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Commentary: PC market still looks strong

The Intel situation reflects a growing European currency crunch rather than a change in fundamental PC demand.

Intel blamed softening demand in Europe for its anticipated lag in third-quarter revenue. However, we believe this is more a result of general business conditions driven by the recent substantial drop of the euro rather than a softening of fundamental demand for PCs.

This situation resulted today in the intervention by European, U.S. and Japanese central banks to shore up the euro.

See news story:
Intel warns revenue won't meet expectations
META Group research indicates that growth in business demand for PCs will remain strong through the end of 2000. During the first half of 2000, many organizations took a cautious view of Windows 2000 on the desktop, evaluating the product and waiting for the release of service packs and drivers. Our research indicates firms are now moving ahead with upgrade plans, and many will choose to upgrade large portions of their desktop fleet. This can result in the purchase of anywhere from 10,000 to 50,000 PCs for a typical large company.

We also continue to see strong demand in the corporate market for laptop computers. All this points to a potential increase in business demand for PCs over the next six months. PC demand on the business side may actually be growing, because during the last six months many companies have limited their purchases to adding systems only as they add employees or retire old systems.

Our research indicates the business PC market is now entering a period where companies will proactively start replacing machines even if they have not reached the end of their normal useful life.

The wild card in PC demand will likely be the consumer market, which accounts for approximately 45 percent of the U.S. and 35 percent of the European PC market. If the pace of U.S. economic growth slows--after the extremely robust economy of the last few years--the consumer PC market, like all other sectors, will feel the effects.

In Europe, both general economic slowdown and the concern around the euro could act to dampen demand. However, other factors can potentially increase consumer demand.

An increasing number of companies (such as Ford Motor and Delta Air Lines) are exploring expanded employee PC-purchase programs. This could have some positive impact on demand for both business and consumer low-cost PCs. In addition, PC prices have moved to a low enough price point that consumers no longer view them as a major capital investment, like an automobile. Also, consumers increasingly view the PC as an education and entertainment device and necessary Internet tool, placing the PC higher on the family shopping list.

Rather than an indication of PC demand, Intel's revenue disappointment may be an indication of increased competition in the chip market as well as changing buying patterns that are exerting pricing pressure. Advanced Micro Devices is cutting into the marketplace for chips for consumer PCs, and Intel is seeing increased sales of its less expensive Celeron chips compared to midlevel or premium processors.

The mix of Pentium versus Celeron is starting to shift fairly significantly. We are even starting to see--although META Group does not recommend this practice--a number of corporate buyers buying Celeron-based systems to save a few hundred dollars on each.

Intel remains a long-term strong market player with impressive technical capabilities, physical assets and a strong vision. The market, too, remains strong in the long term with many forms of computing becoming increasingly vital for consumers and business professionals.

Consumers should proceed with current PC procurement plans and should not expect softening overall demand for PCs to provide opportunities for price concessions. In fact, buyers should actively plan future purchases over the next six months to avoid being caught in potential parts shortages.

META Group analysts Dale Kutnick, Peter Burris, David Cearley, Val Sribar, William Zachmann, Jack Gold and Steve Kleynhans contributed to this article.

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