IP: Problems and Promise for Personal Computers

[David Farber <dave () farber net>]

> Problems and Promise for Personal Computers
>
> December 16, 2001
>
> By KENNETH N. GILPIN
>
>
>
>
> The last 12 months have been horrible for the personal
> computer industry.
>
> It is bad enough that demand has slumped. Most
> manufacturers are saddled with inventory and distribution
> problems, as well as with sales of a product that keeps
> falling in price.
>
> Kimberly Alexy, an analyst at Prudential Securities who
> follows the box makers, took some time last week to talk
> about the industry and what ails it. Following are excerpts
> from the conversation.
>
> Q. Do we really need all the personal computer
> manufacturers?
>
> A. There are 20 to 30 players comfortably in the business,
> and the top three have less than 35 percent of the market.
>
> The market could use some consolidation. But there is no
> reason one manufacturer should buy another. Instead, over
> the last decade, selected vendors have withdrawn from the
> business. Earlier this year, for example, Gateway just
> stopped its overseas business.
>
> Going forward, we will see more companies downsize or
> rationalize their business, but won't outright exit the
> business. I.B.M. (news/quote), for example, has been
> selectively downsizing its operations, withdrawing from the
> consumer personal computer business. They have not been
> terribly aggressive.
>
> Q. The founding families of Hewlett-Packard (news/quote)
> aren't thrilled with the Compaq Computer (news/quote)
> merger. Do you share their lack of enthusiasm?
>
> A. A combination of Compaq and Hewlett- Packard doesn't
> make any sense at all.
>
> Hewlett-Packard has a great printer business. It would make
> sense for them to either emphasize that business or do
> things that build on it, or extend out into storage and
> services. Those are the things Hewlett- Packard needs. With
> Compaq, they are buying a huge personal computer platform.
>
> Q. It seems the last thing we need is more computers. Is
> this still a growth business?
>
> A. Roughly speaking, 65 percent to 70 percent of the
> personal computer market is commercial; the remaining 30
> percent to 35 percent is consumer. Penetration rates in
> this country are around 55 percent, and much lower than
> that outside the United States.
>
> There is a lot of room for new business growth in the
> consumer market, less so in the commercial or business
> market.
>
> But the issue is not growth. The issue is how you make
> money. Essentially, that comes down to business models.
>
> Q. What business model works for personal computers?
>
> A.
> The issue is inventory. In a business where prices fall 25
> percent to 50 percent a year, every week a product is
> sitting on the shelves it is eroding into the vendor's
> profit margin.
>
> Dell, which is building a box fresh and shipping it out the
> door to the customer, doesn't have inventory, and that is
> why they win. Compaq and Hewlett-Packard are the flip side.
> Both of those companies and most of the vendors have built
> channels to retailers, like Circuit City. Dell doesn't have
> a channel; they sell everything direct.
>
> It sounds simple, but it is difficult to change business
> models. To do it, a company like Compaq would have to start
> from scratch and take three steps back to move forward. I
> don't know that they can do it.
>
> Q. Do you like any of the computer stocks??
>
> A. We like
> Dell Computer (news/quote), and have a buy recommendation
> on the shares, and the stock is up more than 60 percent
> this year. We have not been recommending Apple Computer
> (news/quote), but the stock has had a very good year. But
> they had a horrible year in 2000, and the stock sold down
> to very low levels. Then you have Compaq Computer, whose
> stock is down more than 35 percent, and Gateway Inc.
> (news/quote), which has fallen by more than 50 percent.
>
> Q. Years ago, Bill Gates said Microsoft (news/quote) would
> never get into the hardware business. But the X-Box is
> definitely hardware. Is it likely to be a viable
> competitor?
>
> A. I think the X-Box will be viable. It represents the
> convergence between personal computing technology and
> consumer electronics. Over time, in the consumer part of
> the market, the lines between the two will blur more and
> more.
>
> Q. This is a $200 billion business that sells about 130
> million machines each year. Even if the business model
> isn't perfect, won't a recovery in demand help all of these
> companies?
>
> A. A lot of companies have deferred spending, so a pickup
> in demand will help.
>
> If spending comes back, corporations will upgrade their
> machines. That will help Dell, because they do about 85
> percent of their business with corporations. And it will
> also help Compaq, because they are so exposed to the
> commercial end. But it won't help Gateway, which is heavily
> aimed at the consumer market. Ý
>
> http://www.nytimes.com/2001/12/16/business/yourmoney/16INSI.html?ex=1009489820&ei=1&en=e79b3be90e276d8a
\
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