PC Industry’s Heyday May Be Over in U.S.
The crumbling $25-billion merger plan of Hewlett-Packard Co. and Compaq Computer Corp. may be signaling that America’s personal computer industry is nearing the end of its era, analysts and economists say.
Like the once-great companies that dominated the world’s production of steel, televisions and memory chips, the PC industry has been drubbed into the realization that even being the biggest in the world does not guarantee success against plummeting prices, high labor costs and global competition.
The situation has been underscored by a sobering statistic: For the first time since the PC was introduced two decades ago, sales have fallen this year in the United States.
The rejection Friday of the HP-Compaq merger by HP’s largest shareholder group, the David and Lucile Packard Foundation, has reinforced the message that there is no salvation in simply getting bigger.
The deal could still go through if large institutional investors rally behind it, but many analysts see that as unlikely.
“The merger is failing because . . . it’s a strategy to save the past,” said Joel Hyatt, a business professor at Stanford University. “The strategy to build the future is almost always through innovation.”
How well PC companies execute that strategy may spell the difference between a new surge of success--or irrelevance--for some of technology’s most important players.
Judging from history, one key lesson is that sometimes losing the battle can mean winning the war.
For those smart and nimble enough to grasp the opportunity, abandoning the world of cheap, commoditized computers could lead to the next generation of technologies and services, analysts say.
They may have little choice. In an era of razor-thin profit margins, the fight for market share has become a furious race to the bottom for every PC company except Dell Computer Corp.--the master innovator not in PC technology, but in manufacturing and distribution.
At Gateway Inc., for example, the average selling price of a desktop computer fell this year to $1,460 from $1,850 in 2000. The company lost $520 million in the last quarter. Facing similar pressures, Compaq suffered a $499-million quarterly loss. Even Dell, the only PC maker to gain market share this year, saw profits plunge 36% in the last quarter.
Worldwide, the number of PCs sold is expected to drop to 130 million this year from 132 million in 2000, according to a report from market analyst International Data Corp. The primary reason for the drop is a steep decline, estimated at 13%, in U.S. sales.
“Now [the PC business is] 100% inventory control and product flow,” said Bradford DeLong, an economic historian at UC Berkeley. “It’s the same as Wal-Mart.”
DeLong compares conditions in the PC industry to wrenching upheavals that reshaped other once-dominant U.S. companies when they failed to innovate in the face of sweeping competitive changes.
Stodgy Industries Lose to Innovators
Starting in the 1960s, a complacent steel industry was gradually devastated by newcomers from Japan, Korea and Brazil. The upstarts won huge segments of the global market partly because of lower labor costs, but also by innovating. They built smaller, more efficient and profitable “mini-mills” to replace the city-sized behemoths that dotted the American Rust Belt.
In the 1970s, U.S. companies dominated the television manufacturing industry. But as fundamental changes in TV technology ended, Asian nations with a knack for manufacturing commodities took over.
Hyatt said when something can be mass-produced at a low cost to consumers, U.S. technology companies must move on, radically change or die. “That’s been the history of progress,” he said.
Most of the PC industry seems to have been left flat-footed as it has faced this new reality.
Experts point to the model of microprocessor giant Intel Corp. as a possible way out for PC makers.
The dominant supplier of microchips that form the brains of PCs was once the leading producer of memory chips--a cheap but essential computer component.
In the mid-1980s, Intel saw that government-supported Japanese competitors were rapidly capturing its market, and its own high cost structures made further erosion inevitable.
Intel Chairman Andy Grove called the moment a “strategic inflection point.”
In response, Intel made the boldest move in its history. It abandoned memory chips, which at the time provided most of its revenue. The company slashed its work force and threw its engineers into microprocessors--a costly component that Intel correctly predicted would remain profitable for many years to come.
The threat facing HP and Compaq is not foreign, but it’s equally severe, analysts say: Dell’s efficiency is squeezing sluggish competitors out of the marketplace. Meanwhile, small, no-name producers of “white box” computers are squeezing the profits out of the PC business. Together, the generic makers and Dell are to PCs what Japan Inc. was to steel and memory chips.
To survive, HP and other PC companies may have to “make the tough, hard decisions that Intel made: to jettison the past and look to the future,” Hyatt said.
Services May Be Wave of the Future
Some analysts suggest that the future may lie in costly server computers that manage networks of PCs, and in services to organize an increasingly complex world of business technology.
Unlike PCs, services are less likely to become a commodity business that is driven by relentless price competition, said Paul Gottlieb, an economist at Case Western Reserve University.
IBM holds a commanding lead in services--one reason that it has weathered the current technology downturn better than nearly any other large company.
Ironically, HP Chief Executive Carly Fiorina had promised just such a strategy when she assumed command of the company in 1999. She tried to acquire the consulting business PriceWatershouseCoopers for $18 billion last year, but abandoned the plan in the face of investor criticism.
Compaq’s services business, which it inherited from its 1998 acquisition of Digital Equipment Corp., posted a $284-million profit last quarter on revenue of $1.9 billion. But Wall Street seems to see the HP-Compaq merger only as a combination of massive but struggling PC divisions.
Still, experts say services alone can’t save struggling PC makers such as HP. Only the next big device--one that can replace the PC--will do that.
Hand-held computers, Web-surfing appliances, Internet cell phones and souped-up game consoles have all been hyped as the next big thing. All have been revealed as pretenders to the throne.
The next great wave of innovation may instead come from unrelated fields, such as nanotechnology and biotechnology, Hyatt said.
