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PC renaissance begins at home

The personal computer market in 1999 grew over 20 percent--much greater than anyone had predicted heading into last year. Yet big businesses didn't fuel that growth; home consumers did.

The personal computer market in 1999 grew over 20 percent--much greater than anyone had predicted heading into last year. Yet big businesses didn't fuel that growth; home consumers did.

People bought an astonishing 40 million PCs, 30 percent more than last year, for private and home office use. While growth rates are unlikely to be that high in 2000, the PC market should continue to grow this year, and once again it will be the home consumer leading that growth.

Here are three reasons why:

•  The expanded use of the Internet. We all know that more people are connecting to the Internet each day, and that even after all the talk of Web appliances or access devices, the PC is still the dominant way to get connected. Internet applications like digital media (MP3 and streaming video) are becoming more popular, which means more people want to get online. It's not just dad and mom getting connected for work, but kids getting online for entertainment and education, and grandparents for email.

•  The need to upgrade existing home PCs. Just as there are upgrade cycles in business, we are on the verge of one at home. The first wave of consumers buying PCs began in 1995-1996, and those PCs are running out of power. To get high-speed digital subscriber line or cable service, many consumers need an upgraded PC. Also, along with the digital media applications, digital photography is becoming more popular. And digital photography demands powerful new PCs.

•  The continued decline in prices First PCs plunged to sub-$500 prices, then we were hit with the free-PC craze. This trend of more power for less money should continue in 2000, which is important for a couple of reasons: Today about 55 percent of U.S. homes have a PC, and lower prices increase the number of households that can afford a PC. Lower prices are making it possible for a single home to own multiple PCs, especially as the PC/Internet becomes more necessary for students. Just as a single-TV household in the 60's added multiple units because family members wanted to watch different shows at once, the same trend should occur with home PCs. Today 17 percent of U.S. homes have more than one PC, and that percentage will rise dramatically over the next few years.

Overall, I'm looking for over 17 percent growth in consumer PCs compared with less than 15 percent for business--and that's off of the big numbers the industry produced last year.

So which companies are best positioned to reap the benefits of this trend? Apple Computer, Gateway and Hewlett-Packard.

Apple, rejuvenated with the return of chief executive Steve Jobs and the success of the iMac, continues to target consumers with innovative technology and design, a significant new emphasis on the Web, and new products such as the AirPort wireless networking card.

Gateway is in my view the best-positioned player selling directly to the consumer. Its successful hybrid-retail country-store concept continues to expand in the United States and is at the cusp of penetrating Europe broadly. Gateway continues to focus on the consumer market, and its strategy is not just tied to the PC. In fact, management sees revenues growing dramatically over the next few years, fueled by Internet appliance sales, peripherals and Internet access. The company is allied with AOL for Internet service.

I believe Hewlett-Packard is the best-positioned PC provider in the consumer retail-channel. Not only is it growing the fastest--with over 100 percent consumer PC revenue gains in their most recently reported quarter--but the company is also positioned most squarely in the peripheral space with printers, scanners and digital cameras. Finally, the company is strong overseas where I think the next wave of consumer PC growth will be found.

Bottom line: In 2000 as far as PC growth is concerned, once again this will be the year of the consumer.

Philip Rueppel is a research analyst with Deutsche Banc Alex. Brown. Rueppel's comments that appear herein are not a publication of Deutsche Banc Alex. Brown and may not represent Rueppel's complete or current opinion with respect to any company. Persons who want to make an investment decision with respect to any company mentioned by Rueppel should obtain a copy of Rueppel's current and complete opinion as contained in the most recent publication of Deutsche Banc Alex. Brown. Rueppel's opinions are not intended as an offer or solicitation, nor as the basis for any contract for the purchase or sale of any security, loan or other instrument.

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