Reuters logo
Slack PC demand spreads pain across tech sector
January 23, 2009 / 12:55 AM / 9 years ago

Slack PC demand spreads pain across tech sector

<p>A Microsoft Windows user downloads a patch from Microsoft's website to protect his computer from a virus in New York, August 14, 2003. REUTERS/Jeff Christensen</p>

By Gabriel Madway - Analysis

SAN FRANCISCO (Reuters) - Weak results from technology bellwethers Microsoft Corp (MSFT.O) and Intel Corp (INTC.O) show a brutal plunge in demand for personal computers that will likely continue and spread to hurt other tech companies.

Among the more vulnerable is No. 2 PC maker Dell Inc DELL.O, analysts say, whereas larger rival Hewlett-Packard Co (HPQ.N) benefits from a more diversified business and recurring revenue streams from its tech services, like IBM (IBM.N).

Microsoft, whose Windows software is in nine out of 10 personal computers, and Intel, whose microprocessors are in eight out of 10 PCs, have posted disappointing profits for the December quarter, blaming weakness in PC demand.

The world’s top software maker also pointed to the popularity of small netbook computers, which are roiling the industry as their lower selling prices cut into the sales of more expensive laptops, and the margins of tech vendors.

Pacific Crest Securities analyst Andy Hargreaves called the PC demand environment “as bad as I’ve seen.”

“We just saw in Q4 demand fall off a cliff. We were running at double-digit PC unit growth in September and it fell to negative by December, and it happened in all markets almost simultaneously,” he said, adding that the shift to netbooks was a “sea change.”

“For PC manufacturers and for PC suppliers, including Microsoft, that creates a big problem, because netbooks are by their nature commodities,” Hargreaves said.

Robert W. Baird chip analyst Tristan Gerra said recovery will be slow, and computer parts makers have “stopped ordering entirely, as a result of this we’ve seen demand for PC components falling precipitously.”

“Clearly given the end demand environment, there’s going to be increasing pressure by the consumer to purchase low-cost PCs, and that also favors netbooks,” he said.

Intel’s inexpensive Atom chip dominates the netbook market, which is good for the company, Gerra said. But he sees risks to Intel’s gross margin if Atom becomes a more mainstream platform. List prices on Atom are as low as $20, whereas Intel’s Celeron low-end mobile processor costs $70 or more.

Microsoft faces similar margin pressures. Enderle Group analyst Rob Enderle estimates that Microsoft receives $60 in revenue or less for every Windows netbook sold, versus at least $90 for traditional laptops and PCs.

SLOWEST GROWTH SINCE 2002

Businesses and consumers alike are scaling back PC purchases as the economy deteriorates.

According to research group Gartner, fourth-quarter PC shipments grew a mere 1.1 percent worldwide, the worst growth rate since 2002. Gartner’s data showed Dell continuing to lose market share while Taiwan’s Acer Inc (2353.TW) gained ground, fueled by strong sales of netbooks.

“The supply chain is going though a readjustment where nobody wants inventory. They’re cutting back on inventory plans that they had previously, recognizing that we’re in a slower growth market, there’s probably less dollars available,” NPD analyst Stephen Baker said.

Besides Microsoft and Intel, PC-dependent Seagate Technology (STX.O) also issued disappointing results. The top maker of hard-disk drives posted a wider-than-expected loss and its shares fell 24 percent on Thursday.

HP and Dell are feeling pressure at both the high and low end of the market. Smaller companies like Acer are rising fast -- it is now the world’s No. 3 PC maker.

At the same time, Apple Inc (AAPL.O), with it’s slate of premium-priced Mac computers, continues to gain share in the U.S. market, where it currently ranks No. 4. Apple surprised Wall Street with record quarterly earnings.

HP and Dell are expected to report results next month. Dell shares fell 2.2 percent on Thursday while HP shares rose 1.1 percent, even as Microsoft shares plunged 11.7 percent.

CANNIBALISTIC NETBOOKS

According to NPD, an estimated 50 percent of U.S. netbook sales in December were cannibalistic even though they helped boost overall U.S. laptop volume sales that month. NPD said average U.S. notebook selling prices fell to $740 in December from $861 last January, due mainly to netbooks.

Sanford Bernstein estimated some 35.5 million netbooks will be sold in 2012, making up 30 percent of overall consumer PC laptop sales. It said netbook margins for PC makers are similar to those for low-end notebooks, but netbooks still have “the potential to meaningfully disrupt several points along the technology value chain.”

Jeffrey Lindsay, a senior analyst at Sanford Bernstein, said Microsoft had failed to recognize the strength of the netbook market. Around 30 percent of netbooks run Linux, an open source operating system, and many others run Microsoft’s older, less expensive, Windows XP. Most netbooks aren’t powerful enough to run its latest offering, Vista.

Lindsay said Microsoft will have to shift its thinking to face a new reality: consumers want speed and mobility, and are less interested in cumbersome, feature-laden systems.

“They’re going to have to accommodate it <the netbook> because clearly all of the growth is happening with small devices,” he said.

Reporting by Gabriel Madway, editing by Tiffany Wu and Tim Dobbyn

Our Standards:The Thomson Reuters Trust Principles.
0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below