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News > Technology
PC sales drop in 2Q
July 20, 2001: 2:21 p.m. ET

Surveys show global deliveries off 2% in 2Q; Japan, U.S. markets hit
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NEW YORK (CNNfn) - Personal computer makers will need to do more than just cut prices if they are going to spur demand in what has become a heavily saturated market, and an upturn in U.S. sales may be further off than previously anticipated, industry analysts said Friday.

"We were optimistic and expecting some turnaround in the third quarter with strength in the fourth quarter," said Martin Reynolds, an analyst at Gartner Dataquest. "But what's happening is that the signs are so poor, we're not confident we're going to see that now."

Earlier in the day, data released by Dataquest as well as technology research firm International Data Corp. showed that unit shipments of PCs fell modestly from the same period a year earlier, marking the first time the industry had contracted on a year-over-year basis in at least 15 years.

Analysts from both firms pointed to worsening economies, cutbacks in corporate spending and the lack of a compelling reason for users to upgrade existing systems as the primary factors driving the trend.

Although their specific figures differed slightly, both firms' surveys showed that worldwide PC shipments in the second-quarter fell roughly 2 percent from a year ago. IDC said it was the first-ever decline, while Dataquest's figures showed a similar contraction in the second quarter of 1986.

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  Businesses are spending cautiously, and consumers have still not emerged from their shells, but there is some hope that the worst is behind us.  
     
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  Roger Kay,
IDC
 
By IDC's count, second-quarter unit shipments in Japan were flat with the same quarter a year ago but dropped nearly 20 percent from the first quarter. In the United States, shipments were down 8.1 percent from the same quarter a year ago and 1.3 percent from the first quarter, according to IDC's survey.

"The cumulative impact of a worsening economy, declining capital investments and reduced consumer spending is strongly affecting the Japanese market," said Loren Loverde, director of IDC's Worldwide Quarterly PC Tracker. "Although the Japanese market resisted for a while, it now looks like the PC market in Japan will be flat-to-negative into 2002."

Although the actual numbers were worse than expected, the weakness in the market did not come as a surprise.

Faced with flagging sales and a saturated PC market in the United States, computer makers in the first half tried to stimulate demand, engaging in a bitter price war that has weighed heavily on profit margins.

While that strategy has been successful in some respects Dell Computer, for example, widened its market-share lead during the quarter through its aggressive pricing industry observers pointed out that it has not done much too stimulate overall market demand.

"We've populated about 75-to-76 percent of U.S. homes with PCs, and in business, you have about a 95 percent penetration with PCs in one form or another," said Tim Bajarin, president of Creative Strategies, a Silicon Valley consulting firm that focuses on studying emerging PC and consumer electronics technologies.

"The problem is that at this stage of the game, unless someone comes in with something that causes users to want to upgrade, you're not going to see a significant shift to where people are saying, 'Gosh, I've just got to have that new P4."

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Bajarin said PC sales may get a boost in mid-October, when Microsoft releases its newest operating system, called Windows XP. However, he said it could take quite some time before the new operating system, which has been designed with more emphasis on multimedia features such as Web publishing and streaming audio and video, really takes hold.

"We think that there could be a spike, but the problem is that the movement toward using Windows XP as a catalyst for consumers, and more importantly, businesses, doesn't happen overnight," Bajarin said.

"There's a good chance that those laggards out there in business that are still using Windows 95 and even Windows 98 will start moving over," Bajarin added. "But it will probably take corporations 12-to-18 months to start pushing hard to bring in XP."

Dataquest's Reynolds said PC vendors will need to go beyond just cutting prices and pinning their hopes on Windows XP.

"On the commercial side, they've got to come up with compelling value propositions for switching to a new PC, and its not just the benefit that the thing brings, it also has to be a low cost of exchange."

He said the replacement cycle for commercial PCs is about every three-and-a-half years. To stimulate industry growth, vendors need to get businesses to replace systems every two or two-and-a-half years, Reynolds said.

"I'm not going to do that unless I see compelling benefit and low costs of doing so, which in my mind means smaller, lower cost PCs which can easily be switched out and bring benefits with them. So there's a real challenge on the corporate side."

On the consumer side, Reynolds said there are 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.

"But we're still really a year or two away from having the technology to make that work,: he said. "It has to be wireless. You can't expect consumers to go around re-wiring their homes."

Despite the poorer-than-expected second-quarter shipment data and the less optimistic outlook for a return to growth, IDC analysts said they see evidence that things at least don't appear to be getting any worse.

"Although shipment levels in the United States remain depressed, the seasonal pattern appears to be holding, albeit at a lower level than last year. Businesses are spending cautiously, and consumers have still not emerged from their shells, but there is some hope that the worst is behind us," said Roger Kay, director of client computing at IDC.

The latest reports also contained some positive data points for Dell Computer (DELL: down $0.91 to $27.47, Research, Estimates), the market leader.

Dell was the only PC vendor that managed to increase its sales in the quarter, according to IDC. "Dell's aggressive pricing and ability to react quickly to changing market conditions allowed the market leader to further distance itself from competitors," the report said.

Dell enjoyed 10-percent sales growth in the U.S. market from a year ago and greater than 40-percent growth in difficult Asian markets from a year ago, IDC said. In contrast, sales of competitors Compaq Computer Corp. (CPQ: down $0.94 to $14.84, Research, Estimates), Hewlett-Packard Co. (HWP: down $0.47 to $26.04, Research, Estimates), and Gateway Inc. all fell more than 10 percent from a year ago, according to the survey.

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The latest PC unit shipmen data were released just after Microsoft Corp. (MSFT: Research, Estimates) warned its fiscal first-quarter earnings will miss Wall Street estimates and PC maker Gateway (GTW: Research, Estimates) posted a wider-than-expected second-quarter loss and said results for the second half will be weaker than previously forecast. graphic

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.