E-Business Commentary -- PC Industry Stuck In Neutral

Where do personal computer makers go from here?

We've seen the best of times. Now the only question is, is this the worst of times? For those in the $180 billion personal computer industry, there is little question that the current state of the market is stagnant. Unit sales this year are expected to be almost flat, with 128 million PCs shipped, versus 125 million computers shipped last year, according to a leading IT research firm. Some say the PC market is saturated, so that everyone who needs and can afford to buy a desktop or laptop machine already has one. Microprocessors in the current generations of PCs in use are fast enough for most uses, and many companies and individuals see little need to buy new machines, preferring to wait until new applications force them to trade up. Some observers see a longer PC life cycle, as corporations and consumers continue to tighten their belts. Seven out of 10 PC purchases are by businesses, but the average corporation has trimmed its IT spending like a whittler carving a toothpick out of a log. All of this has forced PC manufacturers to cast an ever-wider net to come up with new ways to increase sales. They're employing new strategies, new markets, new sales channels and more aggressive marketing. Dell Computer Corp., for example, is so hungry to find new markets for PCs that in August the company announced that it would sell low-end, unbranded computers to computer resellers with sales of up to $5 million that focus on small businesses. What's interesting is that the so-called "white box" market was one that Dell had traditionally eschewed. The shift, observers say, is a strategic change for a company that worshiped direct sales and viewed middlemen the same way a postman looks at a Doberman. And there's the rub. Dell has grown its industry-leading volume based on low price. Suddenly the company is getting its feet wet with resellers, whose bread and butter is based on being able to charge more by providing some added value to the end customer. Go figure. Dell also is extending itself into other markets as well. CEO Michael Dell recently confirmed plans to enter the printer and handheld computer businesses. With $31 billion in sales in the latest fiscal year, Dell is doing the best of any PC maker. The company recently reported second quarter revenue that was up 11% from last year. That's not too shabby when you match it against overall sales for the computer industry that were off 10%. For an industry that grew by leaps and bounds for the last two decades, being down 10% is about two clicks this side of disaster. Elsewhere in the PC business, Gateway Inc. also is changing course by shifting to building stylish machines, rather than the ubiquitous, one-look-fits-all clones. In its new advertising campaign, Gateway pits its Profile PC directly against Apple Computer's iMac. Even Gateway's ad copy -- "Think Smarter" -- is a takeoff on Apple's longstanding "Think Different" campaign. The ads show a Gateway Profile PC alongside an iMac. While the Gateway's Profile PC leapfrogs the Apple machine, the ad claims that the Profile bests its rival in power, storage and choice of software. Gateway's pricing also takes a slice at Apple, with the cheapest Profile 4 PC selling for $999, versus Apple's cheapest flat-panel iMac selling for $1,299. Gateway, one of the hardest hit PC manufacturers, is struggling with a sharp drop in revenues. The company forecast a pretax loss of $200 million to $250 million this year. Unfortunately, so much of the high-tech portion of the economy rides with the PC industry's fortunes. If they're manufacturing and selling fewer PCs, then orders for semiconductors, disk drives, capacitors, and a host of other components are down. Likewise with semiconductor manufacturing equipment. And so on. You get the picture. For PC manufacturers, the best of times came in the 1980s and 1990s and went away in the 2000s. They had better hope the worst of times also are in memory. Doug Bartholomew is IW's Senior Technology Editor. He is based in San Francisco.

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