Holiday shoppers snub PCs, snatch up gadgets

If PC sales are so slow this holiday season, what are people buying?

Just about any other high-tech gadget or PC-related product, analysts say.

PC retail sales plummeted as much as 30 percent over the Thanksgiving holiday compared with last year. But sales of other high-tech goods seem to be on track.

"People are shopping. They're definitely going into the stores," PC Data analyst Stephen Baker said Friday. They simply seem to be buying "everything but desktops."

In an informal survey of Best Buy stores for the Friday following Thanksgiving, company spokeswoman Donna Beadle said DVD players, televisions and personal digital assistants "were all big sellers." Stores were also selling "a lot of the digital products," she said, such as MP3 players.

None of the Best Buy stores Beadle surveyed brought up PCs when discussing Thanksgiving holiday sales.

Beadle couldn't guess what the season's top pick will be, but she noted that "PlayStation 2 is huge. That is really one of the biggest sellers, and I would say that is the gift of the season this year."

The weeks building up to holiday shopping paint a similar picture.

Sales of high-tech products through retail store and mail-order outlets rose 13 percent during the first three weeks of November compared with the same period last year, according to PC Data. When PCs are added to the mix, however, sales rose just 5 percent compared with last year.

"That's a bad deal," Baker said.

Santa's digital helpers
NPD Intelect analyst George Meier sees computer-related products--not the computers themselves--as the must-have items this season.

Can PC sales slump turn around? Mark Bates, analyst, PC Data

Consumers "are buying things that hang off of computers and sitting with their core computers," Meier said. "They're buying things like PC cameras (Web cams), which are up 254 percent from last year. They're certainly buying PDAs, DVD (drives) for computers, and MP3 players." Digital cameras are also hot, with sales up 121 percent from last year, he said.

Other hot-ticket items include flat-panel monitors, which were already up 150 percent at retail in October from a year earlier, according to PC Data.

PC Data also reported that 19-inch monitors are in demand, moving up to a 12.5 percent share of the retail monitor market in October from 8.5 percent a year earlier. Baker described that as "a nice jump."

"You know what's really up is a lot of CD media," Meier said, "which is reflective of the fact that consumers are buying rewritable drives. CD media sales are up 90 percent, and rewritable drives are up 85 percent."

Several categories that didn't exist a year ago are also booming. Retail sales of wireless networking kits, which link PCs, are at $50 million year to date and $10 million in October, up from literally nothing a year earlier, according to PC Data. Broadband cable and digital subscriber line (DSL) routers are also hot, with 35,000 units sold in October.

Analysts say that preliminary November figures show a consistent sales increase for all these PC-related products, including the monitors, CD rewritable drives, and home-networking kits.

The message is clear, said Gartner analyst Kevin Knox. "People are looking at a number of other devices instead of a PC."

This is bad news for PC makers, particularly those that sell through dealers and may see inventories build up during the holidays.

"For retailers, it's not as bad because some of the peripheral profits have, to some extent, better margins," Baker said. But he noted that Best Buy and Circuit City have reported that increased competition from Wal-Mart and Costco is driving down peripheral prices. "So they're making more in margin, but not as much as six months ago."

One thing many of these devices share in common is that many require a PC to work. But Beadle isn't convinced the holiday season will belong to peripherals as much as digital products, such as DVD and MP3 players.

"This year the emphasis is on digital products," she said. "I think that's where you're going to see the biggest amount of money spent."

It's the economy, stupid
Analysts and PC companies blame the economy on the sudden slowdown in PC sales. But they don't agree on the extent of the impact.

Emachines chief executive Steven Dukker sees a slowdown in all retail sectors, which he blames on the Federal Reserve repeatedly raising interest rates.

"When retail is flat to down for three to four quarters, the result backs up to suppliers and their suppliers, and the result is a drop in GDP (gross domestic product), which when it happens for two consecutive quarters, you have a recession," Dukker said. "I believe the Fed will loosen up at the next meeting, which will give time to reverse the trend."

Roger Kay, an analyst at market researcher ="http: www.idc.com"="">IDC, agrees the slowing economy has put the brakes on sales, but he sees the impact as "more of a problem for PCs."

PC saturation appears to be an important factor, particularly when factoring in the economic slowdown, said Robertson Stephens analyst Eric Rothdeutsch.

"I think the bigger issue is that in the U.S. market, over 50 percent of all households have PCs," he said. "The U.S. market is the most saturated market in terms of PCs."

With the economy slowing and consumers more budget-conscious than they have been in more than four years, they tend to "spend for stuff they don't already have," Baker said. "When people are worried about the economy, they tend to go out and buy something new rather than going for an upgrade."

For PC makers and retailers that means a game of chicken regarding PC sales, as they weigh building inventories against demand.

"Christmas is about who can hold out longer, the consumer or the retailer?" Baker said. "Is the consumer willing to wait until December 22," or will retailers give in to the "pressure to offer promotions because of the overhang in inventory? I think PCs are going to be like that this year."