Taking Inventory of the PC Industry’s Recent Troubles

Is this a speed bump or an offramp?

That was the disconcerting question confronting the computer industry last week as companies made a wide range of forecasts for sales in the coming months.

The even more disconcerting answer may be that it’s both.

Analysts and investors struggled to interpret a wave of corporate announcements that were often contradictory but unanimously pessimistic.

Intel Corp. and CompUSA Corp., for example, each signaled that sales in the current quarter would fall short of previous estimates (which were already conservative), sending their stocks plummeting. Intel shares sank 13% for the week; CompUSA shares tumbled 21%.

But the two companies diverged on the reasons for their sales shortfalls.

CompUSA, the Dallas-based computer store chain, said its problems arose mostly because “the average selling price of personal computer systems has continued to decline.” In other words, more people were flocking to the sub-$1,000 PCs introduced last year.

Intel, whose chips power 85% of the world’s PCs, suggested its woes were largely due to a temporary inventory glut and all but ruled out the sub-$1,000 category as a culprit. Santa Clara, Calif.-based Intel said its top-priced Pentium II chip is enjoying the fastest roll-out of any microprocessor in company history.

“If you were seeing a shift to the sub-$1,000 category,” said Intel spokesman Howard High, “then you would think the Pentium II wouldn’t be doing so well, because it really doesn’t go in that category.”

Further, he pointed to the troubles of Advanced Micro Devices Inc. and National Semiconductor Corp., chip makers that thrive on the sub-$1,000 market but have also warned of sales drop-offs.

Confused? So are many people. But Intel and CompUSA are probably both right.

“It’s a double whammy,” said Roger Kay, analyst at International Data Corp. in Framingham, Mass.

There is an inventory glut that is temporarily stalling orders of Intel microprocessors and other products, Kay said. The glut was largely caused by major PC makers shoving inventory into the channels during the fourth quarter to finish 1997 with a bang.

Indeed, Compaq Computer, the No. 1 PC maker, said late Friday that its first-quarter profit will be wiped out as it cuts prices to clear bloated inventories.

But long-term, there is an undeniable trend toward cheaper machines, and that will force the entire hardware industry to ramp up volume just to maintain revenue.

IDC estimates that sub-$1,000 machines, a category that barely existed two years ago, will account for 31% of PC shipments this year. That might be particularly difficult on Intel, which has been slow to adapt to the shift.

The good news for hardware makers is that nobody seemed to be fretting about overall consumer and corporate demand for computers. Executives at big distributors, including Ingram Micro Inc. in Santa Ana and Merisel Inc. in El Segundo, said the market remains strong.

“We are not at all alarmed,” said Ingram President and Chief Operating Officer Jeff Rodek.