Buyers Waiting For PC Functional Improvements, Not For More Speed.

Wireless, tablets, pocket PCs can all be winners.

Confirming what many observers had been suspecting for months, a recent research report indicates that, for the first time in the history of the personal computer, unit shipments in the U.S. will show a decline from a previous year.

IDC revised its U.S. PC shipment forecast for 2001, lowering it from the previously expected 2.2 percent growth rate to a 6.3 percent decline from 2000.

Worldwide, the firm has found, PC shipments will continue to grow moderately. However, IDC has also lowered its worldwide forecast number for 2001, dropping it from 10.3 percent to only 5.8 percent over 2000. The firm says worldwide performance was strongly affected by the soft U.S. market.

Clearly, the weakening U.S. economy is wreaking havoc on the bottom lines of major PC makers; many had already predicted single-digit growth rates for the year--a far cry from the 25 percent-plus growth rates of the past. But, while the U.S. economy itself has undergone significant expansion since 1992, the country has also seen recession during the modern PC era (from about 1990), which did not lead to a year-to-year sales decline. What's going on?

For some time, anecdotal evidence has suggested that corporate sales have been significantly down over a year ago. Now we have the numbers to confirm it. Through the first quarter, commercial shipments in the U.S. held up reasonably well, achieving mid-single-digit growth rates. However, IDC believes commercial spending will be reduced dramatically through the rest of the year, as declines in consumer spending spill over into commercial markets. Projections indicate that shipments to the U.S. commercial segment will be virtually flat in 2001 with a growth rate of just 0.6 percent.

Poor consumer sales are playing a major role in the overall decline in unit shipments. U.S. consumer sales for 2001 are expected to fall by 17.3 percent, based on the presumption of a continuing poor economic environment.

Worldwide, IDC has found, external factors such as falling consumer spending in Western Europe and declining growth in Asian markets have put the brakes on international PC sales. But just as clearly, the slack U.S. demand for new PCs hurts Asian economies, many of which rely on semiconductor export sales to the U.S. market.

"With the United States clearly in the tank right now, the question is to what extent Europe and Asia will follow," Loren Loverde, director of IDC's Worldwide Quarterly PC Tracker, said in the report. "The commercial segment in Western Europe is showing some promise, but the consumer segment looks more shaky. The heavily export-dependent countries in Asia could also be vulnerable to the U.S. slowdown, although low penetration rates in many countries leaves room for double-digit growth for the foreseeable future."

While the U.S. economy is not yet in "official" recession, IDC believes that major manufacturing industries--including PCs, automobiles, and steel--are in a period of "retrenchment" after the boom years of the late 1990s. This retrenchment will likely result in another year of single digit growth rates for the PC industry: Sales in 2002 are expected to rise 4.6 percent over sales this year, from 45.3 million to 47.4 million. By contrast, sales from 1999 to 2000 rose from 45.1 million to 48.4 million, or a 7.3 percent increase.

Wither Technology?

The numbers, while indeed bleak, do not tell the whole story. Part of the decline can surely be blamed on the fact the few, if any of us, have a true need for a faster PC. Virtually any PC bought new in the past three years will run today's operating systems and applications just fine (with the possible exception of needing some added RAM). Since the vast majority of consumers use PCs for Web surfing and email, most of their perception of the speed of their systems is based on modem throughput, not CPU or graphics chip speeds.

"It's pretty much like anything else: Incremental improvements in speed make a larger percentage difference in performance when the processor speed is low," says Tom Nolle, president of Cimi Corp., a consultancy that tracks computing technology. "133 incremental MHz at a 133MHz performance level doubles speed, but when you're already at a gigahertz, it's a 13 percent improvement." Nolle feels that new technologies, not simply newer, faster chips, are required to jumpstart the market.

From a technology standpoint, those of us in the industry relish the release of new chips from companies like Intel and AMD because they demonstrate the continuing evolution of computing, and they offer a glimpse of what devices of the future have in store. But for consumers (with the exception of hard core gainers) a computer has become less a tool than an appliance, something to be kept until the end of its serviceable life. "Speed alone won't drive today's market," Nolle adds. "We'll need functional improvements, which is where broadband to the home would come in.

Further, the last major upgrade of Windows, Windows 98, was more than three years ago, and this is still the dominant OS on business desktops. IT managers have learned the hard way that a first release of a Microsoft product is, for all intents and purposes, shrink-wrapped beta software, and as such should be avoided. Since an OS upgrade is often the primary impetus for a new system purchase, buying cycles are slowing and PCs are staying in service longer. Windows XP, expected later this year, is not likely to have a major impact on the market until late next year at the earliest, when many corporate systems will be nearly four years old and ready for replacement.

"From a technological perspective, we're seeing the 'good enough' phenomenon," IDC's Roger Kay, the report's author, said in an interview. "The megahertz are now available to do all that's needed [from an end user standpoint]. The constraints are in software, in infrastructure, and in the end user himself. The industry needs a compelling package to make users upgrade, and an Intel P4 and Microsoft Windows XP are not enough." Kay feels that the technology that's necessary to jumpstart the market--including infrastructure-based technologies like client and location independence--are several years away from widespread use. "People now have the machines that do what they want," Kay contends.

Living It Up

"The lifecycle of the PC is definitely lengthening," agrees Charles Smulders, VP of computer hardware platforms at research firm Gartner Group. "We measure the typical lifecycle for the professional market at 3.4 years today, and it's even longer in the home market," Smulders says. "In the past, there were clear reasons to upgrade because of software requirements. Today's machines can run new software, it just may run a bit slower."

To add to PC makers' woes, the heady days of Internet-fueled PC and network infrastructure upgrades are now but a distant memory. Hardware buying cycles have slowed, and have created ripple effects throughout the sector. For illustration, one need only look at Cisco Systems. Once the darling of the industry and the stock market, the networking equipment maker recently reported its first quarterly loss ever as a publicly traded company-yet more indication that corporate IT has built out its networks to not perfect, but good enough. There is simply no compelling reason to upgrade current technology.

Though the two firms are competitors, Gartner Group numbers are generally in line with IDC's projections. The company projects worldwide PC sales showing 6.5 percent growth this year, with U.S. sales flat to slightly negative. The reason, says Smulders, is clear: market saturation.

"There are simply fewer and fewer new seats available," Smulders says matter-of-factly. "In the professional market, everyone who needs a PC has a PC." Smulders believes that the sub-$1000 market for PCs has spurred both corporate IT and consumers to buy new machines, most of which are now less then two years old. This means that most users won't upgrade until sometime next year at the earliest. "Future growth is going to depend on replacement cycles, not sales to new buyers," he adds.

IDC's Kay points out that the double digit growth rates in the PC market are generally a thing of the past. "We'll see moderate double digit growth in 2003 [14.2 percent] but beyond that, growth is going to be very slow." Kay's research shows 7.5 percent and 4.5 percent growth in the U.S. PC market in 2004 and 2005, respectively.

Still, market research isn't infallible, and computing technology is unpredictable. There's always a chance that some new killer app or hardware product will spur a buying frenzy. For example, if Bluetooth or 802.1 lb achieve significant market penetration, PC makers might add these wireless chipsets to motherboards, making the PC a wireless base station. This would take advantage of the growth in the handheld market while at the same time encouraging users to upgrade desktop systems.

But the reality is that the market for PCs is growing; it's just that the PC is no longer simply a desktop or a notebook system. "I think a big kicker could be tablet and Pocket PCs," says Cary Snyder, Senior Analyst at chip watcher Microprocessor Report. "But are they a PC or a handheld?" Indeed, the easy solution to a downturn in PC sales is the simplest one of all: just redefine the definition of "personal computer."