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BusinessWeek: January 10, 2000 |
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Industry Outlook 2000 -- Information
Computers and Chips The Internet explosion is creating once-in-a-lifetime opportunities for innovators who can develop gizmos with the potential to become as commonplace as phones. Even conservative computer companies are finally getting off their duffs and experimenting with new products and business models, says International Data Corp. analyst R.Kevin Haus. These jazzy new Internet products probably won't hurt the PC business much this year. But with the Internet becoming such a big part of everyday life, even erstwhile skeptics realize that friendly, non-PC devices will get a greater slice of the consumer pie. "We're going to focus on PCs and information appliances simultaneously," says H. Weber McKinney, PC chief at Hewlett-Packard Co. Call it the Big Millennial Mind Shift, with the electronics industry taking a giant step beyond the traditional PC-centric world. To be sure, PCs will remain hot, with unit shipments jumping an estimated 19% this year. But come next winter, PCs could be upstaged by a flurry of newfangled Net appliances--not just from relatively unknown pioneers such as TiVo and Research in Motion but from such heavies as Compaq, Gateway, and HP. Fortunately, 2000 will provide a healthy backdrop for the new thrusts. "All of our customers are just doing fantastic right now," says Michael E. Marks, CEO of Flextronics Inc., a contract manufacturer that serves a wide swath of the electronics industry. For chipmakers, all the new-product activity is icing on the cake--adding promises of lucrative new markets to go with the welcome relief from years of overcapacity and soft prices. Sales set a monthly record last October--$13.4 billion--and 2000 will be another best year ever, predicts Walter G. Lahti, an analyst with consultant Integrated Circuit Engineering Corp. Overall, he looks for a 17% increase in chip sales, to $169 billion. That's $25 billion more than the industry's previous peak in 1995. And surging chip sales mean increased demand for semiconductor production equipment, says James C. Morgan, CEO of market leader Applied Materials Inc. "With DVD players and high-definition TVs and all those new applications for the Internet, there's a lot happening out there," he notes. Much of the action is in chips for wireless communications and Net equipment, with more innovations on the way, judging from trends at Texas Instruments Inc., a big supplier of chips for digital phones. Last year, small upstart companies working on new telecom systems bought 30% of TI's output, up from 22% in 1998, says Foreward Concepts Inc. market watcher William I. Strauss. All the new-product development is exacerbating a tight chip-supply situation stemming from recent capital-spending cuts by Asia's chipmakers. As a result, supplies should be tight all year, says Kenneth F. Potashner, CEO of chipmaker S3 Inc. Indeed, prices for flash memory chips--used in digital cameras and MP3 music players--have jumped 50% in recent months. The beleaguered makers of commodity memory chips, led by Korea's Samsung Semiconductor, are also cheering. From 1995 to 1998, their revenues dropped more than 50%, to $25 billion. But the memory-chip business is on the mend. It grew 38.3% in 1999, and sales should increase 33% more this year, to $44 billion, says Dataquest Inc. analyst James Handy. PRICE WAR. For PC microprocessors, the picture isn't so rosy. Demand isn't the problem. Integrated Circuit Engineering predicts growth of 14.4% in 2000, to $32.5 billion, roughly on a par with last year's 14.8% figure. But the price war raging between Intel Corp. and Advanced Micro Devices Inc. could sap profits. Since AMD briefly unseated Intel as the speed champ in August, the two rivals have cut prices more than a dozen times. In addition, both are stepping up development programs and plan to deliver superspeedy 1,000 megahertz, or gigahertz, processors in the first quarter--months ahead of schedule. Still, Merrill Lynch & Co. analyst Joseph A. Osha expects Intel's earnings to rise 12.3%, to $8 billion. Good deals on hot chips should fuel demand for workstations and the computer servers that run corporate networks and Web sites. Sales of Unix servers from the likes of Sun Microsystems Inc. and IBM will climb 6.5%, to $67.5 billion in 2000, says International Data. That contrasts starkly to the negative growth in 1998 and 1999. But the growth prize will go to PC servers. Spurred by Microsoft Corp.'s new Windows 2000 operating software (page 94), they'll jump 26.5%, predicts IDC. PC makers probably will get their holiday from steep, 30%-a-year price declines. Analysts project a drop of just 10% in average price, to roughly $1,200. And given the likelihood of a chip-supply squeeze and high parts prices, PC prices could even rise. There's also less demand for "free" PCs. The percentage of retail buyers willing to sign up for long-term Internet service to earn hefty rebates fell from 4.1% in July to only 1.4% in November, according to Allison Boswell Consulting Inc. Besides, PC demand remains strong. While IDC pegs unit growth at a brisk 19%, that could turn out to be low. "With all the Y2K uncertainty out of the way, I think it's going to be a great year," says G. Carl Everett Jr., senior vice-president of Dell Computer Corp. Analysts look for major gains in laptops and smaller, simplified PCs such as Dell's new WebPC and Gateway's Astro. Apple Computer Inc. is expected to polish off the year with 20%-plus revenue growth. And in Japan, PC sales have also been rebounding. In fact, PC makers are likely to have trouble getting enough chips and notebook displays to satisfy demand. Analysts say fourth-quarter PC production dipped more than 15%, in part because of supply dislocations from the Taiwan earthquake in September. "A lot of the third-tier guys are being forced out of business because they can't get parts," says Gilles Bouchard, operations chief for HP's home-PC division. "I haven't seen that in years." "MAXIMUM REVENUE." Longer term, a bigger threat looms in 2001, when prices head south again. "We're in the moment of maximum revenue right now," says International Data analyst Roger L. Kay. He expects PC revenues this year to decrease $100 million from 1999's peak of $54.7 billion. That's why many PC makers hope to rake in "beyond-the-box" revenues from e-commerce, customer support, and Internet services. For example, Micron Electronics Inc. is diversifying into online storage and Web-site hosting. And last month, Dell took a major stake in allcom Inc., a startup that plans to earn money by connecting consumers and small businesses to for-hire techie problem-solvers. This doesn't mean the companies are giving up on dreams of PC ubiquity. Still, competitors keep popping up in the darnedest places. Connected to a refrigerator, for instance. That's coming soon in the form of a $350 tablet-style device. This newcomer will bring the Net into the kitchen to help plan meals and do financial chores. So computer makers that don't look beyond the heady PC market of 2000 could eventually end up filled with regret. Return to top | |
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  Return to top  Return to top TABLE Positives and Negatives POSITIVES -- The memory-chip market could grow 40%. So-called flash memory will get a boost from digital cameras, MP3 players, and cell phones. -- Dot.coms will snap up record numbers of large computer servers running Unix. NEGATIVES -- Chip-capacity shortages could wreak havoc with PC makers, who may be looking at production shortfalls. -- PC makers will trot out newfangled information appliances. Some new products--and business models--will bomb. Return to top Is There Life before Playstation 2? Ten-year-old Satoshi Kusakabe is a typical Japanese youth. He loves his Pokemon trading cards, Game Boy, and video-game collection. The native of Yamagata in northern Japan owns several dozen software titles and--get this--three video-game consoles: a Nintendo 64, a Sony PlayStation, and a Sega Saturn. So in 2000, will Satoshi buy the new Sega Dreamcast or Sony Corp.'s upcoming PlayStation 2? It's a no-brainer. "I'm getting the new PlayStation," he says. "It's supposed to have the best performance." In five short years, Sony has morphed from a maker of Trinitron TVs and camcorders into the King of Games. The buzz about the new PS2, due in March, is so loud that game-crazed Japanese kids are shunning Dreamcast to wait for Sony. Never mind the fact that the Sega Enterprises Ltd. machine won raves for its speed and mesmerizing graphics, and that it sells for $199, compared to an expected $385 for the PS2. Even in the U.S., where Dreamcast is a hit, many gamesters will wait for the PS2's fall 2000 debut, predicts Ed Roth, vice-president of game market researcher NPD Group. This business is no kiddie game. Total world production of console hardware and software has grown from $10 billion to about $14 billion in the past two years, according to Japanese industry research. Of that, Japanese companies accounted for more than $10 billion in 1999--half of which was exported around the world. In the U.S., console game software alone rang up sales of $3.7 billion. Sales predictions for 2000 range from flat in the U.S. to an 8% or 9% gain for Japan. Until the PS2 actually ships, however, nobody is going to declare Sony the winner. The Dreamcast, with its fast 128-bit microprocessors, has been flying off U.S. shelves since its September launch. It's not the only competition for Sony. Sometime in 2001, it will have to deal with a new Nintendo console, code-named Dolphin, that may run on a 256-bit chip. Around the same time, all three Japanese game makers may be fighting off an assault by Microsoft Corp. Hey, this a heck of an arms race. Somebody really ought to turn it into a video game. Return to top ONLINE ORIGINAL Meet the General Leading Sony's Video-Game Assault You'd think Ken Kutaragi, president of Sony Computer Entertainment Inc., would take it easy and indulge in a favorite pastime -- playing video games. He deserves a break: The PlayStation business he built from scratch is now the Sony Group's biggest cash cow. In the six months of fiscal 1999, ending on Sept. 30, his subsidiary earned almost as much in operating profits as Sony's entire electronics operation, which is 10 times larger in terms of sales. And Sony Computer now rules Game Land, having sold 70 million units worldwide, an industry record, since PlayStation's launch five years ago. But Kutaragi is busier than ever. In the months ahead, he'll be taking the wraps off the new PlayStation 2, a 128-bit machine that boasts mesmerizing graphics and can play DVD-based games and movies. "The first PlayStation succeeded in every way possible," says the 49-year-old computer engineer. "Now, I want to repeat it with PS2 and other sequels." Kutaragi harbors lofty goals. In the years to come, he hopes to position PS2 in living rooms in Asia, North America, and Europe as the digital hub for downloading games, movies, and music sent over broadband networks such as cable. If he succeeds, Sony could emerge as a dominant force in the unfolding world of digital, on-demand entertainment. DREAMCAST NIGHTMARE? Yet its supremacy is hardly a done deal. First, Sony has to fight off Japanese rivals like Sega Enterprises Ltd., which around the world has sold some 3 million units of its Dreamcast, a 128-bit game console capable of delivering near-arcade-quality graphics. Like Sony, Sega envisions a world of multiplayer online games where people will be able to indulge in Matrix-like entertainment. And you can be sure that Nintendo, the company that has given the world Game Boy and Pokemon games, is building its own demolition machine. It has already dropped plenty of hints about its so-called Dolphin project, which analysts believe is aimed at developing a 256-bit machine for 2001. However, Sony could face its most formidable challengers not in Japan but in the U.S. Microsoft is said to be drawing up plans for its own game console and online service in hopes of establishing itself as a hub for deliving digital home entertainment. Kutaragi says he's not concerned. "It's not a case of one company emerging as the sole winner," he says. "We can compliment one another as we create a huge market." SWEET REVENGE. Outspoken and highly creative, Kutaragi isn't your typical manager. He'd probably still be tinkering away in a Sony lab if hadn't been for Nintendo. Back in the late 1980s, he was working on a 32-bit game machine with a CD-ROM drive for Nintendo, then a Sony client and the game industry's titan. When Nintendo suddenly pulled out of the project, a determined Kutaragi convinced senior managers to back his plan to launch the machine and plunge Sony into the unpredictable world of video games. The gamble paid off royally. Today, Kutaragi is one of Sony's top executives, helping President Nobuyuki Idei devise a strategy for the Internet Age. Who know? He may even end up running the entire show. Whatever course his career takes, you can be sure there won't be much time for video games. Return to top |
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