Low personal computer prices don't sway purchasers
By Susan Avery -- Purchasing, 9/20/2001 2:00:00 AM
Lower prices are not moving corporate buyers to purchase more PCs.
The most recent statistics available from Gartner Dataquest, Stamford, Conn., show PC shipments in the U.S. (desktops, mobile and servers) slipping 6.1% from 11.4 million units in second quarter 2000 to 10.7 million units in second quarter 2001 [PUR: Aug. 23, 01; p. 39].
And it looks like more of the same for quarter three. Market research analysts say shipments continue to fall. If their forecasts are correct, that will make third quarter 2001 the third consecutive quarter to show a decline.
The picture isn't any brighter globally. Demand for PCs in Europe has dropped off as well. In Japan, shipments are near flat. The only bright spot is China, where buyers purchase PCs mainly through local sellers.
PC makers, who have been accustomed to double-digit growth, are slashing prices to spur sales. Working on thin profit margins, they're also cutting personnel, spending less on R&D and shutting down some operations. Yet, these activities don't seem to be working. The industry is consolidating. Some second- and third-tier suppliers—such as Micron—already have moved away from providing the market with PCs.
Recent price cuts by PC makers have resulted in a "lower center point to the market," says Todd Kort, principal analyst of Gartner Dataquest's Computing Platform Worldwide group. He explains that the market is shifting down, moving toward $900 to $1,300 desktops and $1,200 to $1,700 notebooks. PCs selling for less than $600 are not attractive to buyers now, he says, nor are there many $2,000-plus units on the market at this time. Consumers, however, who use their computers to play games, are willing to shell out big bucks for the latest whiz-bang technology.
Nevertheless, lower prices are hurting PC makers. Kort says that Dell is the only manufacturer to benefit from recent market moves. Because of the company's build-to-order manufacturing model, he says, "They can pass on lower prices more quickly, gain market share, and maintain a profit." In fact, the Gartner Dataquest figures show Dell's share of market increasing to 23.6% in second quarter 2001, based on shipments growth of 15.2%, compared to the same period one year ago.
Still, Dell warned investors earlier this year that it would be lowering its gross margin from 21% to 18%. Kort says Dell "knows what it is doing...They didn't need to lay employees off. They're simply putting some pressure on other computer sellers."
As for the other big PC makers, both IBM and Hewlett-Packard see profitability as more important than market share, says Kort. "Gateway made some noise with its 'little price war'. It vows to beat every other manufacturers' prices by $1. And, Compaq, who doesn't like to see its market being eroded, is struggling to be competitive with Dell. Dell's favorable market position is enabling the company to get a foot in the door at many companies. Long term, it will have a bigger market share." (Note: Kort's remarks were made before HP's acquisition of Compaq was announced.)
For corporate buyers, time will tell whether PC manufacturers will be 
able maintain the customer support levels their customers have come to expect. "It's too soon into the slump," says Kort, pointing out that computer makers regularly survey their customers' satisfaction levels. Another worry is whether manufacturers are spending enough on R&D.
Corporate PC buyers who keep a close eye on the market say plans to refresh their companies' fleets of desktop and notebook PCs hinge on more than lower prices. Most say they are awaiting new technologies as reasons to purchase new PCs. Some buyers, Kort says, have plans to upgrade PCs so internal customers can run Microsoft's new operating system. Windows XP requires about 25% more processing power than Windows 98. For the same reason, analysts are looking for an uptick in shipments from the consumer market during the coming Christmas selling season.
"XP won't have much impact on the corporate market for at least another six months," says Kort, adding that Gartner consultants advise their clients to skip a generation when purchasing operating systems. "While companies that have Windows 2000 software won't be highly inclined to upgrade, new desktops equipped with Intel's Pentium 4 processor and Windows XP are now the brightest spot on the horizon for PC sellers."
Other corporate buyers may be ready to purchase new machines later on next year. These buyers are replacing units purchased two years ago (older Pentium 2s and Pentium 3s) as part of their companies' preparations for Y2K.
The life cycle of the PC is being extended. Most corporations are getting 3.4 years out of a desktop before they retire it, says Kort. The life of a notebook is starting to creep up as well. It's now three years. It used to be two. "This is bad news for PC manufacturers," he says, "but good news for buyers who are getting more out of their investments."
Corporate PC buyers have always received more bang for their buck. As computer makers introduce ever more powerful desktops and notebooks, they tend to sell for similar or lower prices as older models. But market analysts say this bears little on purchasers' buying plans. PCs already in offices around the country, they explain, provide more than enough processing power for most workers to perform everyday tasks. Buyers who have purchased 800 MHz Pentium 3s for end users don't have much incentive to purchase 2 GHz Pentium 4s. It won't get things done faster.
Looking ahead, results of Purchasing Magazine's most recent Business Survey show 90% of corporate buyers expecting PC prices to either remain flat or fall in the coming three months. A sampling of readers' buying plans for the next six months shows that while they are keeping an eye on prices, they are more keenly interested in whether suppliers are keeping up with technology advances, and whether the technology can help internal customers add to their companies' bottom lines.
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Jim Baehr, manager, technical and services procurement at Bayer Corp. in Pittsburgh, is a corporate buyer who keeps a close eye on the PC market. He expects that many of the companies that purchased PCs in preparation for Y2K or simply rode the crest of the PC buying spree in the late 90s will do "some serious bulldozing" (buying) probably next year, unless the economy fails to pick up. Like many corporate buyers, Bayer has made a decision to lease its PCs on a two-year cycle. That way, it can do a regular technology refresh and doesn't have to worry about disposal.
And, like most PC buyers, Baehr is well aware of recent price cuts by the big PC sellers. "Lower prices are intriguing to us and provide us with opportunity to do some things that we may have considered price prohibitive in the past like look at flat-screen technology. Flat screens are more ergonomically attractive than the CRTs we are currently using."
Bayer leases its PCs through Dell. "They've been forward with us regarding prices," Baehr says. "They see value in having an open dialogue about prices." -
Another IT buyer in the Midwest takes a similar route. "We lease all our laptops and desktops and continuously do technology refreshes as the leases expire. Our laptops are leased for two years and our desktops for three years. We did a global RFP last year for our two-year global volume of desktops and laptops and picked one primary supplier with a few regional exceptions. We have the IDC benchmark built into our main contract (the supplier pays for it) and we get prices adjusted every quarter."
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Greg Buchanan, director of strategic sourcing, information technology and gaming for Harrah's Entertainment in Memphis, Tenn., is another corporate buyer who believes there isn't any compelling technology right now that would entice buyers to go out and purchase PCs. He points to use of PCs for long-distance telephone (and video) communications via the Internet as technology that would help spur growth in PC shipments because of inherent cost savings. Otherwise, he expects that sales of PCs will track current economic conditions, which, for now, means slow or no growth.
Hilton McKenzie, sourcing group manger, IT procurement, global information technology, GlaxoSmithKline in Philadelphia, says price isn't as important as it was a few years back. Continuing service and support are bigger supply chain issues to him as a corporate PC buyer. Financial health is one indicator he uses to track PC manufacturers. He watches a company's revenues and performance of its stock.
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