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PC weakness lingers
August 29, 2001: 1:24 p.m. ET

Despite price cuts and new features, PC sales continue to suffer
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NEW YORK (CNNfn) - PC makers recently have been struggling through what many are characterizing as the harshest business conditions the industry ever has faced.

And recent data suggest that a meaningful upturn is still a way off.

Faced with flagging worldwide sales and a saturated market in the United States, computer makers in the first half of this year tried to stimulate demand by waging a bitter price war that has weighed heavily on all their profits.

While the pricing moves have been successful in some respects Dell Computer, for example, widened its market-share lead during the second quarter through its aggressive pricing they have done little to stimulate overall market demand.

In fact, recent reports have shown that unit shipments of PCs in the second quarter fell roughly 2 percent from the same period a year earlier, marking the first time the industry had contracted on a year-to-year basis in at least 15 years.

Worsening economic conditions, cutbacks in corporate spending and the lack of a compelling reason for consumers to upgrade their existing systems were the primary factors driving the downward trend.

And industry analysts at high-tech research firms Gartner Dataquest and International Data Corp., which had been expecting some turnaround in the third quarter with strength in the fourth quarter, recently have backed away from those expectations.

  It continues to be a very difficult market, and until we see an economic upturn, we should continue to expect that to be the case.  
  Charles Smulders
Gartner Dataquest
"It continues to be a very difficult market, and until we see an economic upturn, we should continue to expect that to be the case," Dataquest analyst Charles Smulders told Wednesday.

Currently, roughly 76 percent of U.S. homes have a PC. In business, the penetration rate is about a 95 percent.

"The economy is compounding saturation issues in the installed base," Smulders said. "So I think until we see consumer confidence improve and the general economic situation improve, then we should not expect the upturn."

Even when the elusive upturn does come, Smulders said, he would not expect it to last very long. Considering the level of saturation in the market, both in the U.S. and abroad, there will be a spike in PC sales when economic conditions improve. But that will be from a replacement cycle, and the opportunity for new shipments will remain relatively small, he said.

In the current quarter, Smulders said he expects year-to-year PC unit shipments to decline again. In the fourth quarter, he expects a modest improvement over the year-ago quarter, which was one of the industry's worst on record.

Many PC makers have been pinning their hopes on Windows XP, Microsoft's newest operating system, as a catalyst for flagging sales. The new operating system is scheduled for release Oct. 25.

Most industry observers agree that the release of Windows XP, and Microsoft's planned aggressive marketing campaign, could spark some interest in the PC platform. However, few are looking at the new operating system as the savior of the PC industry.

Smulders said it is likely to be a while before Windows XP, which has been designed with more emphasis on multimedia features such as Web publishing and streaming audio and video, really takes hold in the marketplace, especially among businesses.

"The significant marketing dollars that are spent on it certainly will generate some interest in the PC platform and perhaps cause small amounts of additive sales," he said. "But in the professional market I don't believe the product will really begin to roll out until 2002."

PC vendors will need to go beyond just cutting prices and pinning their hopes on Windows XP if they want to stimulate sales, other industry analysts have pointed out recently.

Some say that on the commercial side, they need to put more of an emphasis on smaller, lower-cost PCs that can more easily be switched out, giving corporations more of an incentive to replace their systems every 2-1/2 years instead of the current 3-1/2 year replacement cycle.

On the consumer side, industry observers have pointed to opportunities in areas such as home networking and the ability to use multiple PCs and connect to Internet based services from different places throughout the home. graphic