The Forces Conspiring Against PC Sales


It's a tech rite of spring. Each year as the flowers bloom, then fade, chip giant Intel (INTC) unleashes a hefty price cut on the microchips that are the brains of personal computers. This year was no different. On May 27, Intel chopped chip prices in hopes of clearing out aging inventory and stoking demand. The price cuts, ranging from 12% to 43%, couldn't have come at a better time for consumers still anxious about when the economy might turn around. PC makers immediately passed on the savings to customers, mainly by packing bigger hard drives or more memory into existing price configurations.

The stark reality, however, is that this year's cuts will have less impact than perhaps any preceding them. Intel seems to know that: On June 6, it dissapointed markets with a mid-quarter correction when it nudged down revenue expectations for the second quarter to a range of between $6.2 billion and $6.5 billion, down from the previous range of $6.4 billion to $7 billion. After-hours traders sent Intel shares down nearly 14%, to $25, on June 6. The tumble is continuing on June 7, with the stock trading at $22.15 during midday.

Here are the problems: Corporate technology spending continues to lag, and chips have already gotten so fast that most users can barely discern the improvements as new ones are introduced. Plus, consumers, who have been shouldering the burden in PC sales, are now throwing more dollars at DVD players and other new digital toys. Worse, the PC slump appears to be deepening overseas in one-time growth markets that now face their own economic difficulties, such as Latin America and Asia. Europe's wobbly economy isn't helping either.

DREADFUL MONTH. It's still likely that the PC sector can manage a mild rebound, eking out small growth in the second half of 2002. But that's hardly encouraging news for an industry still bumping along the bottom of its worst slump in 17 years.

According to tech consultancy IDC, in 2001 total worldwide unit shipments of PCs fell 5.2%, the first year-over-year decline since 1985. Price wars hammered revenues in the sector, dropping them 13.9%, to $183 billion. The bleeding slowed in the first quarter of 2002 as worldwide sales picked up.

However, signs already show that April was a dreadful sales month. Retail sales tracker NPDTechworld tallied a startling 22.5% sales decline in desktop PCs in April, 2002, vs. the previous year. And on June 5, the Semiconductor Industry Assn. projected that chip sales should grow only about 3.1% in 2002. That same day, Hewlett-Packard, now the world's largest PC maker with Compaq under its belt, said it expects only 7% to 9% growth in the technology sector in 2003 and 2004.

LITTLE MOTIVATION. Why no big bounce? The loss of processor envy, for starters. The thrill of buying a new computer and seeing marked increase in the speed of Web surfing and other computing tasks has been gone for some time now, especially as chip speeds have exceeded 2 gigahertz. "Since most customers have sufficient performance in their existing machines, there is not a lot of motivation to buy," says Roger Kay, director of client computing research at tech consultancy IDC. "The fact that processors are getting more powerful right now is much less of an incentive than it used to be."

The dynamic is particularly pronounced in Corporate America, where the vast majority of employees use basic software that barely taxes even Pentium 3 chips. Add to that suspicions about Microsoft's new licensing plan, which aims to charge a yearly fee for each Windows desktop, and lots of companies are putting off as long as they can purchases of new machines.

At the same time as the need for speed has waned, a raft of cool and vastly more usable electronic toys have flooded the market. From personal video recorders to affordable high-performance digital cameras to DVD players, these products have grabbed public attention and dollars at precisely the same instant that the PC's allure has flagged. That's of particular concern in the U.S., where consumers have so far been the only source of strength in PC buying as businesses have become tightfisted over any tech spending.

"TASK-FOCUSED" BUYERS. NPDTechworld is expecting a decline in retail dollars spent on desktop PCs in 2002 as compared to 2001, yet research director Stephen Baker believes that video consumer electronics will earn double-digit growth.

His suspicions seem to jibe with a customer shift that PC makers are seeing. Before, people were buying PCs because they didn't have a computer or needed a faster machine. Now, they're buying new computers to pursue more specialized tasks. "More and more of them are coming in and saying, 'I need a computer because I want to get a broadband connection,' or 'I need a compute to rip CDs.' It's more task-focused than feature-focused," says Mike Stinson, vice-president for mobile products for PC maker and retailer Gateway (GTW).

Other, more subtle, factors might also be at play. In the consumer sector, increased prices on broadband services might be tamping down new signups for faster Net connections. That could really hurt new PC sales because high-speed Web surfing remains one of the biggest reasons why folks who still cling to their 3-, 4-, or 5-year-old computers would want to upgrade.

RETURN TO DOUBLE DIGITS? Then there's the notebook computer market, which has been steadily closing the performance gap with desktops and is now cannibalizing that market. Bigger displays on the portables and prices that aren't much higher than similarly configured desktops have conspired to make mobile computing more attractive. "We have seen over the last few years a slow migration from the desktop to the notebook platform," says Charles Smulders, vice-president for hardware platforms at Gartner.

That's a daunting list of challenges. And yet, Smulders and other analysts expect a return to low double-digit sales increases in 2003 and beyond for PCs. Some of that will come as the U.S. economy finally gets back on its feet. According to Dell (DELL) spokesperson Mike Maher, his company estimates that 150 million PCs right now are 3 years old, and most of them will need to be replaced if their owners want to migrate to Windows XP.

Still, the potential growth rates in 2003 and beyond will still lag behind the go-go years when the PC industry managed to post increases far greater than 10%. Obsolesence and the economy, rather than innovation and consumer excitement, will drive future sales. Until the PC industry and software makers can come up with more compelling reasons for people to buy new computers -- something both sectors continue to struggle with -- neither price cuts nor speedier chips will be sufficient to create big demand. By Alex Salkever


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