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The week in review: How's the PC really doing?

Compaq's warning that first-quarter earnings would be half of Wall Street expectations due to weak demand for business PCs sets off a grand debate about the industry's health.

Late last Friday, Compaq surprised Wall Street by warning its first-quarter earnings would be about half of expectations, setting off a grand debate about the industry's health.

Chief executive Eckhard Pfeiffer said Compaq's problems are rooted in weak demand, intense price wars, and an unfavorable mix of lower-margin products. But suspicions that larger forces are buffeting the PC industry couldn't be suppressed.

Is the PC dead?
As the market sagged Monday morning, Hewlett-Packard and Gateway announced new programs to reach small business customers, unintentionally underlining the struggles traditional PC manufacturers have faced in dealing with the successful "direct sales" model of Gateway and Dell.

Introducing new server computers the next day, HP chief executive Lew Platt acknowledged that average selling prices for corporate PCs are falling but said the company is "on its way" to making money from that sector. Platt also took issue with Compaq's statement that demand is weak and scoffed at IBM chairman Lou Gerstner's widely quoted view that the PC era is over.

At the end of the week, IBM's new general manager at its Personal Systems Group said that the PC is far from dead, echoing revisionist comments being made by other executives and dampening speculation that IBM is going to get out of the PC business.

Separately, despite the surge in demand for sub-$600 computers, high-end Pentium III-based PCs have managed to rack up respectable sales among consumers, providing some hope to PC makers who have been pummeling each other in the low-cost arena.

Streaming ahead
RealNetworks will team with IBM to develop consumer software based on IBM's Electronic Music Management System. The deal, which sent Real's stock soaring amid the increased interest in Webcasting after Yahoo's purchase of Broadcast.com, gives impetus to another music delivery format competing for both adoption by the record industry and status among consumers.

The next day, Real announced the acquisition of privately held Xing Technology, a developer and provider of MP3 software, in a stock deal valued at a maximum of $75 million. Not to be left out, AT&T announced the second version of its a2b music player, which it said promises faster downloads and cleaner sound than MP3, and Microsoft posted a beta test version of its competing Windows Media Technologies 4.0, which it says offers stronger guards against piracy.

Bank of America has begun a pilot project for viewing and paying bills online that will be expanded by year's end to include Californians who use BofA's online banking services. Launched in March and soon to involve more than 1,000 BofA employees, the move comes as banks, billers, and technology companies jockey to use the Internet to present bills to consumers online, and then allow online payments. The largest U.S. bank has built its own software for the service.

AT&T must increase its @Home Network subscriber base substantially during the next 13 months or risk losing part of its stake in the high-speed Net access company to Cox Communications. The long distance giant, which recently acquired a 71 percent controlling stake in @Home via its purchase of cable operator Tele-Communications Incorporated, has to have at least 277,000 cable modem subscribers by May 31, 2000, according to a federal securities document.

So-called broadband stocks have made serious advances on Wall Street of late, as investors buy shares in firms that are leading the charge for high-speed Net connections. Among the big gainers are fiber optic network builders Qwest Communications International, Level 3 Communications, and the parent company of Williams Communications. But federal lawmakers are calling for the government to examine the business practices in a portion of the market, cable Net access.

IBM is expanding a partner program to include the Internet service providers it considers crucial to helping the firm to expand its e-business push to small and mid-sized businesses. A new unit will sell hardware, software, and computer services to ISPs, who in turn offer customers services including Web access, email and messaging, and e-commerce applications.

Coming and going
More senior executives are planning to leave Netscape Communications in the wake of its buyout by America Online, including those who were instrumental in building the Internet pioneer. Senior vice president Mike Homer, the architect of the Netcenter Web portal, is planning to take a sabbatical, and some insiders say it is likely he may not return.

As one high-level Cisco Systems executive departs, a chief architect of the networking equipment company's success plans to return to the fold. Former chief technology officer Ed Kozel will return on a full-time basis in November, while Bill Carrico, senior vice president for the company's small and medium-sized business unit, will shortly leave the company to return to the entrepreneurial world.

Separately, Cisco announced the $2 billion acquisition of GeoTel Communications, quickening the company's movement toward entering the voice market. The company has been expounding on the benefits of an integrated network for some time.

3Com will cut 150 positions and create a new personal connectivity business unit, as part of its plan to move its business into more profitable areas. Amid a series of financial setbacks, the goal is to streamline traditional but slow-growing networking card and analog modem product lines and pursue emerging high-speed Net access, home networking, and wireless markets.

PointCast is being selective about investment offers despite potential investors dropping out of contention. The privately held Sunnyvale, California-based company has received at least one proposal from founder and erstwhile CEO Chris Hassett but asked him to resubmit. Meanwhile, Softbank has decided not to pitch in on PointCast's new financing efforts.

Bell Atlantic plans to break up the wireless phone joint venture it operates with AirTouch. PrimeCo PCS, a mobile phone venture created in 1994 and operating in 18 states, had led to close relations between the two, eventually culminating in Bell Atlantic's bid last December to buy its mobile phone partner. But Vodafone's winning bid has changed the circumstances.

What's next
Apple Computer posted better-than-expected earnings of $135 million for its second fiscal quarter, good for 60 cents a share, a year-on-year revenue gain, and a sixth straight quarterly profit. The company also outlined plans to boost sales growth and said it is now offering 333-MHz iMacs in the same colors for the same price as the 266-MHz version.

Sun expects it'll be another year before its partnership with America Online starts to pay off. The complex deal will have a neutral effect on earnings per share for the next four quarters, before starting to produce profits in the two years after that, chief financial officer Mike Lehman said after the company reported nudging past Wall Street estimates with third-quarter income of $291.4 million, or 36 cents per share.

Advanced Micro Devices reported a loss of 88 cents a share--81 cents a share excluding restructuring charges--on revenues of $631.6 million, perversely topping analysts' dour, revised expectations. The poor showing largely owes to low yields and production problems associated with the fastest K6-2 processors, declining processor prices, and high fixed-costs. AMD expects to lay off 300 employees in the near future.

Although Rambus has been virtually anointed as the standard bearer for the future of computer memory, product delays and technical glitches have delayed its debut in PCs from the middle of the year to the end of the third quarter. As it slips, the pricey technology could start to feel the squeeze of cheaper alternatives and the industry's obsession with keeping desktop prices as low as possible.

Enterprise application software maker Baan is rolling out the first stage of a Microsoft-based e-commerce strategy that analysts say will suit companies' less-complex Web business needs. Rivals including SAP, PeopleSoft, and Oracle are testing the e-commerce waters as well, scrambling to expand their business beyond their customers' walls.

Cambridge Technology Partners posted first-quarter earnings of $7.5 million, or 12 cents per share, meeting Wall Street's revised estimates. But the company--which is restructuring to shift from ERP toward interactive and Web services--reported a charge of up to $9 million to move and retrain employees, and analysts are worried that Cambridge is having a tough time holding on to IT talent in a highly competitive market.

Privacy worries
In what was called a "technical error," the Nissan sent the addresses of 24,000 potential customers who had filled out a form on the company's Web site to every address on the list. Privacy advocates reacted sharply.

A day later, AT&T admitted a similar mistake, acknowledging it recently revealed the emails of 1,800 customers of an international calling program--putting the recipients in the "to" field instead of the "bcc" field.

In recent weeks, Intel, Microsoft, Yahoo, Excite, and Macromedia have stumbled in protecting users' personal data on Web sites, leading a growing number of observers to conclude that industry self-regulation doesn't work and that while the United States dominates in Net innovation, usage, and investment, its data protection policies are lacking and beginning to trail those of the rest of the world.

At least several volunteers are challenging America Online's practice of relying on volunteers to help maintain its virtual community. Some of the volunteers have asked the Labor Department to investigate whether the use of voluntary labor violates the Federal Fair Labor Standards Act.

One of the four Federal Trade Commission members who must approve the agency's proposed settlement of antitrust charges against Intel spoke out against the deal, saying it will be hard to enforce. But the remaining FTC commissioners applauded the proposal, which was announced last month and settles charges that Intel used its dominance in the microchip industry to stifle competition. The majority's support means the deal is likely to be approved when commissioners vote on the deal, probably in early summer.

Also of note
AltaVista will begin auctioning off placement on its search engine's real estate to advertisers, possibly jeopardizing the distinction between content and advertising ... Companies are in the early stages of an expected three-year transition to the euro currency, and the changeover is expected to bring a surge of business for IT consultants ... A PairGain Technology employee who posted a fake Bloomberg news story on the Internet that drove up the company's stock 31 percent has been arrested ... Gun auction sites are sprouting up all over the Internet in the wake of eBay's decision to ban firearms sales ... The September 9 debut of Sega's new computer game console will be a high-water mark for the convergence of PC and consumer electronics technologies. Dreamcast will feature a built-in modem for online gaming, Web browsing, email, and chat capabilities and can run games written for Microsoft's Windows CE software ... IBM will introduce integrated processor for set-top boxes that could lower the cost of rolling out interactive services ... After a bumpy first year, Mozilla.org finally will see a product based on its work come to market in May--and it's not America Online's ... As the tax deadline loomed, Intuit TurboTax and SecureTax.com users reported sporadic problems in electronically filing their tax returns.

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