PC revenue: As good as it gets?

Forrester Research is predicting that consumer PC spending will peak at around $19.9 billion this year and then wane as alternatives such as intelligent TV set-top boxes and other electronic goods such as MP3 players become more prevalent. The result of declining demand and the increasing power of content companies such as America Online and Yahoo necessitate fairly radical shifts in strategy by PC industry players, the report finds.

"The value in the computing equation has left the hardware and migrated to the network and the services that are provided," said analyst Eric Schmitt. While Schmitt's observations of these trends have been noted in other reports, some interesting strategies are being advocated.

The news for 1999 doesn't look bad at first blush. First-time PC buyers are spurring growth as they rush to get online; meanwhile, "PC veterans" are increasingly buying a second computer. Forrester is predicting that PC sales will grow by 17 percent over last year's unit shipments, but revenue will grow only 2.1 percent to $19.9 billion. Revenues will continue to be hurt by the ever-plummeting price of PCs.

Surplus Pentium III systems?
But in early 2000, PC makers could face a "staggering" surplus of unwanted Pentium III systems as well as average selling prices that will be 13 percent below 1998 levels. That's because, according to Forrester's research, the majority of households will have computers that are less than three years old, resulting in fewer customers investing in hardware purchases.

Schmitt notes that for many of the first-time buyers, the characteristics of the machine--how fast it is, for instance--is secondary to its ability to get them onto the Internet. Any discretionary spending will focus on getting faster access to Internet content.

What's more, entertainment products such as game consoles and spending on peripherals such as digital cameras or portable MP3 players "will further bleed PC budgets," the report finds. By 2003, Internet access devices such as handheld computers will also garner more of the market.

Recommendations for PC Makers
Compaq Computer, IBM, and Hewlett-Packard, and others need to revamp their PC-design strategies to take into account the fact that a PCs main use now is Internet access.

"PC makers need to stop thinking about just configuring a computer differently. Let the [designers] think about how to use a different operating system to cut costs, and design something that doesn't look like a PC," Schmitt said. "At the same time [they need to] recognize that they have to be more in tune with what service providers want to do," he added.

AOL and Yahoo are really the new powerhouses, Schmitt said, because right now they have what consumers want. And because these two companies have such a huge number of users, any direction that they go regarding hardware will be key.

Already, AOL has talked up plans to give Internet access on the television. Consumer electronics giant Philips Electronics will produce an advanced TV set-top box enabled for the service based on, ironically, what is essentially standard PC hardware. Schmitt thinks Compaq and others need to get on board and talk with AOL about developing devices that will serve entertainment and commerce applications--and will be sold through the content and service providers.

Meanwhile, direct PC vendors such as Gateway and Dell Computer "need to leverage their skill at selling complicated equipment into consumer electronics" such as digital cameras, camcorders, even stereos and televisions, Schmitt says in the report. Both companies are partially there already: Gateway purchased a stake in retailer NECX and opened up SpotShop while Dell opened up Gigabuys to start selling computer peripherals and software.

Compaq is already set to capitalize on its ability to sell a wide range of products with its acquisition of Shopping.com, although the company has to work on integrating its various offerings into a cohesive whole for consumers.