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Commentary: Emachines' earnings shortfall brings some surprises

Although the size of the slowdown in Emachines' sales is somewhat surprising, much of the weakness reflects 1999 market events as well as saturation in the installed base.

    By Charles Smulders, Gartner Analyst

    Although the size of the slowdown in Emachines' sales is somewhat surprising, much of the weakness reflects 1999 market events as well as saturation in the installed base.

    Companies face a difficult growth

    See news story:
    Emachines warning may herald another PC price war
    comparison this year because 1999 was a year in which $400 rebates on PCs were launched, resulting in a growth bubble for much of the year. The rebates made PC technology available to lower household income groups for the first time, thereby increasing the total available market.

    The saturation of this market segment appears to be taking its toll. Most surprising is the size of the downturn Emachines is indicating, considering the exit of two major players, IBM and Packard Bell-NEC, from the retail segment in 1999.

    Those exits should have provided a significant opportunity for remaining players. But Emachines indicated in its conference call that demand remained more in line with expectations for high-end products, with the downturn mostly being felt in the sub-$700 market. IBM and Packard-Bell were positioned higher up the price curve than Emachines.

    In this type of environment, consumers can expect to benefit from price-cutting as manufacturers try to clear inventory.

    Compaq Computer and Hewlett-Packard will feel the effects of lower demand, but two factors will play in their favor. First, HP's and Compaq's size gives them greater leverage with suppliers.

    If they have done their jobs properly, they should be able to alter the size of orders later in the cycle in response to a change in demand. If they have not made provisions for doing this, a significant downturn in their performances will likely occur.

    Emachines probably has less flexibility in this respect; therefore, it can do less to forestall the build up of excess inventory.

    Second, HP and Compaq have targeted higher price points than Emachines, so they should feel less direct effects.

    Gartner believes excess inventory will continue to influence the consumer PC market through the third quarter of this year.

    Price-cutting will drive demand but will undermine the bottom-line performance of the players in the market. However, cutting prices in the second quarter may well bring demand forward and lead to further price cuts in the third quarter, until demand and supply are more evenly matched in the market.

    Entire contents, Copyright © 2000 Gartner Group, Inc. All rights reserved. The information contained herein represents Gartner's initial commentary and analysis and has been obtained from sources believed to be reliable. Positions taken are subject to change as more information becomes available and further analysis is undertaken. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of the information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof.