PC Slump Leaves Vendors Up in Air

Downturn looks open-ended in '01.

As the year comes to a close, major computer makers are stinging from the sharp slowdown in PC sales, a trend that fueled a flurry of warnings over the past couple of months and dealt hard body blows to already-struggling stock markets.

The downturn is expected to continue into the first quarter of next year, but how far it reaches into 2001 will depend on a number of factors, ranging from corporate IT budget decisions to the economys health to how quickly companies migrate to Windows 2000. All of these, plus a serious slowdown in corporate PC upgrades, have negatively affected the vendors.

Although such OEMs as Hewlett-Packard Co., Compaq Computer Corp., Dell Computer Corp. and Gateway Inc. are predicting a positive overall 2001—despite warnings of slower growth for their fiscal fourth quarters—some in corporate America arent buying it.

"Weve been in a pretty tight [financial] situation probably for the last year," said Bob Cancilla, director of corporate systems planning for Republic Indemnity Co. of America, in Encino, Calif. "Were being asked, just like everybody else, to hold the line on spending."

That trend seems to be spreading to consumers as well. And because its happening during what is traditionally a lucrative holiday shopping season, many OEMs were forced to redo their earnings predictions for the quarter, which wraps up in late December or January.

But slower PC sales isnt the only thing impacting OEMs. Businesses budget constraints are affecting companies use of outsourced services as well. That could further hurt PC makers, nearly all of which have sought to boost their services revenues to offset the slowed sales growth. "Where in the past we might have brought in some additional resources, today were stretching the staff," Cancilla said.

While a continued slowdown could mean falling prices for buyers, companies still are looking to stretch their dollars. Another way is by keeping PCs a little longer.

"We bought more machines than we should have last year ... so well be buying a little less than normal this year because of that," said Marshall Fernholz, procurement manager for the American Medical Association, in Chicago.

But others just have little reason to upgrade their PCs, saying that even older systems have more than enough processing power to handle most of todays business applications.

"Weve definitely found that when we put a PC in, we have a longer life cycle before we have to replace it," said David Howell, manager of IS at PED Manufacturing Ltd., in Oregon City, Ore.

Indeed, Intel Corp.s production of ever-faster chips and PC makers production of ever-faster systems may come back to haunt them, since software makers have yet to produce applications that take advantage of 1GHz-plus processing power.

"I think the software is further behind the hardware than weve ever seen it before in this industry," said Kevin Knox, an analyst with Gartner Group Inc., in Stamford, Conn. "You look at whats out there—Windows 2000, Office 2000, and all the latest and greatest stuff—and you could probably run all that on a 400MHz system pretty well."

The AMAs Fernholz said theres increasing doubt about the need to regularly upgrade systems.

"Were on track to refresh about a third of our systems per year," he said, adding that "there is less pressure to upgrade systems because the systems are already ahead of the software."

A central theme in the optimism of PC makers is the belief that the migration to Windows 2000 will accelerate next year, with companies upgrading to new equipment.

"Ive been in this industry now for 18 years, and every quarter it gets harder from a competitive perspective," said Ann Livermore, president of HPs business customer organization, in San Jose, Calif. "So Im not sure its going to be any different going into 2001 or 2002 than it was moving from 98 to 99 to 00." Livermore expects HP to meet revenue growth estimates of 15 percent to 17 percent, although its fourth-quarter earnings missed analysts estimates by a dime.

Not everyone has the same view. "The boom years are over," said Republics Cancilla.