For years, the computer industry has thrived on a most improbable combination of circumstances: The prices for its wares have dropped steadily, but its profits have remained strong.
The streak appears to be over.
The pressures of cutthroat competition, excess inventory and–especially–softening demand have driven PC makers into a price war. In the last four months, Compaq Computer Corp., Dell Computer Corp. and Hewlett-Packard Co. have reduced prices on even their newest home computers as much as 20 percent, while chip giant Intel Corp. is accelerating its normally methodical price cuts, following indications that it will sell 2.5 million fewer chips than expected this quarter. Business customers, who were mostly denied the benefits of last year’s sub-$1,000 PC craze, are also finally seeing savings.
“Price drops used to occur once a year, then every six months, then three. Now it’s happening all the time,” said Ira Machefsky, a senior analyst for Giga Information Group. “I’m getting to the point where I’m telling people not to buy anything at all for a while because more price drops are coming.”
Hungry companies are fighting for slices of a smaller-than-expected pie. The PC market continues to enjoy double-digit growth, but the annual percent increase has dipped from nearly 24 percent three years ago to 16.4 percent in 1997 to an estimated 13.4 percent this year.
Many of the big computer-industry players are preparing to report their lowest earnings of the decade. And many smaller PC vendors may be out of the market entirely by year’s end.
“People are having problems and it’s not clear who’s going to be the winner or loser,” said Matt Sargent of Computer Intelligence. “But it’s clear people are going to be hurt by it”–with, Sargent notes, a prominent exception: There may never have been a better time to be a prospective computer buyer.
As is often the case with such trends, there appear to be a host of factors, including:
– Asia–It comes as no surprise to the PC industry that sales are down in Asia, but some manufacturers are now seeing a related problem–firms are delaying capital spending because of the continuing uncertainty about what the Asian economic crisis will mean to their bottom lines.
– The software lull–The software industry has traditionally helped fuel demand for more expensive computers by producing spiffy new applications that demand more memory and more processor power. Lately, that hasn’t happened.
– Inventory readjustments–In recent months, PC manufacturers–like many others in the electronics industry–have moved increasingly to a “just in time” manufacturing model, where they build only the products they expect to sell immediately.
– The changing corporate market–Corporate buyers paying only $1,299 for PCs for their kids are balking at paying $2,500 for desktop computers for the main office. Compaq, HP and IBM are offering business desktops below $1,000–some with relatively beefy processors, like the $939 Compaq Deskpro that includes a 200 MHz Pentium with MMX.
“The technology’s gotten so advanced that businesses are discovering they don’t need the latest, fastest computers to do what they need to do,” said Roger Kay, senior research analyst at International Data Corp. “In a growing number of cases, a sub-$1,000 is just fine.”