Complacency of Consumers Leaves PCs on Store Shelves

It appears that the personal computer boom is finally over.

After five years of stunning growth, the last three months of this year are showing the first fourth-quarter drop in U.S. retail sales of PCs since 1995. PC sales are expected to plummet 15% this quarter from a year earlier, according to PC Data of Reston, Va.

In the last year or so, retailers Office Max and Good Guys have stopped carrying computers to focus on such faster-selling, more profitable products as color printers and DVD players. At CompUSA, the big sellers this holiday season have been hand-held machines, digital cameras and computer accessories.

And a spot check of other stores around tech-savvy San Francisco the week before Christmas turned up few browsers and fewer buyers.

Typical consumers were like Darren McCleary, 39, who has a creaky 4-year-old computer at home. Instead of upgrading to a speedier machine, he was combing the shelves of a Circuit City for the elusive $499 Compaq iPaq Pocket PC, a hand-held organizer that was out of stock in many stores.

“It’s fast, you can put it in your pocket and you can get on the Internet,” McCleary said. He said his computer upgrade can wait for prices to fall some more--and they will.

In recent weeks, every major computer maker has warned of poorer-than-expected sales, and analysts say the news will stay bleak well into next year.

In a report last week, consulting firm Gartner Dataquest said: “It [is] unlikely that the U.S. consumer market will be very active until [the] fourth quarter 2001.”

Dell, Gateway, Compaq, Apple and other PC makers blame a variety of factors for the slowdown, including consumer fears of an economic slowdown and the increasing attractiveness of hand-held devices that offer e-mail and can surf the Web.

To some extent, the PC companies also are victims of their own success.

About 60% of U.S. households already have PCs, and many of the remainder will never get them. And the PCs that have been available for the last two years are, for most consumers, good enough.

“For the home user, the average word-processor/e-mail/Microsoft Office/America Online user getting over 600 megahertz on a chip, there is no need [to buy a faster] 1-gigahertz machine,” said Michael Erbschloe, vice president of Computer Economics Inc. in Carlsbad.

PC prices haven’t fallen much in the last year, but the add-ons included in the packages have improved.

Rewriteable compact disc drives, which allow portable recording from the Internet, are now semi-standard in PCs. Those drives have been popular with consumers drawn to Napster and other services that allow free and easy sharing of music on the Web.

But demand for some features that were expected to help sell higher-priced PCs has stalled. The need for video-quality chip speeds isn’t as strong as predicted because fewer than 5% of homes are equipped with broadband connections--by their high-speed cable or phone lines--that can handle movies over the Internet.

As a result, the roughly 32 million PCs shipped worldwide in the third quarter “fell off a cliff” to about 25 million this quarter, said analyst Eric Ross of Thomas Weisel Partners, an investment firm in San Francisco.

Although some computer executives look to broadband as the next big sales catalyst, that day is not imminent. So PC makers will have to compete by keeping their costs down and shoring up product quality.

Computer vendors also are facing an unfamiliar coldness on the part of corporate buyers.

Chief information officers at major U.S. firms expect to spend only 8% more in 2001 than they did this year, according to a survey released last week by Morgan Stanley Dean Witter.

And desktop computers ranked among their lowest priorities, coming in 17th out of 21 spending categories. (Database software and marketplace software claimed the top two spots.)

Not surprisingly, computer companies now are offering rebates of as much as $300, with retail stores throwing in an additional $50 or more. That’s about the same as a year ago, but analysts predict bigger bargains will come soon.

Consumers have been less motivated by other rebates worth as much as $400 for signing up for three years’ worth of Internet access from one provider or another. Those rebates have been difficult to collect for many consumers, prompting lawsuits and probes by state attorneys general.

Consumers like McCleary are biding their time. And price cuts in the next eight weeks could be stunning, analysts said.

Without the gift-giving incentive for buyers, and with an unwanted buildup of inventory, many manufacturers are likely to be desperate to get products off store shelves so they can introduce new versions.

“Vendors that do not implement strong incentives to clear inventory will likely face drastic price cuts across their entire consumer PC lines in first quarter 2001,” Gartner Dataquest said in its report.

EMachines, the discount computer maker based in Irvine, said last week that it would lose 19 cents to 23 cents a share in the fourth quarter (before some noncash expenses), compared with the 4-cent loss analysts were expecting. The company also said lower sales and increased discounting would hurt results for the first half of next year.

Several analysts said they intend to buy new computers in January or February.

“HP has been very aggressive on pricing--they’ve been accused of selling below cost,” said computer stock analyst Daniel Kunstler of J.P. Morgan in San Francisco. “There are very good deals out of Dell as well. I’m going to buy a PC after Christmas.”

What will bring the industry back to life?

Microsoft’s next consumer operating system, known as Whistler, is scheduled for an August release and will supposedly offer an improved user interface and greater stability.

That should help PC sales some, said Tim Bajarin, president of computer consultant firm Creative Strategies in Cupertino, Calif.

But for a real lift it will take a transformation in the way the computer is used in the home. For example, Bajarin and others said, PCs may become a central controller for a network of portable communicators and home devices that interact with televisions, music systems and even lighting.

That sort of application, however, is widely considered to be years away from broad usage. And the dour mood of consumers this season isn’t going to do much to speed that development forward.