Live: Samsung Unpacked Live Updates Apple's iOS 16.3 Release 9 Ways to Celebrate Black History Month Best Indoor Plants HomePod 2nd-Gen Review 12 Best Cardio Workouts Watch the Galaxy S23 Reveal Salami, Sausage Recalled
Want CNET to notify you of price drops and the latest stories?
No, thank you

PC market staggers into 2001 hoping for recovery

After starting 2000 with strong sales, computer makers were blindsided by soft demand in the second quarter and the collapse of growth during the Christmas holidays.

Coins clank in a can. Feet shuffle close. A wispy voice pleads, "Buddy, could you spare a million? Or two?"

Year in
review special report The plight of PC manufacturers may not be so grim, but given their swift change in fortune, some computer companies may feel little better than bankrupt dot-coms. After starting 2000 with strong sales, computer makers were blindsided by soft demand in the second quarter and the collapse of growth during the Christmas holidays.

Far worse, sales projections for 2001 are, at best, grim. The slowing economy, decreases in technology spending, and cautious adoption of Windows 2000 have conspired against sales, analysts say.

For an industry used to double-digit growth, hard times have fallen on computer manufacturers. With a string of fourth-quarter profit warnings--from Apple Computer, Compaq Computer, Intel and Microsoft, among others--and spending cutbacks at Hewlett-Packard, uncertainty about the future is the mood of the moment.

"It's not the year you wanted it to be," said PC Data analyst Stephen Baker. "Based on the last few months, it's really the year PCs matured in the U.S. PCs started to behave more like a standard consumer item and not like some new high-velocity growth item."

Many manufacturers banked on continued growth that didn't pan out, ignoring warning signs of slowing sales along the way. The problem, said Dataquest analyst Martin Reynolds, "is we've moved from more of a growth to a replacement market; so many (manufacturers) over-forecasted, particularly during the fourth quarter."

On Wednesday, Dataquest revised its year-over-year growth projections for PC sales in the United States for 2001 to 12.8 percent from the high teens. The market researcher said desktop shipments are expected to grow at a paltry 11.8 percent next year, while notebook shipments should increase 17 percent. Worldwide PC growth is expected to come in at 16.1 percent in 2001 vs. 2000. Earlier in this year, 20 percent or more growth seemed sustainable, but Dataquest acknowledges that is no longer the case.

Living in denial
However, everything is hindsight now, for the year started out with a bang. Rather than the sales slowdown predicted with the Year 2000 technology glitch, PCs kicked off the millennium with strong growth. Sales surged in January and February--the two best months of 2000--boosted slightly by the release of Windows 2000.

"We saw a very strong PC market at the start of the year," said Dataquest analyst Jim Handy. "We saw less of a decline from (the fourth quarter of 1999) to (the first quarter) of 2000 compared to the norm. That indicated the year was starting out with retrorockets firing."

But as early as March, market researcher IDC was tempering 2000 projections, warning that the days of year-over-year growth of 20 percent or more were over. Dataquest later did likewise.

The final first-quarter tallies from Dataquest and IDC put U.S. PC shipment growth at only 17 percent--about 3 points less than expected--and 20 percent worldwide. Sales to consumers in Asia and the United States helped buoy sluggish commercial demand.

Worldwide PC sales during the second quarter remained surefooted at 18 percent year-over-year growth, according to Dataquest, and 14.5 percent, as figured by IDC. But again, overseas growth--in China, Japan and Latin America--compensated for slower-than-anticipated U.S. sales. The second quarter typically is the slowest sales period of the year.

Wall Street analysts started firing warning shots about slowing PC sales in September, when U.S. Bancorp Piper Jaffray analyst Ashok Kumar warned PC sales would slow dramatically in the second half.

Still, the third quarter set the stage for a fourth-quarter dip, in part because of strong September sales. Worldwide PC sales shipments grew about 16 percent during the third quarter, according to Dataquest and IDC. U.S. PC shipments, on the other hand, slowed dramatically, posting only 12.2 percent growth, according to Dataquest, and a paltry 9.4 percent increase as pegged by IDC.

Despite uncharacteristically slow growth in July and August, September rebounded as the third-best sales month of the year, according to NPD Intelect.

IDC analyst Roger Kay described the situation that followed as "living in denial." September's sales gains and past experience with strong holiday sales convinced many PC makers to bank on a strong fourth quarter.

Instead, sales collapsed in October. After years of near-continuous growth, PC sales fell 18.5 percent, according to NPD Intelect. November continued the decline, which spilled into December.

PC Data's Baker described the year-over-year retail sales drop the first two weeks of December as "20-plus percent."

Assessing the damage
"The bottom fell out so fast, no one really has figured out why this has happened," Baker said. "We're talking about eight weeks in which sales fell off."

Throughout the year, PC makers had relied on acceptable consumer PC sales to compensate for sluggishness in the commercial sector. One problem: Windows 2000 failed to boost corporate PC buying, even after Microsoft released the first collection of bug fixes, or Service Pack, in July.

See 2000 timeline "Windows 2000 failed to ignite sales as many had hoped," said Robertson Stephens analyst Eric Rothdeutsch, who now sees no sales pickup from Windows 2000 "until second half of next year."

As the economy began to slow in October and November and battered investors started to reel from heavy losses, consumer PC buying stalled suddenly, just in time to torpedo the important holiday-buying season.

"The whole thing turned on a dime," Kumar said. The Piper Jaffray analyst, who was harshly criticized for his predictions about the future of the PC industry, saw even his most apocalyptic projections eclipsed. Worse, slow consumer sales foreshadowed changes to come in corporate buying.

"More importantly, what's happening here is the weakness in retail is spilling over into the commercial market," he said. "Given the lack of take-up in Windows 2000, the slowdown is going to be fairly dramatic."

The sudden shift in PC sales forced market researchers to revise their forecasts for the fourth quarter and 2001. IDC shaved more than 10 points from its consumer PC shipment forecast--21.2 percent growth vs. 10.2 percent--or about 500,000 fewer units than projected.

Overall, in part because of strong demand in the Asia-Pacific region and Japan, IDC lowered fourth-quarter worldwide PC growth only slightly, to 19.8 percent. But the market researcher shaved about three points off U.S. projections, lowering them to 15.8 percent. For 2001, IDC predicts worldwide PC growth of only 16.6 percent compared with its earlier-reduced forecast of 18.8 percent. Earlier in the year, the market researcher had predicted 20-plus percent growth.

Sorting through the mess may take some time. Apple has a whopping 11.5 weeks of stock stuck on dealers' shelves, while Compaq has 8.4 weeks and Toshiba 6.8 weeks of inventory, according to ARS. With 5.2 weeks of inventory, Hewlett-Packard is below the average 6.1 weeks, still above the more typical four-week average.

Rothdeutsch predicted a "bloody battle" over pricing in the first quarter, as companies look to clear out inventory. But Kumar was less optimistic, speculating there could "be two rough quarters" before inventory levels return to normal.

The future uncertain
Sorting through the aftermath may not be easy, particularly for Apple and other companies largely dependent on consumer or U.S. market sales.

"For many of these companies, the future is overseas," IDC's Kay said. But even there, he warned, many markets are growing increasingly saturated.

ARS analyst Matt Sargent sees that a dramatic shift has taken place in the United States, and PC makers must shift gears to for a market dominated by customers buying replacement PCs rather than first-time buyers.

"This is not a temporary shift," he said. "It's not just a one-quarter blip. This is a clear signal that has not only begun, but we're in the depths of it. This market will never be the fast-growing glowing child of the technology industry."

Baker said four things could help reignite PC sales in 2001: "a new, aggressive operating system launch, a much faster rollout of broadband, a component pricing shift, or a shift in how the Internet access device competes with PCs."

Apple and Microsoft both have new operating systems set to launch in 2001. Apple is expected to release Mac OS X in the first half, and Microsoft's Whistler--its successor to Windows Me and Windows 2000--is set to arrive later in the year.

But waiting around for a new operating system or other industrywide change is not enough.

"The free ride is over," Kay said. "Now it's time to truly innovate again."