In May, 2006 we noted that things were tough in the PC industry, with the HP/DELL/Lenovo troika competing heavily for market share at the expense of profitability.
Dell (NASDAQ:DELL) has cut its earnings estimates for the first quarter, saying the shortfall “was driven primarily by pricing decisions in the second half of the quarter.” With prices falling at a faster rate than unit sales are growing, it is tough to show any gains on the top line.
Over the course of the year, that thesis played out in large scale.
Shipments of desktops, notebooks and servers with processors from Intel and Advanced Micro Devices grew by about 10 percent worldwide in 2006, according to figures released Wednesday from research firm Gartner. During the calendar year, 239.4 million PCs left factories.For the year, revenue generated from worldwide PC sales across the industry, however, remained flat at $201.1 billion, according to the firm’s early estimate. It doesn’t appear that 2007 will bring much change. PC shipments will go up by 9.9 percent, Gartner predicts, but revenue will only climb to $201.3 billion.
“It is going to be a tough year,” said Charles Smulders, an analyst for Gartner.
The crazy thing is, though, that 2006 wasn’t especially brutal for PC pricing. While price drops were generally in the low double digits, looking back through history it was one of the slowest paces of price declines on record.
Now the question boils down to several competing factors to see whether the price environment will continue to be merely bad, or whether it will actually get worse. First and foremost among these is whether Windows Vista will truly result in a massive hardware upgrade cycle, and whether it will begin as quickly as customer pre-orders are indicating.
Secondly is whether selling prices are already so low that demand has become completely inelastic (insensitive to price cuts.) With systems now retailing for well under $1,000 this may be the case. Furthermore, it may be the catalyst behind the power shift from DELL to Hewlett Packard. As we discussed in May 2006:
It may not be that people care less about customization but rather that the now super-low prices of PCs has turned the industry on its head in terms of efficiency. In the past, DELL’s model was more efficient because declining prices meant that having a low inventory and no retail markup carried a large enough advantage to offset the cost of shipping the PC. Now, with the PC selling for $500 rather than $1,500 the shipping costs per unit are much higher and may actually make bulk shipments to retailers more cost effective than individual shipments to buyers.
What is clear, though, is that PCs are no longer a growth industry, and if the competition continues to revolve around price, it may soon be a business in permanent decline from a revenue perspective. No wonder Apple (NASDAQ:AAPL) took the “computer” out of its name.