Pricing Shakeout Looming for PCs

Corporate IT unfazed by upcoming reductions.

A major PC pricing shake-out is in the making as OEMs, reeling from the first slump in fourth-quarter sales in five years, move to clear out warehouses full of unsold computers and revive sales.

But while price cuts and rebates—some up to $300—may lure consumers, PC makers shouldnt look to corporate buyers to help shore up their bottom lines. IT executives who have spent the past 18 months or so building up their hardware infrastructures are now turning their focus to other areas, such as software and storage.

Scores of IT professionals contacted by eWeek over the past several weeks said their existing hardware should suffice for in many cases at least the next year to two years.

"Even though prices are decreasing, I have a hard time thinking that people here are going to need more-powerful PC systems than what they have today—at least for another year," said Joel Salamone, director of MIS for The Motley Fool Inc.s Web site,, in Alexandria, Va. "The one area where we are going to be increasing spending is on storage, by far."

The Motley Fools focus on data storage capacity reflects a widespread surge in storage buying by Internet-tied companies.

In a recent survey of CIOs by Morgan Stanley Dean Witter Discover & Co., PCs came in a low 17th of 21 spending categories. Instead, executives said theyll focus more on database, marketplace and e-commerce software.

Rising concerns over a slowing economy are also spurring IT managers to cut back their spending, according to two new surveys. One, by Morgan Stanley, forecast an 8 percent increase in technology spending in 2001, after it climbed 12 percent in 2000. More than 15 percent of the companies surveyed said theyll actually spend less.

Another study, by Merrill Lynch & Co., found that while corporations on average plan to spend more on IT in 2001, many have reduced their budgets from just two months earlier, reflecting fears of a recession.

"The current feeling is that spending will be flat or slightly down for us," said Joe Furmanski, manager of systems and planning at UPMC Health System, in Pittsburgh, which has more than 25,000 employees and has bought thousands of computers in recent years as it expanded and acquired hospitals. While more acquisitions may be on the horizon, Furmanski said his need for new hardware may actually decrease.

"We just buy what we need; we dont buy because the prices dropped," said Doug Long, network coordinator for Mericare Medical Group, in Fargo, N.D.

Reflecting its awareness of tightening IT budgets, Gartner Dataquest in late December reduced its outlook for professional PC sales, calling for 12.8 percent growth in 2001, or about half the nearly 25 percent growth it projected two months earlier.

"We got the first warning of a sales slowdown around Thanksgiving, and things have just snowballed from there," said Gartner Dataquest analyst Todd Kort, in San Jose, Calif. "It appears that even the rebates are not spurring sales."

In contrast with the robust fourth-quarter sales PC makers have enjoyed in recent years, retail computer sales were down 17.5 percent in November compared with a year ago and are expected to be at least 15 percent lower in December, said market research company PC Data Inc., in Reston, Va. It would mark the first fourth-quarter drop since 1995.

Perhaps hardest hit by the downturn was Compaq Computer Corp., which research company ARS Inc. said had 10.5 weeks worth of inventory at the end of October, far higher than the industry average of four weeks. While Compaq refused to publicly address the issue, one executive privately said the company had seven weeks of inventory in the channel.

Hewlett-Packard Co. is also believed to be battling high inventory levels, due in large part to a surge in retail sales last year following the departure of IBM and Packard Bell NEC Inc. from retail stores. High inventory levels put a financial strain on manufacturers and retailers because computers depreciate quickly, and stocking unsold computers pushes up warehousing costs.

With sales falling below expectations and inventories already high, PC makers are offering $500 rebates on systems, with retailers adding on another $100 in savings.

Even Dell Computer Corp., which uses a made-to-order system that eliminates the need to carry inventory, has joined in price cutting. Dell, Compaq and HP representatives refused to comment on their 2001 outlooks, citing the traditional quiet period before their quarterly earnings announcements.

How far prices will actually fall depends on how long it takes PC makers to rid themselves of excess stock and how strong computer sales are overall. But, so far, price cuts have done little to boost sales.

"These guys arent selling anywhere near what they need to do to clear out inventory," said ARS analyst Matt Sargent, in San Diego.