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Lagging PC sales hint of slow '98

Despite go-go growth for the first ten months of the year, computer sales have tapered off, a deceleration that may portend a slower 1998.

Despite go-go growth for the first ten months of the year, U.S. computer sales tapered off last month--a deceleration that, combined with other factors, may portend a slower 1998.

Although most of the evidence of a slowdown is anecdotal at this point, technology executives and analysts say system sales and revenue were below expectations for the past month. At the same time, inventories of components and computer systems have grown while prices have dropped.

"We are hard to measure because our sales were up, but there are resellers that have told us that November was a little soft. It caught people by surprise," said Doug Antone, senior vice president at Ingram Micro, the world's largest computer distributor. "It was a decent October and a good summer. Then, all of the sudden, in November, they [sales] drop off. December is extremely strong. November is generally pretty strong."

While economic conditions in Asia have prompted some to predict slower growth for this quarter and next year, revenue might be slumping for more mundane reasons.

Customers, including corporate buyers, may be growing weary of the constant upgrade cycle. Further, the constant drumbeat of publicity surrounding price cuts has encouraged customers to take a more wait-and-see approach to purchasing.

"A lot of [companies] we talked to who used to say 'I've got to have the latest' are now saying, 'Our machines are fast enough,'" said Steve Cohan, president of Entre Computer Systems, a reseller in Colorado. "There is a definite slowdown for a number of reasons."

Computer analyst Ashok Kumar of Loewenbaum & Company portrayed the situation in more dire terms: "Desktop price points are beginning to crater. The only place for price stability is the enterprise [sector], and God knows how long that can last."

Kumar added that other indications of a slowdown include flat notebook sales for Dell Computer and growing component inventories. A number of other sources have stated that Compaq's computer inventories have increased in recent weeks.

Cohan said news of pending price cuts by chip giant Intel also likely prompted slower sales. "Preannounced cuts kill sales. Why do you want to buy a Pentium MMX [computer] when you can get a Pentium II at the same price in a few months?"

Analysts have pointed out that the most recent processor upgrades have not appreciably added to performance, which could be the reason for this year's drastic price cuts on those systems. Consumers and corporations have had less incentive to move from Pentium MMX chips to the Pentium II.

Last month, Drew Peck, an analyst with Cowen & Company, said the motive behind the drastic Pentium II price cuts--both those that have occurred and those coming in February--owe to the fact that sales of systems based on this processor remain below Intel's internal expectations.

"The Pentium II does not dramatically improve the performance for consumers," he said, "so they are forced to use price as a lever," Peck told CNET's NEWS.COM last month.

Prices on Pentium II systems have come down fairly dramatically this year, faster than other high-end Intel-based systems in the past. Although Intel's top-of-the-line chip was introduced this spring, it can be found in systems costing as little as $1,599 and in many that cost under $2,000.

In addition to these, another factor that may cause revenues to flatten could come into play in 1998. The sub-$1,000 computer, which has spread like wildfire in the consumer market, may start to make greater inroads into the corporate world.

"There will be a little more challenging market for all of us as these price points find their waterline," Antone said. "Buyers will still want a $2,000 PC with more bells and whistles, but there might be downward pressure [on costs]."

Hewlett-Packard released sub-$1,000 computers for the corporate market just this week. Cyrix has already released a reference platform for $500 desktops based around its MediaGX processor. Intel is also rumored to be moving in this direction with a design announced today for "dumb" terminal computers that could cost only $500 and is rumored to be working on a new design for sub-$1,000 PCs.

"If a computer user can have 200 MHz at $1,000, why spend $2,000?" Cohan asked.

Still, not all is doom and gloom, according to Roger Kay, computer analyst at International Data Corporation. The strength of the U.S. economy, as well as slight resurgence in Europe, will lead to overall sales growth of close to 17 percent this year, he said.

"Yes, demand seems to be slowing down, but I'm still predicting a good fourth quarter, especially on the consumer side," he said.