PC holiday sales may become a distant memory

With consumer computer sales slowing, PC executives and analysts have begun to question the bedrock assumption that sales accelerate in the second half.

5 min read
Are PC holiday sales a ghost of Christmas past?

With consumer computer sales slowing, PC executives and analysts have begun to question the bedrock assumption that PC sales start slow in the first six months of the year and then accelerate in the second half as children go back to school and parents look for fun holiday gifts.

The promise of second-half sales typically has been an article of faith for both PC companies and investors looking for signs of hope during slow summers.

But the scenario appears to be changing. Rather than spiking in the fourth quarter, PC sales appear to be flattening over the course of the year. This year, the question of seasonality--big buying for Christmas--hangs over PCs like never before.

"We seem to be seeing less of an uptick in the past two quarters," Jeff Weitzen, CEO of Gateway, said last week.

While a shift in buying patterns alone should not be cause for alarm, some speculate this could reflect a change in how consumers perceive and purchase PCs in the long term.

Once the ultimate in whiz-bang tools, the PC may be starting to take on the characteristics of other utilitarian items like TVs or refrigerators. If so, the replacement cycle will inevitably slow down. Consumers, after all, don't typically upgrade their fridge whenever a manufacturer promises an icemaker with 20 percent more capacity.

"I don't think the PC is going away; that's not what the data is showing," ARS analyst Matt Sargent said. But "the market has reached saturation, and people are going to hold onto their PCs...And in years like this when there's not a lot of new stuff out there, people aren't going to buy."

The PC's transition from extraordinary innovation to common commodity could mean that consumers simply won't buy new systems until they actually need them, analysts say.

Buying seasons
For better or worse, computer makers bank on seasonal sales: big-business buying in January and February, back-to-school and year-end government purchases in August and September, and the coveted holiday boom in November and December.

The first two buying seasons, which are driven more by corporations and consumers, are expected to change little, analysts said, although back-to-school buying is slowing. But the future of holiday buying is more uncertain.

Gateway last week issued a profit warning after PC sales were down 30 percent during the Thanksgiving weekend compared with the same period last year. And for the week of Nov. 12, PC Data said, sales were off 25 percent from last year. This followed a pattern of about six weeks of rapid retail sales declines this fall.

In a Nov. 29 conference call with financial analysts, Weitzen and Gateway chief financial officer John Todd said the changing nature of seasonal sales contributed to their company's slowdown.

Traditionally, Todd said, PC purchases shot up in the fourth quarter, especially in the consumer market, because of holiday buying cycles. At least for PCs, that uptick is now modulating. Consumers appear to be buying throughout the year, which for now contributes to the anemic look of recent quarterly sales results, Todd said.

Analysts are split on whether PC holiday sales are declining, but there appears to be near consensus that the days of booming fourth-quarter sales are a thing of the past.

Who stole Christmas?
"I think we have less seasonality," Gartner analyst Kevin Knox said. "Fourth quarter used to be huge for the year and second quarter down for the year."

Robertson Stephens analyst Eric Rothdeutsch agreed. "I think it is becoming a lot less seasonal than it has been, and it is becoming more linear. I think for the consumer, there will be some but not as much seasonality in the fourth quarter."

Not enough reason to buy could be the simplest explanation for why consumers aren't flocking to the stores looking for PCs the way they have in past years, said NPD Intelect analyst George Meier. "If I can run all the software I have on a 500-MHz machine, why upgrade to 700 MHz?" he said.

In years past, PC makers gave consumers more compelling reasons to upgrade, Meier said. But there is a growing number of compelling products to spend money on, such as peripherals and consumer electronic devices.

"It's the cool factor, and PCs just aren't as cool as (personal digital assistants) or cell phones or MP3 players," Meier said.

But Knox sees other factors contributing to this year's unusually sluggish holiday PC sales. "We had a bunch of recalls, chip problems, and a number of other issues affecting what would have been traditional schedules for this Christmas season. I think consumers are a little confused," Knox said.

Many of those problems affected Intel, which supplies PC makers with processors and chipsets. In fact, a chipset problem affecting Pentium 4 delayed the processor's introduction three weeks just as PC makers readied new models for market.

Some analysts see Intel's delay in shipping the Pentium 4 processor as a major factor affecting sales. "There otherwise definitely could have been a lot more excitement in the market," ARS' Sargent said. "We've been a slave to Intel for many years."

Season still kicking
Not all analysts or even PC makers agree seasonality is totally a thing of the past or that PCs have become bland utilitarian devices.

"The season is dead for this year, but it's not dead for all time," IDC analyst Roger Kay said. "Macroeconomics is a huge factor. People are out spending, but more on small-ticket items."

PC Data analyst Stephen Baker questioned whether seasonal holiday sales would ever disappear.

"As an entertainment purchase, PCs are still going to be tilted toward the entertainment part of the season, which is fourth quarter," he said. "It's a retail consumer product, and bigger-ticket ones sell typically better third and fourth quarter."

The effect of how PC makers run their businesses cannot be discounted, particularly when they offer big sales to woo would-be buyers.

"The other reason it won't happen is the sellers of computers are focused on certain time periods, and that's when the promotional money and the budget money to sell things are highest; that draws more people in," Baker said.

News.com's Michael Kanellos contributed to this report.