Net driving PC sales, but profits shrinking
The Internet has kept its promise of driving personal computer sales higher. Unfortunately, for PC makers, the promise also comes with a curse.
Last year, analysts noted that the 
Internet was cranking PC
sales, and the entire computer industry, into a higher gear. Major computer
makers, including Dell Computer, Compaq Computer, and Gateway, are indeed selling more systems
in part due to the Net.
PC sales are growing at around 12 percent over the same period the year before, and the major manufacturers are growing at much faster rates. Unfortunately, they are doing so at devastatingly lower prices and razor-thin margins.
In order for PC makers to truly profit from the rise of the Internet, industry experts say that the Net itself needs to evolve to a point where users actually require high-end, bigger margin PCs to harness the power of what is available online. Right now, arguably you don't need a computer with an Intel Pentium III chip to surf the Web.
"Once broadband becomes reality, you will have applications such as multi-player games, and large video files that will be stored locally," said Abhi Chaki, director of bandwith and access strategies at Jupiter Communications. Chaki added that with the advent of broadband applications, the early adapters are likely to rush out and buy the brawnier PC.
The industry is trapped somewhat in a vicious cycle in terms of higher function Internet applications. Users can buy a Pentium III system, but they can generally tackle most Web sites with a relatively cheap Celeron or K6-2 based system.
Applications and Web sites that take advantage of more video and multimedia will drive the need for more powerful computers with higher margins. However, the lack of a present market, combined with a shortage of broadband capacity to carry them are keeping developers from making the leap.
Intel for its part has been seeding the path for more power. The company is providing massive amounts of marketing and technical support to developers to build more complex applications. The company is also directing its venture capital funds toward investments in broadband applications.
Until such a time, PC makers are going to have to try to overcome the low-profit margins with a mix of services and products, analysts said.
"People aren't as interested in putting money into the box itself," said Matt Sargent, a senior analyst at ZD market Intelligence. "They are more interested in the add-ons--Internet connection and devices like scanners, digital cameras, and printers."
"The box is just step one, while it used to be the end result," Sargent added.
Net access services
Computer makers have been increasingly providing Net access services
bundled with their units, and analysts agree that they will generate more
revenue from this service.
"A package-in-one makes a lot of sense, because it makes it easier for people to connect," Sargent said, noting that ease of use is still paramount.
Chaki said that Gateway's ISP service, Gateway.net, is something that the other PC makers should move quickly to emulate.
"It is an incredible distribution channel through which new features, upgrades, and customer habits can be tapped into," said Chaki. "That connection with the consumer is potentially of more value than the $600 box itself."
Web server sales
PC makers also have a lot to gain from helping to build the Internet's
infrastructure with Web server sales.
"You see Dell and Compaq really trying to focus on that area," said Sargent. "Service and support connected with that infrastructure has been probably one of the top drivers of both those companies' growth."
There are several other factors currently causing a slowdown in PC sales, including shifting corporate budgets to deal with Y2K expenditures, and a seasonal slowdown. People are also trying to decide if they want to wait for the release of Windows 2000.
"We are in a pause period--a decision making process," said Sargent. "But I think PC makers in the long-term are going to be strong growers."
Sargent concluded: "I think 2000, 2001 will be very strong in the Internet development area as far as Web servers, and you'll see both Dell and Compaq rally selling to that sector."