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Big Blue news a sign of PC market's graying temples

news analysis Sale of IBM's PC unit would be latest example of move toward consolidation as market reaches maturity.

news analysis Charles Darwin is alive and well and looming over the PC industry.

Friday's news that IBM is mulling a plan to shed its PC division shows that yet another battle for survival of the fittest is under way. Despite reinventing the personal computer in 1981 and spawning the multibillion-dollar global industry that grew up around the machines, IBM is now said to be planning an exit from the market by way of selling its PC unit to China's Lenovo Group.

"Effectively, the world has been explored, and there's not a lot of new markets out there."
--Roger Kay, analyst, IDC

Such a deal would be only the latest example of a move toward consolidation in the PC market--a long string of acquisitions, mergers, tie-ups and quiet retreats that have littered the market's path to maturity over the last 23 years and have included milestones such as Hewlett-Packard's May 2002 blockbuster acquisition of Compaq Computer.

As it ages, the PC market will move into a position not unlike that of the auto industry, which plays host to a handful of giants that see relatively slow growth and often steal market share from one another, said Roger Kay, an analyst with IDC.

"Effectively, the world has been explored, and there's not a lot of new markets out there," Kay said. The "market could stabilize in the numbers we're talking about now--150 million to 200 million units per year."

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A host of brand-name manufacturers have already gone by the wayside: Packard Bell, owned by NEC, exited the U.S. retail market; Micron Electronics' assets were sold to Gores Technology Group, which went on to form MPC Computers; AST Research withered away, its assets eventually sold to founder Beny Alagem, who sought to sell PCs under the AST Computers name. AT&T, Zenith and Texas Instruments all dropped or sold their PC divisions.

Disaster struck the PC market at the turn of the millennium. After having grown steadily since 1985, the market slowed in late 2000 and shipments fell by just more than 4 percent in 2001. The drop touched off a major round of consolidation, including HP's Compaq purchase, which swallowed up not only Compaq but also Digital Equipment Corp., acquired by Compaq in 1998.

Even relative giants suffered, including Gateway, which retreated from the global scene and refocused its efforts on the United States, where it tried several different strategies before acquiring eMachines in March of this year and resorting to massive layoffs.

Only Dell, considered by most to be the healthiest of the PC makers, was able to weather that storm, while showing consistent quarterly profits.

Though sales bounced back in 2003, and are expected by researcher Gartner to hit about 180 million units this year, the outlook for the future is cloudy at best, analysts say.

Earlier this week, Gartner predicted that as many as three of the top 10 PC manufacturers may be forced out of the global PC market by 2007 as demand for PCs falls off after 2005. Gartner said in its report that IBM, and also HP, could be forced to spin off their respective PC businesses.

Where it stands
Right now, Dell, HP and IBM rank as the world's top three manufacturers in unit shipments, while Fujitsu, Fujitsu-Siemens, Toshiba, NEC, Apple Computer, the Lenovo Group and Gateway rank fourth through 10th.

Gartner predicts an annual rise in unit shipments of 11.3 percent and annual revenue increases averaging 4.7 percent between 2003 and 2005. Despite that relatively profitable period, 2006 will bring tougher times as demand for new PCs slows and competition between vendors increases, the research company said.

Many businesses and consumers will have replaced their oldest computers by the end of 2005, completing the latest PC replacement cycle. With owners typically replacing desktops every four years and notebooks every three years, there should be a drop in demand between 2006 and 2008. That period will see average annual unit shipment and revenue growth slow to 5.7 percent and 2 percent, respectively, Gartner predicted. So-called emerging markets such as China will deliver the best growth during that time but will be unable to offset slack demand elsewhere, the Gartner report added.

If the predictions hold true, the 2006 to 2008 period will make for better times than 2000 to 2002. But lower revenue and unit shipment growth in 2006 through 2008 will be just as traumatic for manufacturers as it was in years prior.

"The bottom line here is that the vendor landscape will look very different in the next couple of years," Leslie Fiering, an analyst with Gartner, said in an interview about the report.

Gartner isn't alone in predicting slower PC market growth in the 2006 to 2008 time frame. IDC also has warned of even slower, single-digit growth rates after 2005.

"It looks like the unit growth from 2006 to 2008 is going to be in the 8 percent range...driven by nondeveloped markets and a steady replacement market in the developed world," said IDC's Kay.

The fittest
Still, there are several likely survivors. Dell--which can use its relatively low operating costs to reduce prices and still profit--is in the best position for weathering a downturn in demand, Fiering said. The company, which has become the world's largest PC maker and which had just more than 18 percent of the market in the third quarter, has been able to boost shipments and acquire new customers even during the hard times seen between 2000 and 2002.

Apple's uniqueness may have helped it be somewhat immune from the consolidation trend.

Its Macintoshes feature a radically different design from most PCs and use a different OS and processor. That has relegated Apple to a niche, but it has also allowed the company to be one of the few whose PC business is consistently profitable.

More recently, Apple's move into music has allowed it to further stand out from its PC competitors. In recent quarters, sales of the iPod have outnumbered sales of the Mac.

Less clear is how well Apple will be able to translate the widespread popularity of its music player into a greater slice of the computer market.

Although Apple has been able to sell machines that are often pricier than the typical PC, it has not escaped the changing economics and in recent years has radically reshaped operations, moving a great deal of its sales direct to customers and drastically reducing its inventories.

Meanwhile, Lenovo, once known as Legend, is determined to secure a larger role for itself outside of its native China. During 2002, it ramped up plans to sell PCs globally. It even opened a Silicon Valley office and started selling laptops in Spain under its QDI brand. It also had eyes on Thailand and Southeast Asia.

But, by 2003, it retreated, due in part to market share gains in China by Dell and others.

Founded in 1984 by researchers from the Chinese Academy of Sciences, Legend first existed as a distributor of foreign information technology products. It got its start in PCs by becoming AST's distributor in China but dropped AST in 1990. Similarly, Legend had a deal to work with Acer on consumer PCs and went on to sell consumer PCs of its own after the deal ended. The conglomerate makes a wide variety of projects, from supercomputers to cell phones.

CNET's Ina Fried and Michael Kanellos contributed to this report.