PC profits: hard for some, easy for others

Electronic News,  Oct 27, 1997  by Carol Haber

• E-mail
• Print
• Link

PC companies reported mixed earnings in the third quarter as the PC marketplace underwent drastic changes. Bigger profits were earned by companies that had targeted the consumer low end and/or had adopted their logistics to today's market demands. While consumers were going for the under $1,000 PC, the corporate market stalled as company MIS officers waited for the latest Pentium II technology. Suppliers to the PC companies were buffeted by the same phenomena.

Among the standout performers, Compaq recently reported worldwide sales grew 31 percent from 3Q96, with net income up 54 percent from a year ago. Unit volume vaulted 56 percent (EN, Oct. 20). Dell Computer revenues in its most recent quarter rose 67 percent quarter over quarter, and net income, 108 percent. Unit shipments grew "four times the industry rate."

Giants like IBM and HP did not fare as well. IBM reported overall gains, beating estimates (see story, page 48), but difficulties in PC operations tied to the low end of the consumer market. Hewlett-Packard, in its most recent quarter ended July, reported consolidated gains and "outstanding" increases in its PC business, but HP is expected to address the surge in low-end consumer business in the current quarter.

Still analysts think the changing nature of the industry make it likely that industry giants will eventually dominate the PC market, not necessarily those doing well now.

Among factors determining success in the PC marketplace today are: a broad product line to serve more sophisticated and entry-level consumers; degree of penetration into the corporate desktop market; scope of services and support: low production costs/economies of scale; distribution model; increasing value of brand names; and ability to stay on a rapid technology curve.

While companies like IBM and HP may not be so quick to respond to the whims of the consumer market, with their massive services and support infrastructures geared for the rich corporate desktop business, those companies, along with others, may stand the strongest chance to overpower rivals when consolidation occurs. This, as they utilize economies of scale and learn the ropes of new distribution models for lower-priced consumer offerings.

HP has been doing "very, very well" with PCs in the near term, according to Phil Rueppel of B.T. Alex. Brown, but like IBM has not been as quick to capitalize on the $1,000 PC. HP will address the low end in the fourth quarter, he said. HP's PC unit was one of its fastest growing large businesses, he added. About 20-25 percent of HP's business goes through the retail channel to consumers and small businesses, a ratio similar to Compaq's.

Today's Leaders In A Mixed Market

But right now, "Two companies that seem to be distancing themselves from the pack are Compaq and Dell," said Mr. Rueppel. "Compaq in indirect sales and Dell in direct. IBM is not doing as well because it appears to have missed the low-end consumer buying cycle. Gateway appears to be having more difficulty than Dell because of its focus on the consumer and its loss of focus as it moves into retail, with ARL on the server side. It is a less focused company than Dell. They do have some low end but not very good penetration into mid and large businesses, where volumes are more consistent quarter to quarter."

Mr. Rueppel admires what Compaq has done. "Compaq is the number one market share vendor," he said, "and is leveraging that into further market share gains. I believe Compaq has the lowest cost of production of all and also has the broadest product line. When it was apparent that the $1,000 PC was going to be a big success, Compaq could ramp volumes much more quickly than any other vendor. That's what is driving Compaq's success in the near term."

Dell, he said, has perfected the direct sales business model by reducing the amount of overhead involved with middlemen. Dell's distribution allows it to offer more configured, lower cost computers.

Dell sells primarily to business (90 percent) rather than consumers, but is pushing into the consumer market. "Near term both Dell and Compaq are doing extremely well. Compaq just reported its September quarter with sales up 31 percent and units up over 50 percent. It's hard to imagine better execution."

Contending For The Long Term

Nampa, Idaho-based direct marketer MEI, he said, makes a good product but "I don't see any clear trend near or long term that makes me think it will be one of the winners in a consolidation, which I expect over the next five years."

Contenders for long-term dominance are IBM, HP, Compaq and Dell, said Mr. Rueppel. "The top vendors still have less than 50 percent market share. I believe the market will evolve...into three or four large players and some smaller ones, but not the hundreds there are now. There are economies of scale which impact logistics and distribution, and the procurement of parts."

While the PC market is "fairly healthy" right now, one key concern, which "we are all trying to figure out" is: While the thousand-dollar PC is expected to have a lot of impact in the consumer space, "there is no impact or pressure yet for business users to move to a lower price point. We're watching that. We have seen relatively stable average selling prices (ASPs) in the corporate community. Expectations are that the corporate arena will be the first to embrace the Pentium II machines. This market segment of reasonably good power but inexpensive PCs...well, it is unclear how it will impact the players."