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Report: PC demand nears peak

The PC industry faces a bumpy ride over the next few years, as vendors and customers try to plan for the Y2K bug and plummeting hardware prices.

The PC industry faces a bumpy ride over the next few years, a new report concludes, as vendors and customers try to plan for the Year 2000 bug and plummeting hardware prices.

"It's like a roller coaster ride," said Carl Howe, author of the Forrester Research study of corporate computer purchasing. "It will be a boom as people replace Year 2000 noncompliant computers, and then a bust when they realize they don't want to screw up those computers [by changing the infrastructure]."

PC demand will peak over the next two years, Forrester predicts, as corporations make Year 2000 compliance their top priority. However, when that demand falls off through 2002, Howe says, hardware vendors will have to look to radical pricing actions and alternate revenue streams like services to enhance the bottom line.

"The industry at large is going to get a correction to its business model," Howe said. "This will be good for aggressive cannibals like Dell, but bad for no-name vendors, who don't have large economies of scale and who can't add services."

"In the end, $8 billion will fall out of the market, and never come back. Revenue that is flat because of declining prices is very hard to repeal, and it's our belief that you can't. You end up with a new class of Internet appliances and mobile devices," Howe said.

Almost half of companies surveyed will spend more on PC purchases this year, with four-fifths of companies interviewed predicting flat or decreased budgets over the next two years, the Forrester report said.

Hardware, including PCs and notebooks, will be treated as a "loss leader," much like cell phones, with services making up the bulk of revenues. In this scenario, the acquisition of Digital Equipment by Compaq gives the combined company a strategic edge.

"Compaq's acquisition of Digital now looks smart, because the services piece [from Digital] really fleshes out their offering," Howe said.

As the PC industry loses $8 billion in revenue over the next four years, Internet appliances will emerge as a popular alternative to PCs, offering more manageability and lower total cost-of-ownership than traditional PCs, Howe said.

"The reason you buy them has nothing to do with purchase price, it has to do with the cost of maintaining them. If the only computer application I use is the browser, it doesn't matter who the vendor is, if I use it like an appliance."

Those most affected by the industry upheaval are corporate buyers attempting to maintain some amount of stability in their organization. Forty-two percent of companies interviewed cited Intel-mandated truncated product development cycle as their No. 1 PC-planning headache, Howe reported.

"The corporate buyer is worried about the pace of change. The product life cycle is 3 to 6 months long, and the buying cycle is 3 to 6 years long," he said. "The fiction of being able to standardize any organization on IBM or Dell is just that: a myth. They can't keep any platform stable."

"Everyone says they're going to stabilize the platform, but the reality is that the business model is built on upgrades. The way they drive business is they churn," Howe said.

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