PC forecast gloomier than expected

The bad news for the PC industry keeps rolling in.

Market researcher Dataquest on Monday warned of continued slow PC sales, with worldwide sales growing 10.7 percent this year, or about four points lower than 2000. Sales in the United States are projected to be downright dismal with--at best--flat year-over-year growth.

Dataquest analyst Martin Reynolds said the researcher's predictions are based on "the assumption sales in the fourth quarter will be better than the rest of the year. If this doesn't happen, things could be much worse."

In fact, should a recession hit the United States instead of a second-half recovery analysts had been banking on, Dataquest expects negative growth compared with 2000.

Although the economy is a factor, it is not the only reason behind the PC sales crisis. "The U.S. PC market by and large is saturated," Reynolds said. "There really isn?t much of an opportunity to sell systems and growth is slowing down."

Dataquest wasn't the only analyst outfit delivering up gloomy prognostications Monday. Merrill Lynch analyst Steven Fortuna cut his worldwide PC unit growth to 7 percent from 12.5 percent and lowered revenue growth to minus 2.8 percent.

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"All of our checks suggest that PC demand remains weak, especially in the U.S.," Fortuna wrote in his research note. The analyst slashed U.S. unit growth projections to 1 percent from 7.5 percent, Europe to 5 percent from 8.5 percent, Japan to 12 percent from 19.5 percent and Asia-Pacfiic to 17 percent from 23.5 percent.

But Fortuna had some good news, predicting some sales pickup next year. He raised worldwide unit growth projections to 15.5 percent from 12.8 percent, also predicting an 8.1-percent year-over-year revenue gain.

Dataquest also held out some hope for 2002, but not necessarily the following years. The analyst firm predicted worldwide growth of 14.5 percent next year, 8.6 percent in 2003, 9.7 percent in 2004 and 7.9 percent the following year.

But the market's uncertainty, given uncertain global economic conditions makes predictions hard to gauge. Many analyst firms had expected more than 20 percent worldwide PC growth last year. January preliminary estimates put the figure at 14.5 percent. Dataquest has since revised the final tally to 13.6 percent growth.

As recently as late January, Dataquest put 2001 worldwide growth estimates in the mid teens. But global sales uncertainty has forced yet another revision.

No matter what the ultimate outcome, Reynolds was conclusive in his assessment the U.S. looks to be a tough market that will ultimately force consolidation. On Friday, Micron Electronics said it would exit the PC business. Reynolds said to expect more of this.

"We expect one of the major PC players to leave the PC business by 2005," he said, referring to Compaq Computer, Hewlett-Packard and IBM.

In the meantime, Dataquest expects a brutal price war will shakeup the U.S. market, in part led by Dell Computer and Gateway. Ultimately, the larger companies may decide to cede some U.S. sales to Dell or Gateway, while shifting sales overseas whether neither direct vendor has much presence.

Neither Dell nor Gateway has strong overseas presence, but Compaq, HP and IBM are well positioned to exploit strong sales in emerging markets, such as Asia, and capitalize on some recovery in Europe.

Pricing competition also is expected to spread overseas, particularly as Intel phases out the Pentium III in favor of Pentium 4.

"The price erosion will make other regions of the world buy more PCs, so the global vendors might also choose to shift their share from the U.S. to maintain profitability," Reynolds concluded.

But aggressive pricing and shifting sales may not overcome a fundamental challenge all PC manufacturers face and in most regions of the world, Reynolds emphasized.

"The problem is corporate buyers have pretty decent PCs now after the Y2K buyout," he said. "They're not so keen on changing them out. You've got to show them real value not just a new PC comes in at a good price point."

In preparation for the Year 2000 technology many companies starting replacing PCs in 1998 and many more in 1999. Analysts and PC makers had hoped for a second-half 2001 surge as the first wave of companies looking to replace older models bought new systems. But with a recession looming in the United States and fears of an overall global economic slowdown, there is increasing likelihood some companies may chose to sit on models three years or older longer than they might usually, say analysts.

Still, there are untapped markets out there waiting for PC manufacturers to go after them, Fortuna noted in his Monday research note. "We continue to believe that the small business market represents the single biggest growth opportunity for the branded PC vendors over the next couple of years."

In the consumer market, Fortuna predicted the market would move "lower-cost, easy-to-use, portable--perhaps wireless--appliances in the home, given that new consumer PC purchases are driven almost exclusively by the desire to gain Web access."