Slump Worsens in PC Sector

What PC makers had hoped would be a temporary drought is turning into a drawn-out famine.

What PC makers had hoped would be a temporary drought is turning into a drawn-out famine.

PCs are just not selling as well as they used to, and the prolonged sales slowdown is inflicting severe pain on the industrys biggest players. PC sales to both consumers and businesses for the first quarter were even worse than anticipated, and research firm IDC now expects the U.S. PC market to grow less than 2.2 percent from 2000 to 2001 — a septic shock for an industry accustomed to 15 percent to 20 percent annual growth.

The drop-off is forcing Dell Computer, which recently became the largest PC maker on the planet, to shed 3,000 to 4,000 jobs — about 10 percent of its work force — over the next six months. Those cuts, announced last week, come on the heels of the computer makers 1,700 layoffs earlier this year.

Meanwhile, eMachines, a battered low-cost PC maker in Irvine, Calif., last week put itself on the block. The company said it has retained Credit Suisse First Boston to "evaluate strategic alternatives," including a possible sale. In another sign of the sectors distress, Micron Electronics this month exited the PC business, selling its PC unit to Gores Technology Group in Los Angeles.

Whats slamming the brakes on PC demand? Part of the blame must be attributed to the broader economic downturn in the U.S. But analysts suggested that hard times would have hit the PC industry anyway because, simply put, there are not many reasons for businesses or consumers to buy PCs right now.

"The drivers [for PC sales] were even weaker than we expected, and the barriers were much stronger," said Roger Kay, manager of IDCs PC hardware research.

One factor hammering corporate PC sales was the unexpectedly low uptake of Microsofts Windows 2000, introduced a little over a year ago. Gartner Group estimated that, on average, companies upgraded fewer than 10 percent of their Windows 95, 98 or NT machines to Windows 2000 last year — roughly half initial expectations. And at this point, many corporations will probably hold off on large purchases of PCs to wait for Windows XP Professional Edition, which Microsoft said is due Oct. 25.

Another reason for low PC demand is that more than half of all U.S. households already have one. And most PC applications dont run any better on the newest, fastest processors, canceling out one of the main reasons for upgrading.

Analysts predict further consolidation among PC companies, as well as further price cuts by Compaq Computer, Dell and Gateway as they wrestle for market share. One thing is certain: The surviving PC companies will be walking a precarious tightrope for the next several months. "In this market, you dont want to make a misstep," Kay said. "You could be cruising along and somebody miscalculates inventory, and then youre in real trouble."