NOVEMBER 12, 2002
SPECIAL REPORT: A PC REBOUND?
URL:http://yahoo.businessweek.com/technology/content/nov2002/tc20021112_4177.htm
Why PC Makers Are Saying "Next Year"
While 2003 isn't likely to see a boom, here's why it should offer a marked improvement in sales for this beleaguered tech sector
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David Guzman is the kind of executive that PC companies both love and hate. The chief information officer of Owens & Minor (OMI ) in Richmond, Va., a distributor of medical products, Guzman plans to replace 50% of his company's 2,000 personal computers over the next year. The bad news? His oldest PCs are 104 months old and still perfectly fine for some of the jobs they have to do. In fact, Guzman has only 360 PCs that are less than three years old and is replacing machines mostly for high-end users.
Even worse, Guzman sees no end to the lengthened lifecycles that have put a brake on PC sales. Those cycles "have been getting longer for us -- from three years to four, and even five or six. We only replace PCs when there's a business need for more speed or power -- or if they break," says Guzman. "It's our intent to continue to squeeze as much life as possible out of every single PC purchase." The kicker? Guzman doesn't plan on adding to his PC fleet, so his purchases will be strictly replacements.
Guzman's outlook makes few provisions for unforeseen stimulants of PC sales -- just as no one foresaw the Web as a major booster a few years ago. Yet his attitude, while by no means universal, is typical. Lots of U.S. companies are looking to replace their PCs in the coming year, mainly because the ones they have are aging fast. But those same companies are also looking to pry more use than ever out of whatever they buy. That, plus continued reluctance by Corporate America to spend on technology, will translate into slow growth in U.S. PC sales in 2003, on top of a dismal 2002.
ALREADY BOTTOMED? Most of the industry's growth will come from Asia, where PC penetration per household still lags behind that of the U.S. Tech consultancy IDC is forecasting that worldwide unit sales will be flat or increase by a measly 1% for 2002 with a far healthier 8.4% increase in 2003, according to IDC PC analyst Roger Kay. But he thinks those projections may come down in light of the ongoing info-tech malaise.
One measure of the industry's recent trauma is that even these diminished growth numbers will qualify as a big improvement over 2001, when global PC shipments fell by about 4.2%, and U.S. shipments dropped by 11.4%. That marked first time in more than a decade that unit sales declined. It's starting to look as though the PC market bottomed in third quarter, when PC shipments in the U.S. grew 5.8%, vs. a 12.4% drop in the same quarter a year earlier, according to tech tracker Gartner, when the September 11 attacks savaged the IT market.
This year's third quarter was the first positive period for unit shipments in the past five quarters. Gartner reports that the Asia-Pacific region posted a 9.6% bump in unit sales of PCs in the third quarter.
VULNERABLE GAINS. The upshot is that things are clearly improving in the PC market, which recorded $183 billion in 2001 sales, according to IDC. However, the improvement isn't happening fast enough to please investors in most PC companies. And even the latest gains may remain vulnerable to broader economic forces, the specter of a possible war in Iraq, and a slowdown in consumer spending that hasn't happened yet but that everyone fears.
One big entry on the positive side of the ledger could be the XP factor -- Microsoft's new Windows XP operating system -- which appears to be looming larger this year than last. Microsoft reported a 26% gain in third-quarter sales, plus a 112% increase in profits, both driven largely by sales of its XP and Office software. Redmond's gain clearly had much to do with a new model for PC software sales that forces companies to sign long-term licensing deals now or pay stiff prices for a la carte software upgrades later.
This forced upgrade cycle appears to also be forcing up PC sales, as companies that opt to pay Microsoft now rather than later must buy new replacements for one-quarter to one-third of their machines to run the most current Windows software. "Certainly, we weren't happy with the changes in Microsoft's licensing, but it did fuel a move toward more aggressive PC deployment," says James Hughes, chief information officer of National City Corp. (NCC ), a Cleveland finanical-services conglomerate.
NOT UP TO SNUFF. The uptick in PC sales also reflects the fact that many of the hundreds of millions of PCs running worldwide are just plain old: Dell Computer (DELL ) spokesman Bob Kaufman says the No. 1 PC maker believes more than 100 million PCs in the U.S. alone are at least three years old. Most of those machines, he adds, can't run the newest Windows software.
The education and government sectors also appear to be picking up. "K-12 schools are buying wireless networks," says Chris Rother, vice-president for the public sector arm of high-tech distributor CDW, which clocked a 31% increase in public-sector sales during the third quarter.
Wireless is just one of several wild cards -- niche markets that are helping boost PC sales overall. "Another potential driver could be an uptick in voice and video traffic over the Web and to desktops," says Michael Sandifer, portfolio manager for the Amerindo Technology Fund, which controls $1.5 billion in assets.
LACK OF URGENCY. So called voice-over-IP phone systems (which use Internet technology to send voice calls) are growing in popularity as is video-conferencing to and from the desktop. "That new productivity and connectivity enhancement is useful to a lot of people," says Sandifer. Finally, Microsoft's .Net (dot-net) technology, which aims to convert material in multiple databases into a single format, could prompt companies to upgrade their PCs.
Times being what they are, of course, the list of potentially negative news is almost as long. For starters, many analysts doubt that suddenly strapped consumers feel much urgency to buy a new PC. The D.C.-area shootings, the slow economy, and the recent slide in consumer confidence make individual buyers, who account for 40% to 50% of total U.S. PC sales, less likely to pick up a new machine in 2003, according to IDC analyst Kay, who puts U.S. unit-sales growth to consumers at only 1.2% in 2003. That's compared to far more robust projections of 5.7% growth to U.S. businesses.
The ever-lengthening replacement cycle is another problem. It now sits somewhere between three and four years. But Giga Information Group analyst Rob Enderle thinks that it could ultimately be as long as eight years -- much like the normal cycle for telecommunications equipment. "A three-year cycle is too costly and labor-intensive," says Enderle. For Owens & Minor's Guzman, a nine-year replacement cycle is feasible on machines that use applications over the Internet and don't require powerful desktop processors. "All you need is a browser, and that doesn't require extraordinary computing power," he says.
"STRUGGLING." Finally, those who hold the IT purse strings at big companies are generally holding them tightly. While most companies have indicated that they plan to increase IT spending slightly in 2002 and 2003, PCs remain one product that they often feel they can wait to replace for awhile. "Companies don't have any money," Enderle says. "They are struggling through with what they have."
That has forced PC makers to adopt a strategy of trying to differentiate their machines based on factors other than the traditional one: speed. In early November, IBM (IBM ) announced a series of software enhancements such as a rapid-restore capability, which allows users to push a single button to restore crashed laptops and override the dreaded Windows blue screen. IBM hopes these types of enhancements will make its products stand out and solve problems, such as help-desk calls, that cost companies money. "The very first thing customers ask you to show is a return on their investment," says Robert W. Moffatt, the general manager of IBM's personal and printing systems group.
On the consumer side, Sony (SNE ) has designed special multimedia applications to wrap around the Windows operating system on its Vaio PCs to make it easier for Sony machines to record on DVDs and store photo images. "PCs have been sold on the basis of speed," says Mark Hanson, vice-president for the popular Vaio line, which has gained market share during the past year's PC malaise. He adds: "We're trying to get away from that measure because consumers are struggling to understand what the benefits of it are."
NEXT BIG THING? And what about the newly released tablet computers? PC makers debuted these modified laptops that double as digital writing tablets in late October. Much improved over past failures in this category, tablets are expected to be a hit item and could add a percentage point to PC sales if they catch on with corporate road warriors.
Still, tablets and IBM's and Sony's tactics may merely warm up the PC market, rather than make it glow. But after the past couple of years, just about any recovery in 2003 will be welcome news for the struggling industry.
By Alex Salkever, Technology editor for BusinessWeek Online, with reporting by Olga Kharif |
