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Commentary: Consumer, corporate desktop markets slowing

Gateway may be hardest hit in the consumer market, while it'll be a buyer's market when it comes to business computers.

A combination of factors, including a general economic slowdown, market saturation and a shift in consumer buying habits, are contributing to a slowdown in the consumer PC marketplace. Gateway's Nov. 29 announcement of reduced revenue and earnings expectations for the current quarter reflects this overall trend.

See news story:
Gateway shares crash on earnings warning
While Meta Group's corporate customers have yet to change their plans for increased PC buying associated with rollouts of Windows 2000 on the desktop, those plans also could change if the economy continues to soften. Corporate IT organizations need to develop contingency plans in case the enterprise cannot afford to replace large numbers of desktops or implement other infrastructure upgrades in 2001.

The economic slowdown definitely is making consumers uneasy about buying new PCs, and that unease may get worse depending on how bad the economy gets. Slow PC sales, of course, would also contribute to the general slowdown. But consumers have other reasons not to buy new PCs this year. One is market saturation. Today most potential new PC buyers already own a PC. Many bought their first PC or replaced an older PC last year in the major upswing in the consumer market. Why should consumers buy a new 800-MHz PC if their main needs are e-mail and Web surfing and a tool for kids to write school papers with, and they have a perfectly good 500-MHz PC already?

Increasingly, consumers derive value from their PCs via the Internet and the services and applications available via Web sites. These server-centric applications do not drive consumer demand for high-end systems. The next driver for consumer purchase of high-end PCs will likely be multimedia home entertainment (e.g., digital photography, digital video, MP3 and DVD file downloads). But before consumers can start doing those things, they will need other devices--such as DVD and MP3 players, photo-quality printers, or additional storage to handle the large new files they are downloading.

Add-ons, not additional PCs
Consumers have only a certain amount of money to spend, and this year many will spend their cash on add-on devices to increase the capability of their current PCs--or mobile devices such as Palms--rather than replacing a PC that already does everything they want. In two or three years, consumers may be moving to the idea of a personal server rather than a PC as the files they handle become much larger, but that is still in the future.

Without a compelling application or service that drives demand for new systems, the consumer replacement cycle could easily extend from its present three to five years out to five to seven, creating a long-term decrease in consumer market demand. The consumer market, therefore, is likely to see a major slowdown in the next year, with a consequent price war.

All of this has left PC manufacturers in a difficult position. PC vendors have worked hard to drive the costs out of their manufacturing process, but because of the constant price drops, all they have managed to do is stay even financially.

Dell, always the low-cost manufacturer, should be able to weather the price wars better than others. Compaq and Hewlett-Packard, which both outsource the manufacturing of their consumer PCs, should be able to adjust to the slowdown relatively easily. IBM is largely absent from the consumer marketplace, except for sales of its laptops.

Gateway may be more exposed. Gateway is heavily focused on the slowing consumer market and therefore may feel the most immediate and deepest impact. In addition, it has invested in a major expansion of its "Country" stores. While these have been a key to its entry into the small-business market, Gateway may have overextended with this expansion. This could leave it particularly vulnerable if the business market also slows in 2001. On the brighter side, Gateway has been the master of the bundled software and service sale, and its captive market of Gateway users may provide it with some financial cushion.

Waiting on Windows 2000
The corporate market is also seeing a migration to server-centric applications, and demand for client performance is slowing. To date, Meta Group clients still have plans in place for a major replacement of desktop PCs associated with corporate rollout of Windows 2000. However, without Win2000, the corporate marketplace would also start extending replacement cycles.

In addition, the implementation of those Win2000 rollout plans could be delayed indefinitely if the economy cools too rapidly. The plans may be there, but until the corporate buyer signs the purchase order, they can be changed at any time. The main reason corporations want Win2000 is for its set of built-in desktop management services, and if the economy crashes, they may decide to live without those services for a while.

Corporate IT organizations need to develop contingency plans in case the enterprise cannot afford the infrastructure upgrades--including desktop upgrades--that they have scheduled for 2001. On the other hand, a slowdown in the consumer market will leave the PC makers depending on sales in the business marketplace for a larger part of their profits for the coming year. Companies that are planning to make major PC purchases should expect good deals on new systems and should negotiate hard for favorable prices.

Meta Group analysts Peter Burris, Dale Kutnick, Steve Kleynhans, Jack Gold, Val Sribar, David Cearley, and William Zachmann contributed to this article.

Visit Metagroup.com for more analysis of key IT and e-business issues.

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