Gartner foresees trouble for PC vendors

As sales growth slows to less than 6%, three of the top 10 vendors could exit the market by 2007, possibly lowering prices for buyers.

Plummeting growth rates will cause three of the top 10 PC vendors to exit the market by 2007, but this could be good news for buyers hoping for price battles between the remaining sellers, according to new forecasts from Gartner Inc.

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The Stamford, Conn., IT research firm forecasts that the annual growth rate of PC sales will be cut in half to about 6% beginning in 2006, as the latest hardware replacement cycle comes to an end. Gartner said this trend will cause lower profit margins in an industry that many believe is already ripe for consolidation.

Gartner is predicting that slowing PC sales by the end of the decade will ultimately lead to a buyer's market, as vendors intensify price competition in the ongoing effort to stay afloat.

"I wouldn't disagree that there will be fallout in the PC market," said Larry Davis, CIO of Sterne, Agee & Leach Group Inc., a medium-sized retail brokerage house based in Birmingham, Ala. "There are far too many people trying to manufacture PCs."

There are far too many people trying to manufacture PCs.
Larry Davis
CIOSterne, Agee and Leach Group Inc.

The analyst firm forecasts that PC unit growth will average 5.7% annually from 2006 to 2008, about half of the 11.3% average from 2003 through 2005. The company predicts that PC revenue growth will average about 2% annually from 2006 to 2008, less than half the 4.7% average from 2003 to 2005. Additionally, Gartner reports that emerging markets will account for more than 60% of PC market growth from 2006 to 2008.

Gartner analysts did not return calls by deadline, but a company press release states that the decreasing sales growth will cause some PC vendors to diversify into related fields, such as consumer electronics, in order to increase profit margins. Others may try to improve margins by merging with rivals.

Currently, the top 10 PC vendors are Dell Inc., Hewlett-Packard Co., IBM, Fujitsu, Toshiba, Acer, NEC Corp., Legend, Gateway Inc. and Apple Computer Inc. While Gartner did not specify exactly which companies will exit the market, it did say the PC divisions of HP and IBM are in danger of being spun off.

Not all technology analysts agree with Gartner's forecast. Rob Enderle, principal analyst with the Enderle Group in San Jose, Calif., said predictions that three major PC vendors would soon leave the market sounded reliable last year, but that this year things have changed.

The analyst said that HP, IBM, Dell and Gateway have all shown strong improvements this year, largely because companies are getting ready for the next release of Windows by purchasing new hardware and making related security enhancements. The follow-up to XP, codenamed Longhorn, is scheduled to go into beta testing late next year.

"Gartner needs to stick its head out of the hole, check its shadow, and confirm that it is 2004, not 2001, and that the conditions for consolidation are waning," Enderle said.

Sterne Agee's Davis also said that the end of support for Windows NT would drive some growth in the PC market through 2005 as companies still using NT are forced to upgrade their hardware to support a newer operating system.

Yet he noted that a leveling off of growth rates in the coming years made sense, as companies complete their PC upgrade cycles. Since 2000, when many companies rushed to replace PCs and servers prior to Y2K, many enterprises have been on roughly the same replacement schedule.

"After 2000, there was a dramatic problem in moving new equipment because people had new equipment," Davis said. "Half of the [industry analysts at that time] predicted that the buying trends would continue, and they didn't know what they were talking about. Now, as we move into 2005, we're starting to see things get back into a more normal cycle."

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