Annual retail PC sales slip for the first time

For the year, unit sales of PCs through stores, catalogs and online retailers fell for the first time ever, down nearly 1 percent compared with 1999, according to market researcher PC Data.

For December, retail PC sales plummeted 24 percent in what is being called--conservatively--the worst holiday PC sales season on record.

"The real story here is that it's a mature market--suddenly, overnight, in the last half of last year," said PC Data analyst Stephen Baker. "All the easy pickings went away, and the compelling upgrade reasons are not there right now."

In December, retail PC revenue fell 30 percent, to $855 million, compared with the same month last year, according to PC Data. Retail selling prices in December dropped 7 percent, to $846, their lowest for the entire year.

Selling prices are expected to drop in January as PC makers look to unload a backlog of inventory, estimated to be nearly twice normal levels, according to dealer and distributor sources. Apple Computer on Monday, for example, slashed prices by as much as one-third on some systems.

For the fourth quarter, average selling prices dipped slightly, to $872 from $878, but overall unit sales declined dramatically. PC Data reported transactions just shy of 2.5 million unit sales for the quarter, down 18 percent from a year earlier. For the year, average selling prices dropped $10, to $906.

Related figures
NPD Intelect on Wednesday also released preliminary sales data, but for a different time period and using a smaller sampling than did PC Data. For Thanksgiving through Christmas, NPD Intelect reported a 6.4 percent year-over-year decline in desktop PC sales.

But NPD Intelect analyst George Meier cautioned that the market researcher only collected data from 11 retailers, whereas the company typically samples more than 110.

"This specific 11 guys, while they together have represented 50 percent of all the dollars we're going to see, that's not all the dollars. And in certain categories, that can be critical," he said.

Overall, PCs sold poorly during the holidays, in an unexpected decline that blindsided PC makers and retailer, Meier concluded. He blamed the fourth quarter's dramatic drop in PC sales on 1999's Internet access rebates craze, which artificially raised sales levels.

"Had the rebate not existed last year, we would have seen a step down last year and another step down this year. Instead we saw a crash this year," Meier said.

A glimmer of hope?
But PC Data offered some hope to retailers and PC makers battered by dismal holiday sales. While PCs sold poorly, consumers spent generously on other high-tech gadgets, such as handhelds, MP3 players and peripherals connected to computers.

Citing November sales data, Baker pointed out that MP3 sales rose 400 percent from a year earlier, while PC cameras gained 68 percent, CD-rewritable drives 65 percent and digital cameras 26 percent. Handheld computers more than doubled sales in November year over year, he added.

NPD reported a similar trend. Based on preliminary sales data from Thanksgiving to Christmas, handheld sales jumped 202 percent in units and 165 percent in dollars compared with the 1999 holiday season. CD-RW drive unit sales jumped 88.5 percent and dollar sales rose 66.8 percent. Sales of CD-recordable and CD-RW discs gained more in units, up 96.4 percent, but less in dollars, up only 61.5 percent.

Printers emerged as the only major peripheral category in decline, with sales down 14 percent in units and 22 percent in dollars, NPD reported. For this reason, Baker predicted most computer retailers would see fourth-quarter revenue rise in the range of 10 percent to 12 percent.

Shifting focus
For PC makers, the task at hand now is to shift their focus and marketing strategies from getting lots of new customers to catering more to the existing ones. Many PC makers overestimated fourth-quarter and holiday sales because they failed to see that the U.S. market had shifted from growth to replacement, Baker said.

Meier agreed.

"It's a replacement market, and that requires a different kind of marketing thought," he said. "I think going forward PC manufacturers are in for slowing growth. Nothing is going to make that change."

While consumers and businesses may no longer drive double-digit PC market growth, there are still plenty of sales prospects, particularly if companies focus on upgrades. "If you look out into the future, you can see a couple compelling things that are going to get current customers to upgrade," Baker said.

Those upgrades will be driven in part by what did sell well during the holiday season: handhelds, gadgets and peripherals. "The compelling reason to upgrade a PC is the stuff coming into it," Baker said. Broadband and DVD-recordable drives could be the two biggest drivers of consumer PC upgrades, provided the technologies can expand as expected.

But without these and other technologies feeding upgrades, PC makers face a difficult sales climate. "The value proposition for the PC doesn't anymore just lie in the PC," Baker explained. "It lies in the utility of the PC as part of the home or business technology outlook."

There is money to be made in tending to existing customers, a market that Baker said is better in many ways than the old one.

"You have a fairly consistent marketplace now, whereas five years ago you were really dependent on drawing in new customers," he said. "Even if you get only a small percentage of people to upgrade, you've got such a huge installed base now that's still a significant number."