while many of those will upgrade or add another for a working spouse or school-aged children, analysts predict that only about 10 percent of U.S. households will be in the market for a first PC in the coming years.
"This is an issue of saturation vs. penetration," Kay said. "The U.S. market is highly saturated while only two-thirds penetrated." "Clearly this is a replacement market, but that's not the end of the world," Kay said. "The auto industry is effectively a replacement market. It's enough to support a small number of makers, not 20."
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