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Bad tidings for notebook sales

Many people know that desktop PC sales are down this holiday season compared with last year--but notebooks are taking a beating too.

'Twas the week before Christmas and all through the stores, notebook sales were falling like never before.

Much has been said about how desktop PC sales are down this holiday season--between 17 percent and 30 percent compared with last year. But notebooks are taking a beating too. They may be even worse off than PCs, analysts say.

"If anything, notebooks are going to slow down even more than desktops because they're a higher-ticket item," Gartner analyst Kevin Knox said Tuesday.

With Christmas just days away and the fourth-quarter close quickly approaching, notebook makers and dealers are scrambling to unload stock.

"The overall IT economy has slowed down dramatically," said Mark Romanowski, vice president of services for Long Island City, N.Y.-based dealer Jade Systems.

"Every manufacturer is trying to push as much as possible out the door by the end of the year," he said. "You put all those things together, and you can get some good deals."

Even before the holiday buying season started, Compaq Computer and Sony kicked off a notebook price war. But sales are still slowing, despite price cuts, rebates and special incentives, such as Sony's offer last week of a free wireless modem.

"A lot of the manufacturing is down abroad," Knox said. "The forecasts are already in, locked and loaded. The orders are already done. The question is, how do you get rid of this stuff?"

Dealers and manufacturers really have no choice but to cut prices, PC Data analyst Stephen Baker said.

"You can sell off the desktop inventory, but notebooks don't move as quickly, so they end up costing you more to carry over," he said. "While notebook margins are higher, giving you more room on pricing, that still amounts to only a few hundred dollars on a product with much higher costs."

Neither Knox nor Baker was surprised to hear notebook manufacturers driving hard deals to move inventory--even more so than desktop PCs.

Deals and steals
For savvy shoppers, the next week or so could lead to some outstanding bargains as manufacturers and dealers look to clear the shelves, analysts and dealers said.

Compaq this week cut the price of the Presario 17XL360 by $100. The 600-MHz Pentium III model now sells for $1,999. In addition, customers get another $100 rebate from Compaq.

Fry's Electronics is wooing notebook buyers with a free CD rewritable drive with a USB connection. Consumers picking up the $1,699 Presario 14XL340 can take advantage of the CD-RW offer, as well as a $100 rebate from Compaq.

CompUSA is sweetening sales of notebooks with AMD processors by tossing in a $100 gift certificate.

But to offer these hot deals, some companies are taking a big bite out of profits. ARS analyst Matt Sargent used IBM ThinkPad notebooks as an example of the extremes to which dealers and manufacturers are going.

One second-tier online retailer is selling ThinkPad A and T models for 6 percent to 9 percent less than on the ShopIBM Web site.

For example, a ThinkPad T21 with an 800-MHz Pentium III processor, 128MB of RAM and 20GB hard drive costs $3,112 from wholesalers, Sargent said.

The price on IBM's Web site is $3,499, but the online reseller is offering the ThinkPad model for $3,239. This works out to about 3.9 percent margin for the dealer vs. 11 percent sold at IBM's price. Nine ThinkPad models are selling at similar discounts.

Who bears the cost of such pricing action is uncertain, although Baker and Sargent said it is most likely shared by the manufacturer and the dealer. Manufacturers typically offer incentives and what is known as "soft dollars" to help bear the cost of moving inventory quickly.

One dealer familiar with the IBM situation said the company is trying to "blow out" as much inventory as possible before the year ends.

The dealer and other distribution sources also noted that IBM is not alone in offering these kinds of incentives right now, particularly given the slow sales environment.

Overstuffed stockings
Dealer and distributor sources who asked not to be identified said November was the first month in about a year and a half in which inventory levels were higher than unit sales. Typically, notebook makers get more orders than the number of units shipped--or the orders are at least on par.

But that didn't happen in November. Market researcher PC Data reported inventory levels on dealer shelves rising to about six weeks in November from below four weeks just a month earlier. That less-than-four-weeks level had been fairly consistent throughout the year, noted Baker.

Distribution sources acknowledged that inventory levels continued to rise in December, as notebook makers scrambled to lower prices for consumers and commercial buyers and to sweeten purchases by dealers.

Even worse, sales slowed in December. While desktop computer sales plummeted 17.5 percent in November compared with a year earlier, notebooks initially fared better, according to PC Data. Portable sales grew 7 percent in November compared with a year earlier. But by the first week of December, notebook sales had dropped 5 percent vs. the same period last year, according to PC Data.

Weekly data from shows a similar trend among e-commerce operations selling on the Web. The market researcher reported that online notebook sales as measured in dollars were off about 17 percent year-to-date for each of the weeks ended Nov. 25, Dec. 2 and Dec. 9. Unit sales dropped similarly for the first two weeks but rose 3 percent for the period ended Dec. 9.

ARS attributed this to price cuts "driving bargain hunters."

While PC sales have dropped largely on sluggish consumer demand, Sargent sees a broader trend for notebooks.

"What is particularly disturbing is this dip in notebooks sales may be more than a holiday blip and more a sign of a longer-term slowdown in business-related PC purchases," he explained. "The vast majority of notebook purchases made in e-commerce are for businesses. And if this area is slowing down, the entire PC business may be in store for a very long slowdown."

But Knox sees something else at work. "This is the first year manufacturers had really banked on a consumer notebook market. But given the overall slowdown, the sales didn't pan out."

Analysts said to watch for more price cuts right after Christmas, as notebook makers scramble to clear the shelves before the end of the quarter.

"For manufacturers," Knox said, "it could get really brutal."