Home PC Sales Passed Peak, Data Say
The market for home computers in the U.S. has passed its peak in terms of total revenue, according to projections released this week, signaling a sea change that is pressuring the earnings and jarring the stocks of the major PC makers.
The new figures buttress a growing consensus of computer company executives and outside analysts that the best days of the consumer PC business have passed, and that growth lies in such markets as electronic commerce and selling specialized, high-end computers to corporations.
Many executives are pinning their hopes on new “smart” devices for the home as well as corporate and foreign sales, although there is disagreement over which, if any, of these opportunities will rescue the industry from decline.
Research firm PC Data reported this week that the average selling price for home PCs sold at retail stores plunged 16% in February from the same month last year, while the number of units sold edged up less than 1%.
The good news for consumers is that Windows-based PCs are selling at an average of just $947, PC Data said. The bad news for manufacturers is that their time in the sun may be over. And intense price competition means that the worst is yet to come.
International Data Corp. projected Tuesday that even though unit sales will continue to climb slowly, revenue in the core home desktop market will slump from last quarter’s record $5.8 billion to $4.1 billion this quarter, staying at roughly that level for the next two years.
“There will be lots more PCs sold, but they will never be sold for as much money again,” said IDC analyst Roger Kay. “That has huge implications for the manufacturers. They have to find other, more profitable revenue streams.”
The negative sentiment has been crystallizing in the last few weeks as analysts reduced their profit projections for most of the major companies.
Dell Computer shares fell 5.9% Monday after Donaldson, Lufkin & Jenrette cut profit estimates for the current quarter to 15 cents a share from 17 cents and said sales growth would slow to 36% from a 38% clip in the fourth quarter. Dell shares sank an additional $2.19 to $35.69 on Tuesday, leaving the stock down 35% from its recent peak of 55.
Micron Electronics, a direct seller of PCs, on Tuesday reported that it expects revenue to drop this quarter.
Compaq had its turn Thursday, when brokerage Piper Jaffray cut profit estimates. IBM was hammered the next day, shedding 5.2% after Morgan Stanley lowered its target for the stock. Compaq inched up 50 cents to $30.63 Tuesday but is down 40% from its 52-week high. IBM fell $1.63 to $165.38.
“It’s a very, very competitive industry. PCs are basically commodities now,” said Ray Gorman, spokesman for IBM’s Personal Systems Group. “Our customers have more choices.”
As if to underscore the point, IBM on Tuesday introduced a low-end business computer, complete with CD-ROM and 433-megahertz processor, that will sell for as little as $859.
Bob Dies, general manager of IBM’s network and personal computers group, said IBM still intends to compete in the home and lower-end business markets because the company can make money in related deals. In home computing, companies are teaming up with Internet service and content providers to sell complete packages to consumers, much in the way that cellular phones have evolved to the point that the service is more important than the equipment.
In the corporate market, IBM wants to keep a foot in the door with lower-priced products while it pitches an array of services including upgrade, maintenance and system management.
“If consumers are getting sub-$1,000 PCs, businesses start to say, ‘Hey, why can’t we get one too?,’ ” Gorman said.
Another looming problem for the industry: Lehman Bros. analyst George Elling expects companies to start delaying computer purchases until after Jan. 1 and concerns about the millennium bug ease.
Dell may have been hit the hardest in recent weeks because it had benefited the most, outperforming all other stocks in the Standard & Poor’s 500 index in the last three calendar years. The company pioneered direct sales to consumers and businesses, growing revenue at 50% for two years until last quarter. Like IBM, Dell has recently begun selling computers for less than $1,000 to stay competitive, even at the cost of eroding profit margins.
Dell is increasing its focus on selling higher-end servers, which control corporate networks, and IBM is emphasizing sales of components to Dell and other computer makers as well as its profitable consulting business.
As the tide has turned, industry executives blame a variety of factors even beyond the intensifying competition, including the difficulty involved in trying to sell computers to the 50% of U.S. households that don’t own one.
It all spells no less than the end of an era.
“Just as we saw the era of mainframes and then of PCs, this is clearly the era of the Internet and e-business,” Gorman said.
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Sales Up, Revenue Down
Despite continued growth in units shipped, the home PC industry has entered a long-term decline in revenue because of sharply dropping prices, according to analysts’ projections. Future revenue and profit growth for PC makers will have to come from related businesses such as services, support and customization.
Quarterly U.S. home PC sales, in millions of units:
2000*: 4.03 million
*
Quarterly U.S. home PC revenue, in billions of dollars:
2000*: 4.6 billion
*Projections
Note: PC sales traditionally spike in the fourth quarter due to holiday buying.
Source: International Data Corp.
