Businessweek Archives

Personal Computers: Are The Glory Days Over?


News: Analysis & Commentary: Computers

Personal Computers: Are the Glory Days Over?

A fall in business buying hurt Dell--and it looks like a trend

For the past half-decade, there has been one constant in the PC industry: No matter how the fast-changing business battered other players, Dell Computer Corp. kept turning in record-setting revenue and profits growth. That's why Dell's earnings warning on Jan. 26 came as such a shock. The company says that revenue for the quarter that ended on Jan. 28 will come in at about $6.7 billion--$800 million short of analysts' projections. Worse, Chief Financial Officer Thomas J. Meredith advised analysts to slash annual growth estimates to 30%, from more than 40%. "We're trying to set more realistic goals that you can be comfortable we can meet," Meredith told analysts.

What's bugging Dell? Suddenly, the business of selling desktop computers to corporations--Dell's bread and butter is sagging. Prices are creeping downward and demand is soft. Partly, this is short term: After increasing budgets to buy new gear before the Y2K crunch, many companies are now cutting computer budgets. Then there's the long-term trend toward putting tech money into back-office gear to run e-businesses, rather than upgrading desktop systems. "We are very focused on e-commerce," says David L. Johns, chief information officer of Toledo-based Owens Corning. "Our spending on PCs is definitely going down." The share of corporate technology budgets allocated to PCs is expected to fall from 21% in 1997, to 18% this year, says International Data Corp.

Any slowdown in corporate PCs is bound to hit Dell hard. The company receives 40% of revenues from corporate desktops--compared with 21% for Compaq Computer Corp., says Unterberg Towbin analyst James D. Poyner Jr. And given the soft market, Dell will have to work harder to keep its corporate desktop line growing. This year, unit growth should be just 18%, and revenue growth is expected to be just 7%. And, with corporations opting for cheaper desktop PCs--used mostly for Web work--IDC analyst Roger L. Kay figures average pricing will fall 10%.NO RETREAT. Even Microsoft's new Windows 2000 software, to be unveiled on Feb. 17, isn't likely to provide a big pick-me-up, as Windows 95 did five years ago. "Companies have been through [Windows upgrades] enough times to ask themselves, `what did I really get out of this last time,"' says Larry Garlick, CEO of software maker Remedy Corp.

Dell is not about to fall back amid the PC pack anytime soon. The Austin-based company continues to beat its rivals in its key markets. Meredith insists the parts shortages and Y2K-related slowdown that caused the quarterly shortfall are easing. And Dell is zooming past rivals in all the hottest market segments, going from 3% to 16% in servers since 1996. Since it got serious about the consumer market last year--it finally waded into the sub-$1,000 market toward the end of 1999--it has grabbed 5.2% of the home market. In business desktops, Dell is the only major player besides Hewlett-Packard making solid profits.

But the fact remains that Dell's principle rivals have moved faster to lessen their reliance on corporate desktops. HP has stopped chasing corporate market share; it's now focusing more on the booming home market. IBM, whose PC operation lost $1.5 billion in the past two years, is focusing more on supplying underlying technologies. And Compaq, beset with losses and layoffs from its 1997 Digital Equipment Corp. acquisition, is showing signs of revival. During Compaq's analyst meeting on Jan. 28, CEO Michael D. Capellas said 52% of its fourth-quarter revenue came from such "enterprise computing" sales--vs. 32% from commercial desktops.

It's not clear that Dell can match that. "Dell's excellence at selling PCs in some ways becomes a liability when the game moves beyond selling PCs," says IDC analyst Kay. New game, new pressures.By Peter Burrows, with Bureau ReportsReturn to top


Burger King's Young Buns
LIMITED-TIME OFFER SUBSCRIBE NOW

(enter your email)
(enter up to 5 email addresses, separated by commas)

Max 250 characters

 
blog comments powered by Disqus