Justin Sykes finally has a digital home. The 27-year-old Brit, who works for the U.N.'s International Labor Organization in Geneva, has used PCs for years at school and in the office but has never owned one. Now, like millions of Europeans this year, Sykes has succumbed to the call of the Internet and plunked down $1,800 for an Apple computer. He plans to surf the Net, but also to watch DVDs and store digital music and photographs. His new toy is no desktop monster, though: Sykes joined the craze sweeping Europe for notebook PCs. "I decided if I was going to buy a home computer, I might as well get a laptop," he says.
Thanks to plunging prices and enticing features, Europeans are snapping up notebook PCs at record rates. In the third quarter, they purchased more than 3.1 million machines, a staggering 53% increase over the same period in 2002, says market researcher IDC in London. That compares to just 31% growth in the larger U.S. market. Overall, that made Europe the world's fastest-growing PC market, with unit sales up nearly 20%. Taiwan's Acer Inc., the No. 4 brand in Europe, recorded the biggest sales gains (55.5%), followed by No. 2 Dell Inc. (DELL) (29%). Hewlett-Packard Co. (HPQ), by far the market leader, managed a 17.6% gain, thanks in part to a near-tripling in sales of consumer laptops. "We haven't seen numbers like this in three years," says Karine Paoli, London-based research director for IDC's European personal-computing group.
What's behind the surge? Growing Internet usage and digital convergence -- cameras, music, video, and the like -- certainly play a role. But the real driver is price. Not long ago, consumers in the Old World regarded laptops, costing upwards of $2,000, as expensive luxuries for corporate road warriors. Now, many models cost less than $1,500, and some are under $1,000. Brian Gammage, a vice-president at researcher Gartner Inc., figures half of the Europeans who purchased notebooks in the third quarter were first-time buyers. In countries like Spain with relatively low PC penetration, "we're seeing users hop right past desktop PCs directly to laptops," says Gammage.
The implications for the PC business are huge. Home PC penetration in Europe has long lagged behind the U.S. Even this year, it will hit just 21%, vs. 60% in the U.S., says IDC. But Europeans' new infatuation with notebooks could help close the gap -- and accelerate a worldwide shift to portable PCs. "We've been talking for years about the trend toward notebooks," says Kasper Rorsted, managing director for Europe, the Middle East, and Africa at HP. "Now it has finally hit this year." HP reckons consumer notebook sales could overtake desktops within two years.
Unfortunately for PC makers, swooning prices mean that revenues aren't climbing as fast as unit sales. IDC figures European laptop prices fell 25% in the third quarter vs. the same period in 2002, wiping out nearly half the unit-sales gain. That takes a bite out of profits, too, because notebooks carry higher margins than desktops. Lehman Brothers Inc. (LEH) analyst Daniel T. Niles says price pressures and higher costs for components could squeeze HP's operating margins from 1.5% to just 1.3% in its fourth quarter.
PILING ON TO THE NET
Still, many outfits linked to the PC business are feeling a lift. Swiss peripherals maker Logitech (LOGI) booked 17% higher revenues in the quarter ended Sept. 30 thanks to strong sales of mice, Webcams, and speakers. Buoyant PC demand was one of the reasons cited by Ulrich Schumacher, CEO of Munich-based Infineon Technologies, for the chipmaker's return to profitability in the third quarter.
No sector stands to gain more than the Internet. In the past year alone, 10 million more Europeans have piled on to the Net, bringing the total to 83 million active surfers, compared with 126 million in the U.S., says researcher Nielsen//NetRatings (VNUVY). What's more, the number of broadband subscribers in Europe has doubled in the past year, to more than 18 million. That's boosting results for Internet service providers such as France's Wanadoo and Germany's T-Online.
E-commerce also is surging. Forrester Research figures total online sales in Europe will top $42 billion this year, a 23% increase over 2002. EBay has already seen its European sales volume soar 85% in the past year. And Europe's leading online shopping-comparison service, Paris-based Kelkoo, says the number of visitors to its Web site in September topped 20 million, more than triple that of a year earlier. "We're going to have a very hot online Christmas-shopping season," predicts CEO Pierre Chappaz.
Could anything cool the European laptop market? Analysts fret about shortages of liquid-crystal displays because of demand from competing products, such as flat-panel TVs. There also are signs that higher demand could spike costs for some components, which in turn could force up notebook prices. But manufacturers, eager for fourth-quarter sales growth at any cost, may swallow the difference even at risk to their profits. One way or another, this romance looks set to stay hot. By Andy Reinhardt, with Ellen Groves, in Paris